To Accompany the May 26, 2011 edition of Tidbits
Bob Jensen at Trinity University
"Plentiful Fuel," by John Stossel,
Townhall, May 18, 2011 ---
I just learned I'm going to save money! My apartment building in New York will switch from heating oil to cleaner natural gas. Gas is much cheaper than oil now because energy companies found ways to get more of it out of the ground.
Even more astounding is that by using this technique, America won't run out of natural gas for 100 years or more! Time to break out the Champagne?
Not so fast, say environmentalists. To get gas out of the ground, companies use pressurized chemicals to blow up rock. It's called hydraulic fracturing -- fracking. An Oscar-nominated movie, "Gasland," says that fracking contaminates our water supply with chemicals. In the movie, some homeowners set their tap water on fire.
That got my attention. I've seen Michael Moore's movies and environmental documentaries, which I thought were nonsense. But "Gasland" is more convincing.
Unfortunately, "Gasland" producer Josh Fox turned down my interview requests, as did representatives of the big national environmental groups that oppose fracking. I think I know why. The movie and the left's arguments against fracking are deceitful.
First, the movie implies that nasty chemicals get into the water table. That seems logical, since they shoot them down into gas wells. But it turns out that the shale gas wells are thousands of feet below the water table. Do the chemicals flow up -- against gravity?
But then what's the explanation for the most dramatic part of the movie: tap water so laden with gas that people can set it on fire?
It turns out that has little to do with fracking. In many parts of America, there is enough methane in the ground to leak into people's well water. The best fire scene in the movie was shot in Colorado, where the filmmaker is in the kitchen of a man who lights his faucet. But Colorado investigators went to that man's house, checked out his well and found that fracking had nothing to do with his water catching fire. His well-digger had drilled into a naturally occurring methane pocket.
Continued in article
"On Spending Cuts, Democrats Give Voters
the Brush Off Obama says he'll 'check under the cushions.' But neither he nor
his allies on Capitol Hill have initiated any net reductions in spending since
last fall's election. Not once," by Fred Barnes, The Wall Street Journal,
May 9, 2011 ---
Do President Obama and Democrats want to cut spending? There's not much evidence they do. They have acquiesced to some cuts—but only under political duress.
The importance of the spending issue escalated last Thursday with the start of budget negotiations between Democrats and Republicans under the direction of Vice President Joe Biden. The 2012 budget, an increase in the debt limit, and long-term reform of entitlements are all on the table.
The parties have very different goals. While Republicans want a cap on spending, Democrats favor a ceiling on the deficit. The distinction is significant. A spending cap is straightforward. But a cap on the deficit can be satisfied by raising taxes, which Democrats prefer.
To be sure, Mr. Obama frequently pays lip service to tackling spending. "We've got to comb through the budget and find every dime of savings that we can," he said at a town hall meeting last month in Reno. "We'll check under the cushions. Any program that's not working, we need to eliminate."
But neither the White House nor congressional Democrats have initiated any net reductions in spending. Not once since the election. Their strategy is to defer to Republicans, then denounce whatever cuts Republicans come up with.
In February, for example, the Republican-controlled House approved $61 billion in cuts from a $3.7 trillion budget of 2011 spending with a projected deficit of $1.6 trillion. In response, Senate Majority Leader Harry Reid called the cuts "reckless."
Mr. Reid then turned around and claimed to have proposed $41 billion in cuts himself. How so? The $41 billion was the difference between what Mr. Obama had called for in his never-enacted 2011 budget and what was actually spent. The "Fact Checker" of the Washington Post, Glenn Kessler, dismissed Mr. Reid's claim. "He's talking about cutting spending that never happened."
Then, after Democrats reluctantly agreed to a mere $10 billion in cuts over the next five weeks, Senate Appropriations Committee Daniel Inouye professed outrage. "How much before we have to cancel the construction of dams, bridges, highways, levees, sewers, and transit projects and throw thousands of private-sector workers onto the street?" he said.
The reality is that since the November midterm election—when voters expressed their displeasure with the pace of government spending—Democrats have had eight openings to initiate cuts. Let's review the record.
The Democrats' first opportunity was during the lame-duck session of Congress in December. Senate Democrats sought to boost 2011 spending—fiscal 2011 had begun the previous September—by $19 billion. Their bill was studded with earmarks and pork-barrel expenditures. But it wasn't until Senate Minority Leader Mitch McConnell lined up Republican votes to block the measure that Democrats gave up. Spending in 2011 remained frozen at the 2010 level.
The second chance for spending cuts came in February when Mr. Obama unveiled his 2012 budget. The president said he had made "tough choices" but avoided "symbolic cuts this year that could endanger the recovery." His budget (now superseded) would have increased spending by $41 billion.
The third chance (mentioned above) came a few days later when the House voted to cut $61 billion from 2011 spending. Senate Democrats responded with roughly $4 billion in cuts. Both proposals lost in the Senate, but the $61 billion plan got more votes than the Democratic alternative.
