We have been keeping track, so to speak, of California’s high-speed rail project, the vaunted “bullet train.” In February, we noted that farmers are not eager to sell the land the project needs. The alleged cost of $68 billion was already more than double the $33 billion estimate before California voters approved $9.95 billion in bonds seven years ago. The costs will likely be much higher because the mountains north of Los Angeles will require 36 miles of tunnels, the most ambitious tunneling project in the nation’s history. High-speed rail bosses were touting a “revised version” of the route connecting the San Joaquin Valley with the San Francisco Bay Area, instead of Los Angeles as the project was sold to voters. Now the rail bosses are up to new tricks.
As Dan Walters writes in the Sacramento Bee, in the current “blended” system, the bullet train shares tracks with local commuter rail projects. This was supposedly to keep costs down but the state is planning to spend “at least $1.1 billion” on the “bookends” of the project. These commuter rail links, having been merged with the larger bullet train project, “also share its legal and financial challenges.” For one thing, an independent consultant must certify that the project passes the legal criteria of the bond issue, before approval of funding. Walters doubts the project can pull that off, “and that doubt could doom the bookends as well, since they are now part of the overall system.” Politicians have responded with a measure that would allow the bookends to get bond money by bypassing independent certification. Despite such moves, the bullet train’s larger problems remain.
Many Californians see little need for a rail project that would be slower than air travel and more expensive. If anyone believes the bullet train can be built for $68 billion, or any amount politicians claim, they might recall the new eastern span of the Bay Bridge: $5 billion over budget, ten years late, and still contending with safety issues.
Yesterday, the Congressional Budget Office published its 2016 Long Term Budget Outlook for the U.S. government. Investors Business Daily‘s John Merline identifies the main takeaway from this year’s edition of the CBO report.
The nation’s long-term fiscal picture has grown considerably more dire over the past year, according to the latest forecast from the nonpartisan Congressional Budget Office, driven mainly by out-of-control spending.
The CBO now expects federal debt held by the public to reach 141% of the nation’s GDP by 2046, assuming that current policies remain in place. That’s up sharply from last year’s forecast of 111%, and would be the highest level of debt in the nation’s history.
The new forecast shows that annual deficits will top 8% of GDP by 2046, up from 2.9% this year. The growing deficit is entirely the result of increased spending. While revenues are expected to hit 19.4% of GDP that year — up from this year and far higher than the post-World War II average — federal spending will consume a record 28.2% of the economy by 2046.
Merline goes on to identify the federal government’s spending on health care as being the major driver of the future spending increases.
The CBO’s 2016 Long Term Budget Outlook anticipates that economic growth in the U.S. will be considerably than both it and the White House has previously projected, which will impair the government’s revenues. When that gloomier outlook is combined with the CBO’s projections of ever higher spending and deficits, the nation’s fiscal situation has clearly worsened.
The bright spot in the CBO report is that even though the nation’s fiscal situation has become gloomier, it is benefiting from falling interest rates on the U.S. government’s $19.2 trillion national debt.
The CBO warns however that the benefit of lower interest rates on debt issued by the U.S. Treasury will only last for so long. Merline comments:
CBO also expects interest payments to shoot up from 1.4% of GDP to 5.8% of GDP.
As the report notes, if left unchanged, this future would be devastating to the nation’s economy.
“Large and growing federal debt over the coming decades would hurt the economy … reduce national saving and income … and increase the likelihood of a fiscal crisis,” the report says.
The U.S. already has an outsized national debt, worsening economic growth and out of control spending. The CBO’s 2016 Long Term Budget Outlook projects that without major fiscal reforms, that already dire situation will continue to get worse.
In recent years, income equality has become an issue, with the discussion usually generating more heat than light. As Michael McGrady writes in The College Fix, income equality research has also become a lucrative pursuit. Drawing on a recent report from the California Policy Center, McGrady notes that several UC Berkeley economics professors who support such research bag more than $300,000 a year. Prominent scholars associated with the Cal Berkeley Center for Equitable Growth are “richly compensated as professors,” even as the center seeks to research ways to create economic growth that is “fairly shared.” The Center’s director Emmanuel Saez, for example, is paid nearly $350,000 and the three economics professors on the advisory board are paid $336,367, $304,608 and $291,782, plus generous benefits typical of the UC system. McGrady finds little income equality with teaching assistants, graders, readers and others “staff at the bottom of Cal’s income distribution.”
