MyGovCost News & Blog

Watching U.S. territory Puerto Rico’s debt crisis is a lot like watching a train derail from its tracks in slow motion. Except with one important difference—it’s a train wreck where the locomotive operators’ best idea for dealing with it involves making it worse by setting the crashing train on fire.

With that image in mind, here is the latest update to the story of Puerto Rico’s growing default on its government’s debt from Reuters:

Puerto Rico asked its creditors to take a huge “haircut” that would slash its total outstanding debt by about $23 billion in an opening salvo to resolve a crippling debt crisis, but creditors reacted with frustration, calling the offer “not credible,” “not serious” and a “trial balloon.”

With $70 billion in debt, a 45 percent poverty rate and a steady exodus of its population to the mainland, the U.S. territory is trying to crawl out of an economic swamp before substantial debt payments come due in May and July. Puerto Rico has already defaulted on some debt and is trying to persuade its creditors to take concessions.

“We do not view this proposal as a serious effort,” said Nader Tavakoli, president and chief executive officer of bond insurer Ambac, which insured $2.2 billion net par, or original face value, of bonds as of the end of November. Ambac recently sued Puerto Rico over a debt default.

Why don’t the people who lent money to Puerto Rico’s government and public entities believe the government’s offer to have them be forced to take a 46% loss on the money they loaned to the U.S. territory is serious?

It is because the $26.5 billion haircut they are being asked to accept on a base bond would be paired with an empty promise that they can make up $22.7 of that $26.5 billion gap by sharing in the U.S. commonwealth’s potential future economic growth through additional bonds linked to the territory’s GDP.

Reuters quotes Height Securities’ analyst Daniel Hanson on what that means:

Height Securities analyst Daniel Hanson said there was no mechanism to ensure the commonwealth upholds its end of the deal and that growth is pursued along the lines envisioned, noting that these bonds were likely “not worth the paper they’d be printed on.”

While in theory investors could recover par on their bonds “if the plan works out under the rosiest of assumptions,” in practice the payouts from the growth bonds would be extraordinarily low, he said.

Hanson compared the plan to Ukraine’s 2015 debt restructuring, which used growth warrants, “now widely acknowledged to be a pipe dream.”

Greece’s government attempted a similar strategy that was ultimately rejected by its creditors during its third default crisis in 2015. To our knowledge, the only place it has worked, to a limited extent, is Argentina following its fiscal crises in the 2000s.

However they reason why it worked there can be chalked up to unique circumstances. Bloomberg describes the unique factor that applied in the South American nation and why similar limited success is not likely to be repeated in Puerto Rico.

While it worked in Argentina because the commodities boom helped the nation quickly recover from its fiscal crisis, Puerto Rico faces a very different set of circumstances. Not only has the economy contracted in the past decade, its prospects remain bleak. That’s raising questions about whether the offer is credible enough to win over bondholders as they kick off negotiations over how to restructure its debt.

“It’s hard to see any meaningful economic growth coming out of Puerto Rico in the foreseeable future,” said Matt Fabian, a partner at Municipal Market Analytics, a research firm based in Concord, Massachusetts. “Those securities would essentially have no value. The most likely outcome is that they never receive a payment.”

Would you ever put your own money at risk given those extremely long odds of ever getting 46% of your money back?

At the very least, it explains why Puerto Rico’s offer to settle its debt liabilities is not considered to be serious and really represents bad faith bargaining. Since the territory is now limping toward its next scheduled debt default event, the lack of good faith bargaining on the part of the commonwealth’s political leaders is not only not helping their situation, it is making it worse because it is damaging what remains of the Puerto Rican territorial government’s credibility.

When we last looked at the ongoing ethical saga of Kimberly Graves and Diana Rubens, the two executives at the troubled Department of Veterans Affairs’ Veterans Benefits Administration (VBA) who abused their power to displace lower ranking employees from their jobs so they could take them for themselves, complete with big relocation bonuses and benefits to lower cost-of-living regions but with no cut in pay, Kimberly Graves had obtained a favorable ruling from an executive branch administrative judge that reversed her demotion—the only penalty she had faced for her unethical actions. Meanwhile, a decision regarding the fate of Diana Rubens demotion was still pending.