In early March, Democrats had a fourth opportunity when the government's stopgap authority to spend—known as a "continuing resolution"—was due to expire, threatening a government shutdown. Mr. Reid attacked the Republican response to cut $2 billion while extending spending for two weeks as "reckless." But he grudgingly agreed to it.
Democrats soon had another shot at getting in front with a spending plan for the remainder of fiscal 2011. They hung back. When the House attached $6 billion in cuts to a three-week extension, Democrats again went on the attack. They made no counteroffer. Eventually they went along with the Republican cuts, missing their fifth opening.
At this point, Democrats saw they were losing the 2011 spending battle piecemeal. They abandoned any hope of a spending freeze. A freeze, by the way, isn't a cut. They settled with Republicans for $38 billion. This was the sixth opportunity they failed to seize.
In April, Mr. Obama acted, involuntarily. His 2012 budget had been widely bashed, even by his supporters in the media. The president presented a new plan that he said imposed twice in spending cuts what it would collect in tax increases. The reverse is closer to the truth, though Mr. Obama was so vague that it's impossible to know. Another opening to propose a series of major cuts—No. 7—was wasted.
The Democrats' eighth opportunity involves the debt limit. Treasury Secretary Tim Geithner insists it must be raised by early August or the government will be forced into defaulting on its debt. He, Mr. Obama and Democrats have called for a "clean bill," one without spending cuts or caps attached. They've lost that argument. The question now is how much to concede to Republicans on spending to ensure an increase in the debt limit. In any case, they've failed to take the initiative.
If Democrats' hostility to spending cuts wasn't clear from these episodes, it comes through in every speech Mr. Obama makes. He talks enthusiastically and at greater length about "investments" he intends to "protect" or "preserve." On the need for cuts, he sounds grim and apologetic.
In revising his 2012 budget, the president proposed a clever mechanism for avoiding spending cuts. He called it a "debt fail-safe." If the debt burden doesn't shrink as a percentage of the economy, it would require "additional savings with more spending cuts." Except that as much as 90% of spending would be exempt, leaving little room for cuts and lots for raising taxes.
Continued in article
"Vermont Gives the 'Public Option' a Clinical Trial The governor claims it
is 'all about containing costs.' The evidence is not encouraging," by David
Gratzer, The Wall Street Journal, May 21, 2011 ---
In America's courtrooms, ObamaCare is on trial. A majority of states have filed lawsuits arguing that its mandate requiring individuals to purchase health insurance is unconstitutional. But in Vermont, ObamaCare is about to get a trial of a different sort—a clinical one.
This coming Thursday, Gov. Peter Shumlin will sign a bill doing what President Obama and his allies have hoped to do all along: sell a public insurance option alongside competing private insurance as a first step toward a single-payer, government-run system. Unlike the president, Mr. Shumlin has been up-front in his support for single-payer care, even on the campaign trail last fall. At least he can say he has a mandate from voters to do what he's doing.
The last time Vermont's health system gained national attention was in 2004, when Howard Dean, then governor of the state, ran for president. As governor, Mr. Dean expanded public insurance eligibility, struggling to get as close to single-payer health care as he legally could. New regulations pushed out private insurers, reducing competition. Vermont imposed a guaranteed-issue mandate, which requires insurers to sell to any applicant, and forced insurers to use community rating, which requires them to offer the same price to everyone, regardless of age and health. Both measures also appeared in the final ObamaCare law.
The result? The number of uninsured Vermonters barely budged. But costs sure moved—in the wrong direction. From 1991 to 2004, according to the Kaiser Foundation, Vermont's health costs grew by 7.6% annually. Across the U.S. comparable costs grew only 5.5% on average. From 2005 to 2008, in data cited by Dr. William Hsaio, a Harvard consultant studying this for the state, growth in Vermont's health costs grew 8.2%, against a national average of 5.7%.
The current governor says his plan is "all about containing costs," echoing Mr. Obama's absurd claim that increased health spending would mean lower deficits. Mr. Shumlin can talk about government health care and savings in the same breath because millions of Americans still believe the myth that socialized health-care models are immune from cost inflation.
Yet data from the Organization for Economic Cooperation and Development show that U.S. health inflation rates are roughly identical to those seen in European and Canadian systems. From 1990 to 2006, U.S. health costs grew an average of 1.66% faster than the economy vs. 1.62% for OECD nations.
Socialized medicine advocates say the point is moot because government-run systems start from a cheaper baseline. That's true, but that advantage is eroding quickly. A recent paper projected that Canadian health-care costs were growing so fast that they should consume 19% of GDP by 2031. The chief author of the paper is David Dodge, Canada's former deputy minister of health and a former governor of the Bank of Canada.
