Tuesday, July 23, 2013

Karl Denninger makes a no varnish call on why Detroit and every other public pension plan is de facto kaput.

There is no diplomatic way to speak the truth on this, so why not simply say it?


  "The common rubric was that 8% or even 10% returns would be "modeled" and used to "compute" the contributions that are required for all those cops, teachers, school administrators and firefighters.
This might work for a while -- in an expanding credit environment it can.  Indeed, isn't it funny that this almost-exactly matches the credit expansion in rate over the last 30 years?

But a pension plan is a forward, indefinite-duration thing because new employees come in to replace the ones who retire.

As such the claimed "return" that is embedded in to the promise is impossible to provide because it grossly exceeds the real return of the economy over any long run period in history.  Leverage expansion returns can run in this range for a few decades but not permanently because leverage expansion is predicated on stealing purchasing power from the people on a continual basis. 

The people eventually run out of marginal income that you can steal and ends -- it mathematically must because the alternative is that everyone starves!

Any and all such plans are thus scams.  The people on both sides of the table either know or should know that this is the case.  Those who argued for it and those who agreed to "pay" those amounts are equally at fault for either demanding or agreeing to give that which is impossible over the long run. 
So in addition to the financial scam of these pensions that are spread far and wide in the United States we then add the physical crime of thugs thinking they can, without consequence, victimize the people who produce in a given area and they'll keep producing and paying into the government so they can not only be thugs but receive various forms of welfare and subsidy besides.

That sort of thought process goes beyond dumb -- it's criminally insane.

The pension promises of all of these "public" employees across the United States must be repudiated as fraudulent from inception and thus void.  Transfer the balance of whatever is in there now into a separate fund, appoint someone to manage it to pay current beneficiaries and whoever is "vested" in ratable proportion to whatever is there, and let it run off until it's gone.  Done.

Next, get the Sheriffs and Chiefs of Police out into the streets.  Explain to the residents that they have two choices -- stop acting like thugs and find a way to be industrious in a lawful and reasonable fashion or they will starve.  Start tapering the "welfare programs" in all forms at 5% a month from today's baseline until they're gone in less than two years.  Keep hammering it -- vote for whoever you want, but this is how it's going to be because you're all there is and you're not, at present, earning any money to fund the services you want!

At the same time drop all the regulations that prevent private charity from running soup kitchens and similar, if they're willing to do so.  Some churches and other organizations will do so provided they're not getting shot at.  Whether they get shot at is up the residents.

You can't force people to stay, you can't tax someone who's not producing and those who were "promised" rich pensions that have payouts exceeding economic progress will not receive them because the promises were impossible to fulfill at the time they were made."

10 comments:

  1. You should look at the landmark case where Orange County, CA attempted to do this and was opposed by the Association of Orange County Deputy Sheriffs (circa 2008-9). It went all the way up to the California Supreme Court and the decisions upheld the union all the way.

    The way the contracts were written (at least in the case of Orange County), the pensions are a "property interest". The pensioners would stand in first place in any bankruptcy proceeding and the County would be force to liquidate all property to their benefit. You could change this, moving forward, but you can't go back and repudiate what was agreed to in good faith. It was not a "fraud".

    Written by yours truly:

    http://www.amazon.com/Orange-County-Bankruptcy-Investigative-ebook/dp/B005CBF83G/ref=sr_1_3?ie=UTF8&qid=1374602223&sr=8-3&keywords=orange+county+bankruptcy

    Until the Detroit bankruptcy, the $2.7 billion Orange County Bankruptcy in 1994 was the largest Chapter 9 filing in the nation's history. I was in charge of that investigation for the Orange County District Attorney's Office at the time.

    The writer (above) is wrong.

    The way to deal with the problem moving forward is to make it ILLEGAL for any elected official to obtain any benefit from the employees or unions, whose salaries they vote on. That law could be enacted easily...but these unions contribute a lot of money from members to "buy votes", so lawmakers won't give up that perk easily.

    REMEMBER that when you're an elected official, you get to keep your campaign war chest when you leave office. A lot of these poor, underpaid, elected public servants leave office with a fat pension AND literally millions or tens of millions in their campaign funds.