At the time, the Chicago-based Merit Systems Protection Board administrative judge who heard the case did not provide any rationale to justify their decision, which resulted in Graves’ annual salary being restored to its pre-demotion level of $173,949.

Since then, another Merit Systems Protection Board administrative judge issued a similar ruling in favor of Diana Rubens, reversing her demotion and restoring her salary to a level of $181,497. But now, at least we have an explanation from the administrative judges in both cases that accounts for the reversal.

It is because both Rubens and Graves’ superiors at the VA knew of their plans and signed off on them. The Washington Post reports on how the VA’s leadership apparently supported Rubens and Graves’ separate plans to oust the incumbents from the jobs they coveted:

An administrative judge reversed Graves’ demotion Friday, saying higher-ranking officials knew about her plans and did nothing to stop them. A different judge reversed Rubens’ demotion Monday on similar grounds.

“There is a significant problem created by the inconsistent treatment of a comparable employee,” Judge William Boulden wrote, referring to Beth McCoy, a VBA official who also pressured a regional manager to leave his position. McCoy was never disciplined and was later promoted, Boulden noted.

Rubens told the judge at a hearing that she “did not hide any of her actions” and that at least three higher-ranking VA officials — including Allison Hickey, the VA’s undersecretary for benefits — were aware of the scheme.

Hickey resigned in October amid criticism of a chronic backlog in disability claims and questions about her role in the transfers obtained by Rubens and Graves. The report by the inspector general’s office said Hickey and other top VA officials likely encouraged the scheme.

And so, with the assistance of two executive branch administrative judges, the institutionalization of corruption at the VA has deepened.

Meanwhile, the man who demoted both Graves and Rubens for their actions, VA Deputy Secretary Sloan Gibson, has said that he still intends to punish them for their ethical transgressions. The Washington Post also reports on that aspect of the story.

Gibson said Tuesday he did not believe it was right for Rubens and Graves to go unpunished when charges against them were sustained.

“I do not believe it’s the intent of Congress, and I don’t believe it’s the right thing” to allow employees who commit wrongdoing to go unpunished, Gibson told reporters in a conference call. “I intend to take some punitive action” against Rubens and Graves.

If the name Sloan Gibson sounds familiar, it is because he is the VA official who testified before a U.S. Congressional committee that “you can’t fire your way to excellence“.

Here is our reaction to Gibson’s exclamation from just over a month ago:

Given what we’ve learned of the state of personnel demotions at the VA, Gibson doesn’t seem particularly capable of enforcing demotions as a path to excellence either. In all his many years in the private sector, he also appears to have not learned that a change of leadership is one of the first definitive steps that you can take to stop the bleeding in a failing enterprise. Sadly, the VA under its current leadership is hemorrhaging blood in more ways than one.

Maybe he’ll listen this time. And as a bonus, in identifying their higher ranking co-conspirators, not to mention an additional case that the MSPB’s administrative judges have clearly stated would need to receive similar punitive action, Graves and Rubens may have provided the key for cleaning house at the VA. For the man who wasn’t capable of enforcing demotions as a path to excellence, the question now is whether he capable of taking that more effective action as a better path to excellence?

With all this excitement over national elections, taxpayers may have lost count of how much their state government is taking from them. Fortunately, veteran Sacramento Bee columnist Dan Walters has been keeping track. By his count, “California’s state and local governments hit us with about $250 billion in taxes every year, $6,000-plus per Californian.” This works out to 11 percent of personal income, the sixth-highest level of any state, based on Tax Foundation data.

Before the 1978 Proposition 13, “state and local taxation was 12.2 percent of personal income, the nation’s fourth highest.” If that was the case today, California would tie with New Jersey for number 3, behind New York and Connecticut, at 12.7 and 12.6 percent respectively. In 1978, voters aimed to lower and limit taxes. For the government establishment, however, it’s just the opposite. As Walters notes, the California School Boards Association wants a whopping $42 billion more for K-12 education, already the state’s biggest expenditure, with not exactly stellar results. A tax hike along those lines would turn back the clock to before Proposition 13 and grab a full 13.5 percent of personal income, “the highest of any state in the last four decades.” That has the columnist wondering, “how high is too high?” For taxpayers, that’s always a pertinent question.