Single-payer countries also keep costs below U.S. levels by rationing care, not by being more efficient. Several weeks ago, the government-run, government-appointed health authority in the Canadian city where I was born admitted that a dozen patients died in the last three years while waiting for routine cardiac surgery. None was classified as an emergency case. In Canada's system, that made them "elective" surgery patients, triggering wait times that can delay treatment for weeks or even months. Yet single-payer activists persistently claim that "death by rationing" is a myth invented by insurance lobbyists.
In the U.S., Medicare hasn't seen much rationing yet, because it can rely on a privately funded reserve of resources to meet surges in demand. Whenever Congress flirts with serious cuts to Medicare fees, doctors push back. Then, Congress flinches—a sign that the program is more dependent on the private-sector than its champions admit.
Now Vermont is on course to repeat others' mistakes. For American liberals, there's no better place to test-run a public option. But if the new plan doesn't work, Vermont is so small that government-care supporters can pretend it's the state's fault and not a flaw in the concept. Darcie Johnston of Vermonters for Health Care Freedom fears the worst: "the largest tax hike in Vermont history" and a dysfunctional system.
It's a pity, because Vermont is an ideal place to run a very different experiment. Health-care policy thinkers are shifting focus to the potential benefits of a true wellness policy. Your health is as important to health outcomes as your health insurance, after all. Europeans have better life expectancy than Americans because they take better care of themselves on average, not because they get better care in their hospitals.
Through their own lifestyle choices, Vermont residents already have lower than average obesity levels and below-median smoking rates. With a more patient-centered insurance market, Vermont residents could receive, for example, cash incentives to prevent diseases caused by obesity, tobacco, and other lifestyle choices, all at a fraction of the cost of future treatments.
Continued in article
In this experiment Vermont suffers from a relatively small population over which to spread health insurance costs for very expensive treatments such as AIDs medications, organ transplants, premature baby care, and the costs of dying (especially extended intensive care unit confinements while dying) for patients not on Medicare. Medical cost In the 2010 census, Vermont only had 630,337 people, many of whom are children and elderly that will not pay medical insurance premiums in Vermont's public plan --- http://en.wikipedia.org/wiki/Vermont
Vermont residents also rely heavily on out--of-state medical providers such as physicians and hospitals in bordering states of New Hampshire (especially the Dartmouth-Hitchcock Medical Center), Massachusetts (especially in the metropolitan area of Boston), and Canada. This greatly limits cost containment initiatives that accompany Vermont's public medical insurance plans.
"Here’s Why Health Care Costs Are Outpacing Health Care Efficacy," by Stephen J. Dubner, Freakonomics.com, April 18, 2011 ---
In a new working paper called “Technology Growth and Expenditure Growth in Health Care” (abstract here, PDF here), Amitabh Chandra and Jonathan S. Skinner offer an explanation:
Bob Jensen's threads on health care are at
"Look who's getting out of ObamaCare," by Michelle Malkin, New York
Post, May 19, 2011 ---
Hear that? It's the escalating cry of American employers and workers trying to hold on to their health-care benefits in the age of stifling Obama health-insurance mandates: Gangway! Gangway! Save me! Waive me!
ObamaCare refugees first began beating down the exit doors last October. Waiver-mania started with McDonald's and Jack in the Box; spread to Dish Networks, hair-salon chain Regis Corp and resort giant Universal Orlando; took hold among major Big Labor outfits from the AFL-CIO to the CWA to the SEIU; roped in the nationalized health-care promoters at the Robert Wood Johnson Foundation; and is now gripping entire states
The latest to catch the waive? West Coast liberals.
Yes, amid House Democratic Leader Nancy Pelosi's congressional district, a cluster of San Francisco small businesses is among the latest waiver recipients. At least two dozen Bay Area companies -- including bars, restaurants, hotels, tourist shops, real-estate and auto firms -- have secured temporary, one-year reprieves from the federal law.
Another noteworthy waiver winner: Seattle-based REI. The trendy outdoor-equipment retailer's progressive CEO, Sally Jewell, appeared with President Obama in 2009 to tout White House health-care-reform initiatives. Two years later, REI snagged a waiver to protect the health benefits of a whopping 1,180 workers from the big-government bureaucrats that Jewell embraced at Obama's roundtable.
To date, the Health and Human Services Department has granted health-care-law exemptions to more than 3 million workers covered by more than 1,300 unions, companies and insurers who'd voluntarily offered low-cost health plans with annual benefits limits.
ObamaCare architects outlawed those private plans (nicknamed "mini med" plans) in the name of "patients' rights." Without waivers, the escapees would have had to hike premiums or drop insurance coverage for mostly low-wage, seasonal and part-time workers.