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    1. Which should be illegal. The unions literally run the state here, and we literally work for them. Democracy? No way. Try Oligarchy.

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    2. There are two ways to change the law. Revolution tends to put an equally bad or potentially worse crown on the throne. Or to change the law. Changing the law unless you suspend the Constitution means that you can't create an ex-post facto law. It has to move forward from the present.

      The problem that we all face is that the legislators themselves, colluding together, create benefits/sinecures for themselves. Even removing a rat from office only means that another hydra's head would spring up and take the place of the politician who was removed. Public pressure, moving from one point - to another, might be able to change the law incrementally. The first step would be to disallow any from receiving any contribution by an employee, union or association that benefits from a vote on salary or benefits.

      That would in effect, de-fang the unions. Politicians shouldn't be able to vote in conflict of interest and it is illegal to do that EXCEPT where public servant's salaries are involved.

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    3. The unions legally bribed their way into positions of power. Those positions of power can be legally removed. I agree with you. I'm not disputing what you're saying. It's just that the remedy (if one is to be found) must make sense.

      California is a broken toy. And every year, the fractures run deeper.

      The money interests support the status quo, which is why it's the status quo. To fight them, you must have the legs to do so.

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    4. LL, as i reflect on this further, I see you arguing that legally, nothing can be done ex post facto, so the only option is to seek to cure future issues of this type. Doesn't Denninger posit that the problem is that there simply is no money, irrespective of the fact that the unions have legally protected their benefits about as well as they possibly can? In other words, if there is no money, there is no money, and that is a fact that cannot be overturned by any judge.

      Further, from a political standpoint, the voters will only tolerate so much in making sure the gold plated benefits of public workers are paid. When it comes down to sacrificing all other essential public services so that your local sheriff can retire with basically full pay and benefits at 55 and then play golf the rest of his life, you will have a huge problem politically no matter what. At that point, there will be changes, no matter what.

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    5. It takes a LONG time to completely wipe out a vibrant capitalist economy (absent a nuke or saturation bombing). Look how long it took the liberals to completely devastate Detroit. The place looks like Rome after the Vandals rode through. (well, they did ride through but that's another story) Not all pension systems are in as bad of shape as Cal PERS is, but they are all based on a species of Ponzi Scheme. Stockton has felt the sting and is in a state of reorganization/bankruptcy.

      I accept the likelihood of eventual change, but as with any bingeing alcoholic, one must hit rock bottom first. And that is a painful journey. States, counties and cities can't print money the way that the feds can, so they feel the pinch long before the nation does. $86 billion on failed green energy schemes (wrap your head around that number) predicated on $800 billion in Stimulus 1 and $120 billion in Stimulus 2 -- that flopped.

      I'm going to write a blog on the issue of law enforcement/fire department pay and benefits and of the trade-offs that I see there. I could do it here, but it's your blog. Your comments and feedback would be appreciated. The issue is not so clear cut as one would think.

      Something just to ruminate over is the change that is happening in many police pensions. They are changing from "defined benefit", which is 2% of base per year of service at age 55 for example --- to defined "contribution" where the government puts aside an amount as a fully funded 'savings program' for an employee, like a 401K. And yes, that's going into effect in many locations. The problem with that is the defined contribution doesn't fund the Ponzi Scheme.

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    6. I will look forward to that post. Your point about how long it takes to run down a capitalist system is well taken. Even here in California, with all it's myriad of problems, the radio informed me that Jerry Brown has the second highest approval rating of this most recent stint as our governor. That tells me any solution, even a half hearted one, is years away, as the economic pain is simply not bad enough yet to make folks look to enact significant change. It's easier to just move away, either your business or personally. For now, all of us in the private sector will simply need to accept paying more and more of our earned income to the government, and living on less and less.

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    7. For what it's worth - - and it may not be worth much, I've worked for the government much of my life. As a US Naval officer, in the law enforcement arena, as an intelligence officer and more recently as an "expert" with companies that do business outside of the US. Private industry is a much NICER place to work for the most part. They simply treat you better (pension notwithstanding).

      Part 1 on that post goes up on Sunday morning (already written) with at least one more part to follow later in the day or on Monday.

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    8. Believe you me, I'll have my computer spooled up and running early on Sunday. Looking forward to that post.

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