In similar style, most workers in the private sector, even those who earn incomes in six-figures, will not receive a pension that pays them more than their highest salary level. As we noted, Michael Wiley, outgoing boss of Sacramento’s Regional Transit was paid an annual salary of $230,000, despite his poor record as a manager. He was also eligible for a pension of $278,000, a full $48,000 more than his final salary of $230,000 and $68,000 higher than the federal pension maximum of $210,000. And Regional Transit wanted to keep paying him $50,000 as a “retired annuitant.” In government circles, that kind of largesse is common, all funded by taxpayers.
California maintains a state Board of Equalization, but it does not conduct income equality research and does not equalize anything. The BOE dates from 1879 and its mandate was to ensure that property tax assessments were uniform across all California counties. The BOE now collects taxes and in 1996 attempted to tax editorial cartoons as though they were works of art purchased in an art gallery. The BOE’s ramshackle Sacramento headquarters has become known as the “bottomless money pit.”
Global Financial Data is a firm that maintains a big database the records lots of economic data going as far back as the year 1168. The firm recently produced the following chart showing the interest rates that the U.S. government has paid to its creditors on 10-Year debt securities issued by the U.S. Treasury since February 1790.
While the Wall Street Journal recently published a version of this chart, this particular chart was featured on Barry Ritholtz’ The Big Picture blog, on the historic occasion that the yield, or interest rate, that the U.S. government is paying on the newest 10-Year Treasury securities that it issues has dropped to an all-time record low of 1.367%.
Forbes Steve Schaefer explores the following possibilities that might explain why this new record low was set, which are summarized below (see the article for more detailed discussion of each):
Perhaps the most immediately relevant explanation is the third option, because of the increase in global financial instability that has occurred following the U.K.’s recent popular referendum in favor of exiting from the European Union, which was subsequently followed by much worse financial news in that large banks in the EU nations of Germany and Italy are teetering on the edge of insolvency and are at a heightened risk of failing.
The U.S. government currently benefits from that increase in financial instability as global investors are fleeing risks in a flight to safety, where their desire to avoid losses is helping to push the interest rates that the U.S. government pays on the money it borrows from them lower than it ever has been before. That flight to safety is making the U.S. government’s $19.36 trillion total public debt outstanding relatively more affordable.
That benefit can be seen in the portion of the national debt that the U.S. Treasury is effectively rolling over, replacing debt it previously issued that paid much higher interest rates with newly issued debt that pays much lower interest rates. Ten years ago, these debt securities paid the U.S. government’s creditors a yield of 5.19%. Today, the yield for the same 10-year maturity for U.S. Treasuries is 1.37%.
For every $1 million in debt that it can roll over at these lower interest rates, Bankrate.com’s loan calculator the equivalent monthly payments that the U.S. government makes to its creditors through 10-year Treasuries securities drops from $10,699.67 to $8,921.95, a monthly savings of $1,777.72, or annual savings of $21,332.64.
According to the U.S. Treasury Department, nearly $1.2 trillion of the national debt that matures in 2016 was issued in the years from 2006 to 2009. Assuming similar savings apply, rolling over just that portion of the national debt into new 10-year Treasuries will reduce the U.S. government’s cost of borrowing by $25.6 billion per year.
Should interest rates rise however, those benefits will immediately begin shrinking and can reverse, turning the existing national debt that must be continually rolled over into a time bomb. Considering the 226 year history of the interest rates that the U.S. government has paid for the privilege of borrowing money, there is no evidence to suggest that the current trend avoiding that fate can be sustained indefinitely.
Yet another federal government trust fund supporting the welfare of America’s elderly population appears set to run out of money within the next 12 years. This time, it’s Medicare’s Hospital Insurance Trust Fund which, when it runs out of money as projected in 2028, will shrink the amount of money that goes to help pay Medicare’s Part A hospital insurance program by 13%. The Mercatus Center’s Brian Blase describes how the trust funds financial health has changed since last year’s Trustees’ Report.