Among the most recent union affiliates to secure pardons:
* Teamsters Local 485 Health and Welfare Fund in Brooklyn
* Detroit and Vicinity Trowel Trades Health and Welfare Fund
* Communications Workers of America Local 1182 Security Benefits Fund
* CWA Local 1183 Health and Welfare Fund
* Bakers Union and Food Employees Labor Relations Association Health and Welfare Fund
* SEIU Healthcare Illinois Home Care and Child Care Fund
* United Food and Commercial Workers San Diego Employers Health and Welfare Trust
* Welfare Fund of the International Union of Operating Engineers Local 15, 15A, 15C, 15D AFL-CIO
* United Steelworkers Local 1-0318 Health and Welfare Trust Fund
* United Association of Journeymen and Apprentices Local 198 AFL-CIO Health and Welfare Trust
* Teamsters Local 617 Welfare Fund in Ridgefield, NJ
* Plumbers and Steamfitters Local 60 Health and Welfare Fund
* New York State Nurses Welfare Plan for New York City Employed Registered Professional Nurses
Pelosi and the Golden Ticket Administrators in Washington deny preferential treatment for waiver beneficiaries. But the stench of waivers-for-favors won't be dispelled until and unless the Obama administration releases a full list not only of those who won exemptions, but also of those who applied and were denied.
With San Francisco businesses caught with their hands in the waiver jar, Pelosi's office could do nothing else but pout: "It is pathetic," said Pelosi spokesman Drew Hammill, "that there are those who would be cheering for Americans to lose their minimum health coverage or see their premiums increase for political purposes."
It is far more pathetic to have cheered, as Pelosi did on the one-year anniversary of ObamaCare, the law's onerous benefits limits from which thousands of her own constituents have now been exempted.
Continued in article
"CEO Pay in 2010 Jumped 11%," by Joann S. Lublin, The Wall Street
Journal, May 9, 2011 ---
Chief executives at the biggest U.S. companies saw their pay jump sharply in 2010, as boards rewarded them for strong profit and share-price growth with bigger bonuses and stock grants.
The median value of salaries, bonuses and long-term incentive awards for CEOs of 350 major companies surged 11% to $9.3 million, according to a study of proxy statements conducted for The Wall Street Journal by management consultancy Hay Group.
The rise followed a year in which pay for the top boss was flat at these companies.
Viacom Inc. CEO Philippe P. Dauman topped the list. He received compensation valued at $84.3 million, more than double his 2009 pay, thanks largely to equity awards in a renewed contract.
The Journal measured CEO pay by total direct compensation, which includes salary, bonuses and the granted value of stock, stock options and other long-term incentives given for service in fiscal 2010. That figure excludes the value of exercised stock options and the vesting of restricted stock. The survey covered the 350 biggest companies that filed proxies between May 1, 2010, and April 30, 2011. Graphic: CEO Pay at Biggest 350 U.S. Public Companies
The Wall Street Journal CEO Compensation Study was conducted by Hay Group, a management-consulting firm. The study analyzes CEO pay from the biggest 350 U.S. public companies by revenue that filed their definitive proxy statements between May 1, 2010, and April 30, 2011. [CEOPAY11_promo]
Click on image to see CEO Pay at the biggest 350 U.S. public companies
For the surveyed CEOs, the sharpest pay gains came via bonuses, which soared 19.7% as profits recovered, especially in some hard-hit industries.
Profits and share prices increased even more than CEO compensation. Net income rose by a median of 17%; shareholders at those companies enjoyed a median return, including dividends, of 18%.
CEOs of media companies claimed four of the top 10 spots: Mr. Dauman at Viacom, plus the chiefs of CBS Corp., Walt Disney Co. and Time Warner Inc.
Another media CEO, News Corp.'s Rupert Murdoch, ranked 52nd, with total compensation valued at $16.5 million. A spokesman for News Corp., which owns The Wall Street Journal, declined to comment.
Mr. Dauman, Viacom's CEO since 2006, achieved his $84.3 million largely due to one-time equity awards valued at $54.3 million as part of a five-year employment contract signed in April 2010. In extending his contract, directors cited his operational and financial leadership.
CEO pay rose last year by about 11%, according to the Wall Street Journal's annual CEO pay survey. Kelsey Hubbard talks with WSJ's Erin White about the results.
"Viacom shares appreciated 33% during calendar year 2010 as compared with the 13% increase in the S&P 500,'' a Viacom spokeswoman said. The company benefited last year from a rebound in the advertising market and improved ratings at its cable networks.
Larry Ellison, the billionaire founder of Oracle Corp., took second place. Long ranked among the highest-paid chiefs, he received compensation valued at $68.6 million for the year ended last May 31. It mostly consisted of options valued at $61.9 million. (The package was included in a November Wall Street Journal survey of CEO pay that slightly overlapped the current study.)
Oracle declined to comment.
CBS CEO Leslie Moonves landed the No. 3 spot with compensation valued at $53.9 million. The total includes a $27.5 million bonus, which "reflected the company's remarkable year under his leadership,'' a CBS spokesman recalled. "He led CBS to results that produced extraordinary growth in shareholder value'' as returns of 37.4% outpaced media peers, the spokesman said.