Walters does not forget the November ballot measure to extend the temporary surtaxes of the 2012 Proposition 30. As we noted, this is a project of California’s government employees, the highest paid in all 50 states. California remains the least tax-friendly state, and as Jon Coupal of the Howard Jarvis Taxpayers Association observes, “No matter how high taxes are increased, it’s never enough for public officials and bureaucrats who live off taxpayer funded paychecks.” In the Golden State, government greed is truly fathomless.

Richard Pollack of the The Daily Caller News Foundation has something of a blockbuster news scoop out today. Here, documents obtained from the New York branch of the U.S. Federal Reserve by the U.S. House of Representatives’ Financial Services Committee would appear to confirm that the Fed was directed by U.S. Treasury Department officials to not answer questions from the U.S. Congress about the real risk of the U.S. government defaulting after the nation reached its debt ceiling in 2011 and in 2013.

Specifically, the New York Fed’s officials were directed to not answer questions from Congressional oversight committees that would reveal that the Fed had found that the risk of the U.S. government running out of its ability to borrow more money to keep its operations going was much, much lower than the Obama administration was making it out to be, because the Fed determined that the U.S. Treasury Department was fully capable of prioritizing payments to the U.S. government’s creditors – a direct contradiction to the public statements made by the Obama administration at the time.

Here is the introduction to the story:

Federal Reserve Bank of New York officials secretly conducted real-time exercises during the 2011 and 2013 debt-limit crisis that demonstrated the federal government could function during a temporary shutdown by prioritizing spending, even as Treasury Secretary Jack Lew publicly claimed many times that such efforts were “unworkable,” according to a new report by the House Financial Services Committee obtained by The Daily Caller News Foundation.

The staff report, to be released Tuesday, charges that Lew and other Obama administration officials deliberately misled Congress and the public during the federal budget and debt limit showdowns in both years. The committee will convene a public hearing on the report Feb. 2.

The report also states that the Obama administration crafted actual contingency plans to pay for Social Security and veterans benefits, as well as principal and interest on the national debt if the government was temporarily unable to borrow more money. The Committee concludes that over the last two years the Treasury Department has “obstructed” congressional efforts to get to the bottom of the administration’s real-time policy during the two showdowns.

The Constitution stipulates that only Congress can determine how much money the federal government can borrow. Presidents thus cannot unilaterally spend beyond congressional debt ceiling limits set. The committee — chaired by Republican Rep. Jeb Hensarling of Texas — charged that during both confrontations, the Obama administration held the country’s creditworthiness “hostage” by claiming default was the only possibility if the debit ceiling was not raised.

“These internal documents show the Obama Administration took the nation’s creditworthiness and economy hostage in a cynical attempt to create a crisis so the president could get what he wanted during negotiations over the debt ceiling,” Hensarling said in a statement to be released with the report Tuesday.

The report also revealed that the Treasury Department did not publicly divulge its plans to prioritize payments “for the express purpose of creating market uncertainty in an effort to pressure Congress to acquiesce in the administration’s ‘no negotiation’ posture on the debt ceiling.”

Wisconsin Republican Rep. Sean Duffy, the financial services panel’s oversight subcommittee chairman, said the administration “manufactured a crisis to put politics ahead of economic stability.”

Please do read the whole story.

As a result of that withheld knowledge, U.S. financial markets were effectively manipulated by the Obama administration into a more unstable performance than would have been the case if the truth were allowed to be known. An instability that served the administration’s political purposes, even though the consequences would damage the value of investments held by regular Americans, including millions of retirees.

That damage wouldn’t appear to have been much of a concern for an administration that was unwilling to restrain its desire to spend.

The ongoing ethical meltdown of the leadership at the U.S. Department of Veterans Affairs took a new, nasty turn for the worse on Friday, January 29, 2016, as Kimberly Graves, who was “demoted” along with fellow VA executive Diana Rubens after having been found to have abused their power by securing cushy new jobs with less responsibility for themselves by forcing out the people who previously held those jobs just had their “demotion” officially rescinded.

Sarah Westwood of the Washington Examiner reports:

A Department of Veterans Affairs official who was demoted after allegedly stealing thousands of taxpayer dollars from the agency was quietly reinstated to her position earlier this week.