In 2015, Medicare financed health care services for an estimated 55 million people at a total cost of nearly $650 billion. Last week, Medicare’s trustees—Treasury Secretary Jack Lew, Health and Human Services Secretary Sylvia Burwell, Labor Secretary Thomas Perez, and Acting Social Security Commissioner Carolyn Colvin—submitted the annual report of the program’s finances. Although the program’s finances have slightly deteriorated, not much has changed from last year’s report.
The insolvency date of the Hospital Insurance (HI)/Part A trust fund was moved up two years to 2028; according to the report, “[a]s in past years, the Trustees have determined that the fund is not adequately financed over the next 10 years.” But the payroll tax financed HI trust fund is just one part of Medicare, and Medicare’s other parts continue to claim increasing amounts of general tax revenue. Once again, the trustees have sounded an alarm that policymakers should enact legislation to deal with Medicare’s “substantial financial shortfall… sooner rather than later to minimize the impact on beneficiaries, providers, and taxpayers.”
Keep in mind that the same federal policymakers knew of Puerto Rico’s decade-long fiscal deterioration, yet waited until just two days before the territory’s government’s imminent default on its constitutionally-guaranteed debt before taking any action that might mitigate the territory’s decaying fiscal situation, which didn’t do anything to keep it from defaulting on making its debt payments anyway. Timely action that minimizes the impact on beneficiaries, providers and taxpayers just isn’t something they prioritize doing.
The 2016’s Trustees’ Report is available here. The report indicates that Medicaid’s Hospital Insurance Trust Fund will start running a deficit in four years, and will be completely depleted in 2028.
When that happens, the amount of money that is collected from Medicare’s payroll tax collections will only be enough to cover an estimated 87% of the projected full cost of providing Medicare’s Part A coverage in 2028. That amount will then steadily fall to 79% of Medicare’s Hospital Insurance program by 2043, just 15 years later.
How many elderly Americans do you suppose will be ready to come up with the missing 13% to 21% of the cost of being hospitalized once Medicaid’s Hospital Insurance Trust Fund runs out of money?
The whopper government pension of Mike Wiley, outgoing boss of Sacramento Regional Transit, continues to make news, but not just because it draws on the RT operating budget. As Tony Bizjak notes in the Sacramento Bee, Wiley is eligible for a pension of $278,000, a full $48,000 more than Wiley’s final salary of $230,000 and $68,000 higher than the federal pension maximum of $210,000. What did Wiley do to deserve this largesse?
“Shortly after signing Wiley’s contract,” writes Bizjak, “RT slipped into financial duress from which it has yet to recover. The agency has tapped reserve accounts in the last three years to balance its budget, leaving it with virtually no emergency funds this summer. RT raised rider fares 10 percent on Friday, making its buses some of the most expensive to ride in the country.” Looks like Mike Wiley was a major bust, but he still gets the big bucks. The outgoing RT general manager plans to select a pension option that will pay him some $220,000 a year, still $10,000 above the federal pension maximum of $210,000. As Mr. Bizjak observes, Mike Wiley is not alone in that regard.
According to the California Public Employees’ Retirement System (CalPERS), 684 retired government employees get benefits above the federal maximum of $210,000. To pay for the extra amount, the cities, school districts and other government agencies that employed the retirees must come up with the additional money. As Bizjak observes, “the supplemental money is more like an ongoing salary paid to the retiree, rather than a formal pension.” In similar style, Regional Transit had considered paying the “retired annuitant” Mike Wiley a personal services contract of up to $50,000.
Meanwhile, RT board chairman Jay Schenirer explains that new boss Henry Li does not have a pension supplement deal like Wiley’s. “We are trying to be responsible stewards of the public money,” Schenirer told the Bee. Sure you are, Jay, just like the legislature. Taxpayers get that.
Last week, on June 29, 2016, President Obama signed a bill designed to help Puerto Rico’s government restructure its excessive debts into law – the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). CNN reports:
On Thursday, President Obama signed a bill known as PROMESA (Spanish for “promise”) to help Puerto Rico get out of its massive economic crisis.
The island has run up nearly $70 billion of debt about $20,000 per resident). At the same time, the island’s population has shrunk dramatically. Puerto Ricans are moving to Florida, Texas and elsewhere in the mainland U.S. for better paying jobs.
PROMESA was a bipartisan compromise with the Republican House and Senate. Both chambers approved the bill by a large margin.