View Full Image TOPEARNS TOPEARNS TOPEARNS
Media mogul Sumner Redstone controls Viacom and CBS through National Amusements, his family holding company, although the CBS and Viacom boards set executive pay through their independent compensation committees.
Martin E. Franklin, the longtime head of Jarden Corp., was fourth highest-paid. His $45.2 million package consisted mostly of restricted shares tied to higher per-share earnings or stock price at the maker of consumer goods. (An executive gets such shares free after sticking around for several years, but they sometimes come with a performance test, as Mr. Franklin's did.)
Continued in article
Bob Jensen's threads on outrageous compensation are at
How Accountants Hide the Pension Bomb in the Public Sectors
"The Hidden State Financial Crisis: My latest research into opaque
state financial statements suggests taxpayers will be surprised by how much
pensions are underfunded.," by Meredith Whitney, The Wall Street Journal,
May 18, 2011 ---
Next month will be pivotal for most states, as it marks the fiscal year end and is when balanced budgets are due. The states have racked up over $1.8 trillion in taxpayer-supported obligations in large part by underfunding their pension and other post-employment benefits. Yet over the past three years, there still has been a cumulative excess of $400 billion in state budget shortfalls. States have already been forced to raise taxes and cut programs to bridge those gaps.
Next month will also mark the end of the American Recovery and Reinvestment Act's $480 billion in federal stimulus, which has subsidized states through the economic downturn. States have grown more dependent on federal subsidies, relying on them for almost 30% of their budgets.
The condition of state finances threatens the economic recovery. States employ over 19 million Americans, or 15% of the U.S. work force, and state spending accounts for 12% of U.S. gross domestic product. The process of reining in state finances will be painful for us all.
The rapid deterioration of state finances must be addressed immediately. Some dismiss these concerns, because they believe states will be able to grow their way out of these challenges. The reality is that while state revenues have improved, they have done so in part from tax hikes. However, state tax revenues still remain at roughly 2006 levels.
Expenses are near the highest they have ever been due to built-in annual cost escalators that have no correlation to revenue growth (or decline, as has been the case recently). Even as states have made deep cuts in some social programs, their fixed expenses of debt service and the actuarially recommended minimum pension and other retirement payments have skyrocketed. While over the past 10 years state and local government spending has grown by 65%, tax receipts have grown only by 32%.
Off balance sheet debt is the legal obligation of the state to its current and past employees in the form of pension and other retirement benefits. Today, off balance sheet debt totals over $1.3 trillion, as measured by current accounting standards, and it accounts for almost 75% of taxpayer-supported state debt obligations. Only recently have states been under pressure to disclose more information about these liabilities, because it is clear that their debt burdens are grossly understated.
Since January, some of my colleagues focused exclusively on finding the most up-to-date information on ballooning tax-supported state obligations. This meant going to each state and local government's website for current data, which we found was truly opaque and without uniform standards.
What concerned us the most was the fact that fixed debt-service costs are increasingly crowding out state monies for essential services. For example, New Jersey's ratio of total tax-supported state obligations to gross state product is over 30%, and the fixed costs to service those obligations eat up 16% of the total budget. Even these numbers are skewed, because they represent only the bare minimum paid into funding pension and retirement plans. We calculate that if New Jersey were to pay the actuarially recommended contribution, fixed costs would absorb 37% of the budget. New Jersey is not alone.
The real issue here is the enormous over-leveraging of taxpayer-supported obligations at a time when taxpayers are already paying more and receiving less. In the states most affected by skyrocketing debt and fiscal imbalances, social services continue to be cut the most. Taxpayers have the ultimate voting right—with their feet. Corporations are relocating, or at a minimum moving large portions of their businesses to more tax-friendly states.
Boeing is in the political cross-hairs as it is trying to set up a facility in the more business-friendly state of South Carolina, away from its current hub of Washington. California legislators recently went to Texas to learn best practices as a result of a rising tide of businesses that are building operations outside of their state. Over time, individuals will migrate to more tax-friendly states as well, and job seekers will follow corporations.
Continued in article
Some accountants naively assume that the new IASB-FASB agreement on fair value accounting will make pension obligations more transparent, especially if the GASB follows suit. What they don't really understand is that obligations that are not recognized in the first place are not going to be made more transparent with fair value accounting if they're hidden in the first place. For ten years Arnold Swartzenagger disclosed four kids and hid a fifth kid from his wife and the rest of the world. With pensions it's more like disclosing one kid and hiding four from the world.
Arnold pretty well ruined parts of his life when the that which was hidden
was finally revealed. The same thing will happen to local, state, and national
governments in the U.S. if hidden pension obligations are ever revealed. It will
ruin everything in future elections if voters really understand how bad the
hidden entitlements have really become ---
Although all 50 states are in deep financial troubles, what state is in the worst shape at the moment and is unable to pay its bills?
Hint: The state in deepest trouble is not California, although California is in dire straights!
How did accountants hide the pending disaster?