Kimberly Graves, former head of a VA regional office in Minnesota, appeared before the Merit Systems Protection Board Wednesday to appeal the VA’s decision to strip her of her title in the wake of a scathing inspector general report. That report found Graves had pressured a colleague to leave his job so she could manipulate an employee relocation program and pocket nearly $130,000.

So how did Graves, who had previously plead the fifth in testimony before the U.S. Congress to avoid criminal charges, a legal strategy that would appear to have been successful as the U.S. Department of Justice under Attorney General Loretta Lynch declined to pursue any kind of prosecution in the matter, get such a favorable ruling?

The Hill‘s Bradford Richardson describes how that happened:

A judge on Wednesday reversed the demotion of a top Veterans Affairs (VA) official who allegedly manipulated a program to pocket thousands in taxpayer dollars.

The Merit Systems Protection Board (MSPB) in Chicago ruled in favor of Kimberly Graves, a former St. Paul, Minn., regional director, who had appealed her demotion in the wake of the scandal.

The ruling will likely reinstate Graves’s senior executive service status and boost her salary, which was cut by $50,000 in the demotion.

Graves, who had been reassigned to the ethically-troubled Phoenix branch of the VA, will now not only benefit from having been reassigned to a region with a considerably lower cost of living, where we estimate that she actually came out ahead even with her cut in pay from her “demotion”, with the MSPB’s ruling, she will now also have the salary of someone who works in the nation’s highest cost of living regions.

How does Kimberley Graves feel about that situation? Government Executive‘s Kellie Lunney got an answer to that question:

“Ms. Graves is happy the action was reversed, and she looks forward to continuing her life’s work serving veterans,” said Graves’ attorney Julia Perkins, a partner at law firm Shaw Bransford & Roth.

But why did the MSPB reverse the demotion? Lunney confirms that is a mystery:

It’s not yet clear what the MSPB judge’s rationale was for reversing the department’s decision.

Perhaps it has something to do with the institutional bias that permeates hiring practices at not just the Department of Veterans Affairs, but all U.S. government agencies, where one special class of person is preferred to be placed in jobs above all others. The Daily Caller News Foundation‘s Luke Rosiak recently discovered a disturbing reality:

Virtually the only jobs explicitly reserved for veterans at the Department of Veterans Affairs are toilet-cleaning “housekeeping aides,” a Daily Caller News Foundation analysis of data from USAjobs.gov found.

Filling the janitorial jobs with veterans helps the VA meet its hiring goals without intruding on a lucrative union giveaway that favors current government employees over everyone else for the majority of open positions….

Seventeen percent of job ads said they were open to current employees and to veterans under the Veterans Employment Opportunities Act (VEOA), which allows vets to apply for positions that otherwise are available only to current employees.

But, as TheDCNF reported Thursday, what job-seeking veterans don’t know is that a clause in VA’s collective bargaining agreement with the American Federation of Government Employees requires the agency to give “first and full consideration” to current federal employees before hiring veterans.

The same Chicago-based Merit Systems Protection Board is expected to announce whether Graves’ fellow pleader of the fifth, Diana Rubens, will have her “demotion” overturned on Monday, February 1, 2016. Providing job “protection” for fellow federal employees otherwise facing penalties for documented misconduct perhaps being the apparent racket that Board is in.

As we noted in 2014, the State Board of Equalization (BOE) headquarters in Sacramento has been dubbed the “Terror Tower,” with good reason. It has been plagued with invasive mold, leaking windows, burst pipes, unreliable elevators, falling glass and traces of toxic substances. Someone was looking the other way when this atrocity was built, and afterward as well. Politicians never held contractors accountable for the defects, and the deadline for legal action passed in 2002. The building has cost taxpayers about $60 million in repairs and in 2014 the outstanding debt on the building was $77 million.

This year governor Jerry Brown announced a $1.5 billion infrastructure plan that would also remodel a portion of the Capitol. The plan includes a new $530 million office building for the Natural Resources Agency and $226 million to replace a vacant state building. The BOE headquarters gets nothing, even though it still needs $30 million in repairs. Now, as Jon Ortiz notes in the Sacramento Bee, the BOE tower is “too small and poorly configured to efficiently process the $60 billion in taxes and fees it collects each year,” according to a state report. Therefore “the building is terrible for business.” The state wants to move the BOE folks into “a campus of low- and mid-rise buildings that better facilitate its work and communication among employees.”