Now law, PROMESA allows the territorial government of Puerto Rico to be able to restructure the terms of its debt obligations in a process similar to bankruptcy, but with the provision that the territory’s finances will now be under the control of an independent board that will be appointed by the President and the U.S. Congress, rather than under the exclusive control of Puerto Rico’s government as it was before.
Two days after PROMESA was signed into law however, on July 1, 2016, the U.S. territorial government of Puerto Rico officially defaulted on another $2 billion of its total $70+ billion debt anyway, an amount that included for the first time some $779 million of the portion of the government’s debt that is supposed to be guaranteed to be paid to its creditors by the territory’s constitution. The Wall Street Journal has the story:
Puerto Rico will default on its constitutionally guaranteed debt for the first time Friday by failing to make most of some $1 billion in payments due, officials said on Friday.
The island’s Government Development Bank said the territory faces an imminent cash crunch and that its cash balances have dropped to “dangerously low” levels. As a result, the government isn’t likely to make any of the $779 million payment on general obligation bonds due Friday.
The default will be particularly expensive to the U.S. insurance companies that underwrote Puerto Rico’s government debts:
A default would force the three major insurers backing Puerto Rico’s debt to pay out as much as hundreds of millions of dollars to bondholders. Ambac Financial Group backs $122 million in Puerto Rico debt due Friday, company disclosures show. National Public Finance Guarantee Corp. backs $173 million in general obligation debt coming due Friday, records show. Assured Guaranty Ltd. backs $428 million coming due in the third quarter, most of it also due Friday.
Puerto Rico’s government took the action to officially default on making its debt payments due on July 1 just minutes after President Obama signed the PROMESA bill into law.
Puerto Rico’s default on its constitutionally guaranteed General Obligation debts marks the first time that any state or territorial government in the United States has defaulted on such constitutionally guaranteed debt since Arkansas did in 1933, during the Great Depression.
The existence of perverse incentives explain a lot of the bad behavior that we see among government bureaucrats.
A perverse incentive can be said to exist whenever an incentive to achieve a specific goal instead creates an unintended and undesirable result, which is often entirely contradictory to the intentions of the people who created the incentive.
Perhaps the best example in recent years of perverse incentives at work within the U.S. government is the performance bonuses that provided a financial motive for the Department of Veterans Affairs’ supervisors and scheduling staff to create the phony wait lists that were at the heart of the scandal that resulted in American veterans being denied medical care.
Although the performance bonuses had been established with the intention of rewarding those supervisors who succeeded in reducing the amount of time that veterans seeking medical treatment had to wait before seeing a VA doctor, the VA’s supervisors and staff realized that they could more easily pocket the money if they kept two sets of appointment books to make it look like the veterans were getting the care they were seeking within a short period of time, which then allowed them to claim they were meeting the goal of the performance incentive, entitling them to claim bonuses.
For thousands of veterans, the fraudulent wait lists meant that instead of their getting to see a VA doctor more quickly, they were instead told they had to wait months or even years to even get an appointment, with the consequence that hundreds of veterans died waiting to get care – the exact opposite intention of the performance incentive to shorten the time that veterans had to wait for medical treatment.
Not long ago, we identified a perverse incentive that would give the U.S. government a financial motive for creating instability elsewhere in the world. Because global investors avoid investing in other parts of the world that become consumed by instability, their flight from risk can benefit the U.S. government because it can lower its cost of borrowing money as they seek the relative safety of investing in U.S. Treasury securities.
For a nation whose national debt is well over 80% of the way to doubling in the 7+ years since January 20, 2009, such an incentive would be fairly powerful and could very well influence how it goes about achieving its foreign policy objectives. Or rather, how it goes about failing to achieve its stated foreign policy objectives, where its failure to achieve success in its stated objectives results in an increase in international instability, where the primary benefit that the U.S. realizes in continuing its ineffective policies without reform exists because of its perverse incentive.
It can be argued that the financial turmoil of the recent Brexit vote is just such an example, where President Obama’s April 2016 comments to the British people produced the opposite effect of the President’s stated desires, with the result of increasing instability overseas and with the benefit of having the interest rates that the U.S. pays on its national debt fall significantly as a result of the heightened political and economic turmoil produced by the vote’s outcome.