Watch the Video
This module on 60 Minutes on December 19 was one of the most worrisome episodes I've ever watched
It appears that a huge number of cities and towns and some states will default on bonds within12 months from now
"State Budgets: The Day of Reckoning Steve Kroft Reports On The Growing Financial Woes States Are Facing," CBS Sixty Minutes, December 19, 2010 ---
The problem with that, according to Wall Street analyst Meredith Whitney, is that no one really knows how deep the holes are. She and her staff spent two years and thousands of man hours trying to analyze the financial condition of the 15 largest states. She wanted to find out if they would be able to pay back the money they've borrowed and what kind of risk they pose to the $3 trillion municipal bond market, where state and local governments go to finance their schools, highways, and other projects.
"How accurate is the financial information that's public on the states? And municipalities," Kroft asked.
"The lack of transparency with the state disclosure is the worst I have ever seen," Whitney said. "Ultimately we have to use what's publicly available data and a lot of it is as old as June 2008. So that's before the financial collapse in the fall of 2008."
Whitney believes the states will find a way to honor their debts, but she's afraid some local governments which depend on their state for a third of their revenues will get squeezed as the states are forced to tighten their belts. She's convinced that some cities and counties will be unable to meet their obligations to municipal bond holders who financed their debt. Earlier this year, the state of Pennsylvania had to rescue the city of Harrisburg, its capital, from defaulting on hundreds of millions of dollars in debt for an incinerator project.
"There's not a doubt in my mind that you will see a spate of municipal bond defaults," Whitney predicted.
Asked how many is a "spate," Whitney said, "You could see 50 sizeable defaults. Fifty to 100 sizeable defaults. More. This will amount to hundreds of billions of dollars' worth of defaults."
Municipal bonds have long been considered to be among the safest investments, bought by small investors saving for retirement, and held in huge numbers by big banks. Even a few defaults could affect the entire market. Right now the big bond rating agencies like Standard & Poor's and Moody's, who got everything wrong in the housing collapse, say there's no cause for concern, but Meredith Whitney doesn't believe it.
"When individual investors look to people that are supposed to know better, they're patted on the head and told, 'It's not something you need to worry about.' It'll be something to worry about within the next 12 months," she said.
No one is talking about it now, but the big test will come this spring. That's when $160 billion in federal stimulus money, that has helped states and local governments limp through the great recession, will run out.
The states are going to need some more cash and will almost certainly ask for another bailout. Only this time there are no guarantees that Washington will ride to the rescue.
Continued in article
"Public Pensions Cook the Books: Some plans want to hide the truth from taxpayers," by Andrew Biggs, The Wall Street Journal, July 6, 2009 --- http://online.wsj.com/article/SB124683573382697889.html
Here's a dilemma: You manage a public employee pension plan and your actuary tells you it is significantly underfunded. You don't want to raise contributions. Cutting benefits is out of the question. To be honest, you'd really rather not even admit there's a problem, lest taxpayers get upset.
What to do? For the administrators of two Montana pension plans, the answer is obvious: Get a new actuary. Or at least that's the essence of the managers' recent solicitations for actuarial services, which warn that actuaries who favor reporting the full market value of pension liabilities probably shouldn't bother applying.
Public employee pension plans are plagued by overgenerous benefits, chronic underfunding, and now trillion dollar stock-market losses. Based on their preferred accounting methods -- which discount future liabilities based on high but uncertain returns projected for investments -- these plans are underfunded nationally by around $310 billion.
The numbers are worse using market valuation methods (the methods private-sector plans must use), which discount benefit liabilities at lower interest rates to reflect the chance that the expected returns won't be realized. Using that method, University of Chicago economists Robert Novy-Marx and Joshua Rauh calculate that, even prior to the market collapse, public pensions were actually short by nearly $2 trillion. That's nearly $87,000 per plan participant. With employee benefits guaranteed by law and sometimes even by state constitutions, it's likely these gargantuan shortfalls will have to be borne by unsuspecting taxpayers.
Some public pension administrators have a strategy, though: Keep taxpayers unsuspecting. The Montana Public Employees' Retirement Board and the Montana Teachers' Retirement System declare in a recent solicitation for actuarial services that "If the Primary Actuary or the Actuarial Firm supports [market valuation] for public pension plans, their proposal may be disqualified from further consideration."
Scott Miller, legal counsel of the Montana Public Employees Board, was more straightforward: "The point is we aren't interested in bringing in an actuary to pressure the board to adopt market value of liabilities theory."
While corporate pension funds are required by law to use low, risk-adjusted discount rates to calculate the market value of their liabilities, public employee pensions are not. However, financial economists are united in believing that market-based techniques for valuing private sector investments should also be applied to public pensions.