In the meantime, presumably after spending the $30 million on repairs the previous $60 million did not fix, “smaller state tenants” could be moved into the BOE tower. As Mr. Ortiz notes, “the report does not estimate the cost of new facilities.” It’s a virtual lock that the costs will be higher than politicians and bureaucrats estimate. And the facilities could turn out defective and dangerous, just like the BOE building. That would be terrible for taxpayers.

After 7 full years in office, President Barack H. Obama has added an amount equal to $70,612.91 per U.S. household to the U.S. national debt.

CNSnews‘ Terence P. Jeffrey does the math to back that figure up:

The debt of the federal government increased by $8,314,529,850,339.07 in President Barack Obama’s first seven years in office, according to official data published by the U.S. Treasury.

That equals $70,612.91 in net federal borrowing for each of the 117,480,000 households that the Census Bureau estimates were in the United States as of September.

How does that compare to George W. Bush, President Obama’s predecessor in office, as accounted for over the eight full years of his tenure? Jeffrey calculated that number as well:

During President George W. Bush’s eight years in office, the federal debt increased by $4,899,100,310,608.44, according to the Treasury. That equaled $44,104.65 in net federal borrowing for each of the 111,079,000 households that, according to the Census Bureau, were in the country as of Jan. 20, 2009, the day that Bush left office and Obama assumed it.

Doing some math of our own, if the total national debt on President Obama’s seventh anniversary in office of $18.941 trillion were split equally up among each of the 117,480,000 households in the U.S., each American household’s debt would be increased by $161,230.91.

Can your household really afford the extra $161,230.91 in debt that represents? Above and beyond what everyone who lives in your home may already owe on their mortgage, car loans, student loans and credit cards? Not to mention your ordinary monthly bills that you pay with money straight out of your paycheck or savings?

Or would the heavy foot of the national debt weigh too much on top of all your other expenses and crush your house?

Expressing their contributions to the growth of the national debt a little differently, President Obama is responsible for 43.8% of the current burden of the national debt on U.S. households and former President George W. Bush is responsible for 27.4%. All the other previous 42 U.S. Presidents together would account for the remaining 28.8% of the current national debt burden per U.S. household.

And for a better, more personalized estimate of what your household’s share of the burden of the national debt is, be sure to plug your household’s income into the MyGovCost calculator – you might be surprised at how large that burden actually is!

The stylish new eastern span of the San Francisco–Oakland Bay Bridge cost $6.4 billion, about $5 billion more than the original estimate, and came in ten years late. As we noted two years ago, all that time and money could not prevent hundreds of leaks during the first winter storm. A supposedly watertight steel chamber supporting the roadbed was leaking, and water also entering through guardrail holes for lights and service panels. Caltrans bosses were stumped and said that any solution would be “high maintenance.” About this time last year, the bridge continued to leak water inside the structure and efforts to caulk about 900 bolt holes had only been partly successful. Independent experts warned about corrosion and rust on strands of the main cable and anchor rods. Caltrans bosses didn’t want to talk about it, but in early 2016 they think they’ve got the problem whipped.

“After spending more than $1.4 million trying to plug leaks that put the cable of the Bay Bridge’s new eastern span at risk of corrosion,” writes Jaxon Van Derbeken in the San Francisco Chronicle, “Caltrans says it has finally hit on a fix that costs less than $100,000 — and has all but eliminated a problem that plagued the project for years.” Caltrans maintenance engineer Ken Brown explained that water was coming in through gaps on the roadway side of the guardrails and the application of industrial-grade caulking plugged up 90 percent of the leaks. Brown, however, still sought a longer-term fix and Berkeley corrosion expert Lisa Fulton said “we will have to wait and see,” whether Caltrans “got something right this time.” Taxpayers, meanwhile, have good reason to remain skeptical.

Since the leaks were not supposed to happen, the bridge’s design wasn’t exactly right. The new span was supposed to cost some $1.5 billion, not more than $6 billion, so costs were out of control. The new span was supposed to be safe but the problems persist. Congressman Mark DeSaulnier, who as a state senator held hearings on the bridge problems, is on record that “there’s never been anyone in the management of the bridge who has been held accountable.” The congressman has that right, so despite the industrial-grade caulking the stylish new span is still the bridge to no accountability.