Lower borrowing costs are not the only benefits a nation might realize from the political or economic instability in other nations. Alberto Ades and Hak Chua considered whether a nation might realize positive gains in trade if its neighboring countries were experiencing turmoil. In the following passage, note that no distinction is made with respect to whether the cause of a nation’s political turmoil is homemade or if it has been fomented by external actors:
There are however cases in which countries may benefit from political unrest in neighboring countries. If neighbors compete for a scarce pool of foreign capital or aid, political instability in the rival country can lead to a larger share of that pool. If neighbors are competing oligopolists of a good or resource, production disruptions in a rival country can lead to an improvement in the terms of trade as well as an increased share of the export market. Neighboring countries may also benefit from the huge capital flight and the migration of talented people that often occur in countries with political turmoil.
Ades and Chua go on to note that such benefits can be completely overwhelmed in the case where instability spreads beyond the affected nation’s borders and produces instead a strong adverse effect, harming all nations in the affected regions through the disruption of trade and the diversion of resources toward military expenditures rather than toward productive investments that might grow the economies of all the nations.
The same principle would apply to the pursuit of the perverse incentive of increased international instability as a means to lower a nation’s cost of borrowing money to finance an excessively large national debt. Such a strategy would undoubtedly be overwhelmed in time by more negative political and economic outcomes that would outweigh whatever hoped benefits might be realized. As a general rule, if you think you can profit by going out and causing trouble in the world, eventually the world’s trouble is going to come looking for you with a bigger bill than you can ever hope to pay.
According to a report by Adam Ashton in the Sacramento Bee, California will net a large portion of Volkswagen’s $14.7 settlement for cheating on emissions. Some $10 billion will go to buy-back programs and $4.7 billion toward state and federal air-quality programs, and “California stands to gain $1.18 billion of that money.” Mary Nichols, chairwoman of the California Air Resources Board (CARB), a 2007 appointee of governor Arnold Schwarzenegger, announced that the agency would keep a sharp eye on Volkswagen’s repair plan. “As you can imagine with our history with this company,” she said, “we’re not going to take anything on its face.” Taxpayers have good reason to show the same skepticism with CARB
Hien Tran, manager of the Health and Ecosystems Assessment Section in CARB’s Research Division, authored the 2010 report “Methodology for Estimating Premature Deaths Associated with Long-term Exposure to Fine Airborne Particulate Matter in California.” Dr. S. Stanley Young of the National Institute of Statistical Sciences found the report too flawed to be done by a capable statistician, but according to CARB Tran had recently earned a PhD in statistics from the University of California at Davis. In reality, Tran’s PhD came from Thornhill University, a diploma mill located in a New York City UPS office.
The falsifying of academic credentials is a serious matter and can easily end a career. CARB, however, did not fire Tran, opting instead for a suspension and demotion. And CARB used Tran’s flawed study in heavy-handed diesel regulations, a costly state policy.
For CARB boss Mary Nichols, the affair was “a very annoying distraction,” and no legislator called for her resignation. Based on a history of indulging fakery, taxpayers should never take anything from CARB at face value.
As we recently noted, the Regional Transit authority in California’s capital of Sacramento cut 20 administrative positions, saving taxpayers $1.5 million. In similar style, the salary of incoming business manager Henry Li is $14,000 less than that of outgoing boss Mike Wiley. Those reductions set a good example, but all is not well at Regional Transit.
As Tony Bizjak writes in the Sacramento Bee, RT officials wanted to keep Wiley through the end of the year, even though new manager Li does not need him. RT is considering a personal services contract with Wiley as a “retired annuitant” that would last until November 2017. Wiley’s pension is another matter.
His initial deal gave him a whopping $285,612 a year, “including $75,000 a year that would come out of RT’s operating budget.” A new deal would drop the pension to $279,000, but still grab money from the Regional Transit operating budget, reducing the amount by only $6,730 per year. Operating budgets are for operations, not pensions, so this is hardly an example of responsible management. Fabrizo Sasso, executive director of the Sacramento Central Labor Council, told Tony Bizjak that even with the proposed reductions, Wiley’s package is out of line, and called the personal services contract “insane.” Sasso is right on both counts, but Regional Transit is hardly the only place where things are out of line and insane.
In California and across the nation, extravagant government pensions are depleting budgets and threatening vital public services. For that story see Lawrence McQuillan’s California Dreaming: Lessons on How to Resolve America’s Public Pension Crisis.
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