Because the power of compound interest is so strong, discounting future benefit costs using a pension plan's high expected return rather than a low riskless return can significantly reduce the plan's measured funding shortfall. But it does so only by ignoring risk. The expected return implies only the "expectation" -- meaning, at least a 50% chance, not a guarantee -- that the plan's assets will be sufficient to meet its liabilities. But when future benefits are considered to be riskless by plan participants and have been ruled to be so by state courts, a 51% chance that the returns will actually be there when they are needed hardly constitutes full funding.
Public pension administrators argue that government plans fundamentally differ from private sector pensions, since the government cannot go out of business. Even so, the only true advantage public pensions have over private plans is the ability to raise taxes. But as the Congressional Budget Office has pointed out in 2004, "The government does not have a capacity to bear risk on its own" -- rather, government merely redistributes risk between taxpayers and beneficiaries, present and future.
Market valuation makes the costs of these potential tax increases explicit, while the public pension administrators' approach, which obscures the possibility that the investment returns won't achieve their goals, leaves taxpayers in the dark.
For these reasons, the Public Interest Committee of the American Academy of Actuaries recently stated, "it is in the public interest for retirement plans to disclose consistent measures of the economic value of plan assets and liabilities in order to provide the benefits promised by plan sponsors."
Nevertheless, the National Association of State Retirement Administrators, an umbrella group representing government employee pension funds, effectively wants other public plans to take the same low road that the two Montana plans want to take. It argues against reporting the market valuation of pension shortfalls. But the association's objections seem less against market valuation itself than against the fact that higher reported underfunding "could encourage public sector plan sponsors to abandon their traditional pension plans in lieu of defined contribution plans."
The Government Accounting Standards Board, which sets guidelines for public pension reporting, does not currently call for reporting the market value of public pension liabilities. The board announced last year a review of its position regarding market valuation but says the review may not be completed until 2013.
This is too long for state taxpayers to wait to find out how many trillions they owe.
Whither California?" by J. Edward Ketz, SmartPros, November
When people ignore economic realities and are foolish enough to make and adhere to ill-conceived and faulty budgets, well, they get what they deserve. Take California, for example.
The state has greatly reduced its cash infusions to the University of California system, and recently the university’s regents voted to increase fees (California’s code word for “tuition”) 32%. This has led to a strike at Berkeley and to student demonstrations and to the take-over of some buildings there and at Santa Cruz. This planned tuition hike comes on the heels of layoffs and furloughs and salary cutbacks of many university employees.
Recently, the Academic Senate at Berkeley voted to end financial support for the Department of Intercollegiate Athletics. The Senate even had the gall to ask the Athletics department to repay a loan of $5.8 million. Nothing is sacred anymore! But nothing to fear—I bet the regents will save Berkeley football before it saves the classics department.
The state of affairs at Berkeley will be watched all over because many other public universities are not much different. It is only a matter of time when they too will be faced with the question of how to endure economic sacrifice.
But, it won’t be all bad. Such difficult times provide moments when society can rethink its goals and strategic priorities. How many research universities do we really need in this country? How many administrators do we really need to protect the interests of Croatian students or to assist those who wish to preserve the heritage of Bon Jovi or to supply counselors for those trying to give up Law and Order? And does every town with a population of at least 1,000 really need a branch campus?
The state of California itself is much worse off than Berkeley. Given the state’s penchant to provide welfare to everybody who can generate a creative excuse for an entitlement, it was only a matter of time before the state’s budget was so out of whack even Alec Baldwin and Barbara Streisand could acknowledge it.
State legislators and governors over the last 10 to 20 years are to blame. Not only do they not understand the word “NO” when it comes to spending, they were very short-sighted when it came to revenue generation. They thought the dot-com slush funds would continue to be created out of nothing, though physics and economics indicate otherwise. They then did want virtually every politician does—they are so without original ideas!—they raised taxes on corporations and rich people. Unfortunately, the legislators and governors forgot that corporations and rich people can move, and indeed enough of them have left the state, leaving California in serious trouble.
The woes are so great that it is easy to predict that California will become the first state in U.S. history to declare bankruptcy. I put the odds at least at 50 percent in 2010.
Then the fun begins. California, before or shortly after entering Chapter 11, will ask for help from Washington. While the Obama administration and the Congress likely will administer CPR to the state finances, they really should just admit that the state is insolvent. The moral hazard is huge. If Washington provides assistance, there will be 49 states that will quickly follow suit.
The bankruptcy process itself will be interesting because nobody will know what to do with a state. Creditors might try to win concessions about the state’s budgeting process or membership to state agencies that make economic decisions. They will also attempt to rewrite existing contracts.
The biggest effect will be on bond yields. Any bankruptcy will shoot rates up and this will make future governmental borrowing hard and expensive for all governmental units.
Taxpayers will face a major nightmare. Taxes will skyrocket for those who are not fortunate enough to be retired. Maybe taxpayers will even wake up and realize that they have elected nothing but economic idiots for quite some time. But what do you expect from a state that thinks actors actually know something?
I just love California dreamin’.