As Tony Barboza notes in the Los Angeles Times, the California Coastal Commission is “the most powerful land-use agency in the nation” and some of the 12 commissioners want to fire the boss, Charles Lester. This action should serve as a timely reminder for Californians of the abuse they face at the hands of bad government

Ordinary residents can’t fire Lester because the powerful CCC is an unelected body and none of the commissioners ever comes before the voters. As Barboza has it, former CCC boss Peter Douglas “chose Lester from within the ranks of the agency as his successor, and the commission appointed him unanimously in 2011.” So it’s kind of a hand-me-down thing, and the boss makes the call. Douglas, Barboza explains, was “an aggressive and hard-nosed environmentalist, spent more than 25 years running the commission and advocating forcefully for its independence.” Douglas was actually a regulatory zealot of considerable ferocity, with a complete disregard for the property rights of the people.

The California Coastal Commission was Douglas’ private fiefdom, a combination of Stalinist-style regulation and Mafia-style corruption. On Douglas’ watch commissioner Mark Nathanson served five years for bribery and Douglas is on record that more of that was going on. The CCC has made the coast a millionaires’ enclave and driven development into hotter inland areas, where energy demands are higher. The CCC is also expansionist, intruding into inland issues such as landfills. Activists also ply the unelected CCC on animal management and even surfing tournaments.

The beef against Lester, an attorney, is not exactly clear. Some see an attempted coup by pro-developer interests while others find a protest against bureaucratic lethargy. However it shakes out in a February 10 public meeting, the basic problems remain. The CCC shows how government progressively becomes more intrusive, more expensive, and less responsive to the people. The voters, taxpayers and duly elected governments of coastal counties and cities are entirely capable of overseeing land-use and environmental concerns. It would be nice if ordinary residents could fire Lester, the commissioners, or CCC staffers who abuse the public. What ordinary residents really need is the opportunity to eliminate the CCC, a powerful agency California doesn’t need.

Earlier this week, we looked at whether tax cuts were responsible for reversing the downward trend in the U.S. government’s projected budget deficits over the next 10 years, at least as is being repeatedly suggested by the mainstream media in its reporting on just-released analysis by the Congressional Budget Office.

We said no, which has since been confirmed by other analysts, including Forbes contributor Ryan Ellis, who dug deeper into the CBO’s numbers and writes:

The problem is not on the tax side. At all. If you look at the 10-year baseline, which is now infinitely more realistic post-extenders, you see that tax revenues bob around an 18% of GDP level. That just so happens to be right around the historical average for tax revenues, according to CBO. So taxes are coming in right on target, right where you’d expect them to. They are not, in other words, underperforming in any way. If the deficit is the sick love child of taxes and spending, the former is not contributing the corrupting genes.

What is the problem? Why does the CBO project such large increases in the federal government’s deficits and the national debt?

Over the ten year window, spending is set to grow from 20.7% of GDP in 2015 to 23.1% of GDP in 2026. That already puts spending above the CBO historical average, which is right about 21% of GDP.

The long term baseline takes over from there. Spending grows to 23.5% of GDP in 2030, to 25.3% of GDP in 2040, and to 26.5% of GDP in 2050. It gets worse from there, especially if you take a peek at the alternative fiscal scenario spending baseline.

All of the growth in that spending comes from two sources: entitlement program autopilot growth for Medicare, Medicaid, Social Security, Obamacare and others; and the attendant interest spending on the national debt that comes from the entitlement-driven deficit scenario.

The plane is coming in for a landing here. We have a growing deficit problem. We have shown that taxes are not only not a contributing factor, but that taxes are actually helping the situation. We have shown that spending is 100% of the deficit problem, and that entitlement spending is 100% of the spending problem.

This isn’t that hard. If you’re concerned about deficits, the only thing you should be focused on is restraining the growth curve of entitlement spending. To the extent your focus is elsewhere (tax hikes, waste/fraud/abuse in discretionary spending, etc.) you’re being less than serious about your concern.

Indeed. And as one popular left-wing economist frequently writes: “Why Oh Why Can’t We Have a Better Press Corps?”