Bob Jensen's threads on the sad state of government accounting and
Bob Jensen's threads on pension schemes to hide debt ---
"Understanding Liberals," by Walter E. Williams, Townhall, May
18, 2011 ---
The liberal vision of government is easily understood and makes perfect sense if one acknowledges their misunderstanding and implied assumptions about the sources of income. Their vision helps explain the language they use and policies they support, such as income redistribution and calls for the rich to give something back.
Suppose the true source of income was a gigantic pile of money meant to be shared equally amongst Americans. The reason some people have more money than others is because they got to the pile first and greedily took an unfair share. That being the case, justice requires that the rich give something back, and if they won't do so voluntarily, Congress should confiscate their ill-gotten gains and return them to their rightful owners.
A competing liberal implied assumption about the sources of income is that income is distributed, as in distribution of income. There might be a dealer of dollars. The reason why some people have more dollars than others is because the dollar dealer is a racist, a sexist, a multinationalist or a conservative. The only right thing to do, for those to whom the dollar dealer unfairly dealt too many dollars, is to give back their ill-gotten gains. If they refuse to do so, then it's the job of Congress to use their agents at the IRS to confiscate their ill-gotten gains and return them to their rightful owners. In a word, there must be a re-dealing of the dollars or what some people call income redistribution.
The sane among us recognize that in a free society, income is neither taken nor distributed; for the most part, it is earned. Income is earned by pleasing one's fellow man. The greater one's ability to please his fellow man, the greater is his claim on what his fellow man produces. Those claims are represented by the number of dollars received from his fellow man.
Say I mow your lawn. For doing so, you pay me $20. I go to my grocer and demand, "Give me 2 pounds of steak and a six-pack of beer that my fellow man produced." In effect, the grocer asks, "Williams, you're asking your fellow man to serve you. Did you serve him?" I reply, "Yes." The grocer says, "Prove it."
That's when I pull out the $20 I earned from serving my fellow man. We can think of that $20 as "certificates of performance." They stand as proof that I served my fellow man. It would be no different if I were an orthopedic doctor, with a large clientele, earning $500,000 per year by serving my fellow man. By the way, having mowed my fellow man's lawn or set his fractured fibula, what else do I owe him or anyone else? What's the case for being forced to give anything back? If one wishes to be charitable, that's an entirely different matter.
Continued in article
"Wisconsin professor under investigation for promoting recall of GOP
Senators," by Ed Morrissey, Hot Air, May 7, 2011 ---
Consider the University of Wisconsin officially shocked, shocked! to discover that one of their professors politicized his classroom to encourage the recall of Republican state Senators that backed Gov. Scott Walker’s public-employee union reforms. Color the rest of us less shocked that the professor in question, Stephen Richards, couldn’t bother to get the details right on the law before instructing his students how to recall those who backed it. First, Green Bay’s WFRV reports this morning that the university has released details of the investigation that strongly suggest that Richards will face disciplinary action (via Tim R)
. . .
Not everyone on campus is impressed with the investigation. One student told WFRV that every instructor had pushed their viewpoints on the controversy in the classroom, which means that instead of a Death on the Nile whodunit, UW may be looking more at a Murder on the Orient Express conclusion. Other students disagreed, saying Richards went out of his way to bully people on the issue in the classroom setting. Richards denies having done anything inappropriate, saying that budget matters relate directly to his coursework, but “regrets” using classroom time to discuss the recalls.
UW officials might want to look into Richards’ competence as well as his judgment. According to the audio, Richards materially misrepresented the bill:
Continued in article
Bob Jensen's threads on political correctness in the classroom ---
Bob Jensen's universal health care messaging --- http://www.trinity.edu/rjensen/Health.htm
the Tidbits Archives ---
Against Validity Challenges in Plato's Cave ---
· With a Rejoinder from the 2010 Senior Editor of The Accounting Review (TAR), Steven J. Kachelmeier
· With Replies in Appendix 4 to Professor Kachemeier by Professors Jagdish Gangolly and Paul Williams
· With Added Conjectures in Appendix 1 as to Why the Profession of Accountancy Ignores TAR
· With Suggestions in Appendix 2 for Incorporating Accounting Research into Undergraduate Accounting Courses
Against Validity Challenges in Plato's Cave ---
By Bob Jensen
wrong in accounting/accountics research? ---
The Sad State of Accountancy Doctoral Programs That Do Not Appeal to Most
AN ANALYSIS OF THE EVOLUTION OF RESEARCH CONTRIBUTIONS BY THE ACCOUNTING REVIEW:
Bob Jensen's threads on accounting theory
Tom Lehrer on Mathematical Models and Statistics
Systemic problems of accountancy (especially the vegetable nutrition paradox)
that probably will never be solved
Bob Jensen's economic crisis messaging http://www.trinity.edu/rjensen/2008Bailout.htm
Bob Jensen's threads --- http://www.trinity.edu/rjensen/threads.htm
Bob Jensen's Home Page --- http://www.trinity.edu/rjensen/