Apolitical Government Reform

Not as a libertarians, but as a good government fiscal conservatives, who value government and government programs, how might we respond to charges of right wing radicalism? How might we respond to charges that we are biased against working people, or want to destroy the middle class, or are a tool of the super-rich? If you want to keep good government programs, but want to make government more financially efficient, how to respond to charges of resenting government workers, or wanting to change the deal on government workers, or not appreciating government workers? Focusing on the state and local government entities here in sunny California, here are some thoughts:

(1) Public employees used to take jobs that paid less than private sector jobs. Up until about 20 years ago, the trade-off was clear: Government workers exchanged a lower salary for better benefits, a pension that was better than social security, and job security. This was a fair exchange, and the system worked just fine.

(2) Over the past 20 years, during the economically unsustainable internet bubble followed by the real-estate bubble, public sector unions stirred up envy among public sector employees, prodding them into demanding unsustainable increases to their compensation to match the private sector. Since these bubbles have burst, these unions use their nearly absolute power over California’s state and local politicians to maintain unsustainable levels of public sector employee compensation.

(3) We now have a situation where public employees have, in most cases, better base salaries than in the private sector, and enhanced pension benefits that now are about five times as generous as social security.

(4) It is absurd for anyone to compare public sector workers to the wealthy. Of course wealthy people will have more wealth than middle class workers. Public sector workers need to compare themselves to private sector workers. In California, the private sector worker makes, on average, about half as much in total compensation than the public sector worker. It strains credulity – and is downright arrogant – to suggest this entire differential can be attributed to superior education and skills.

(5) The people who are being denied a chance to experience upward mobility are the private sector small businesspeople who create jobs, and the people who they hire. Entrepreneurs personally carry legal liability and financial risk for their businesses. They work all the time. When the economy strains under the financial enslavement caused by the partnership of Wall Street banks with government debtors, private sector businesses can’t thrive, and their employees make less.

(6) The wealthy are not right-wing or left-wing. There is as much money donated to left wing causes by wealthy individuals as to right wing causes. The distortion in our democracy is not caused by wealthy individuals, who are ideologically diverse and whose contributions benefit both sides of political and economic questions.

(7) It is necessary to make a distinction between wealthy entrepreneurs who create products and services people voluntarily consume and which improve people’s lives, and wealthy bankers and financial middlemen who have used their political influence to overbuild their industry and become a drain on the economic health of America.

(8) The biggest source of funds to Wall Street bankers and financial middlemen, by far, is the deficit spending of governments. When a government issues bonds, the money goes through Wall Street. When a government pension fund expropriates taxpayer’s money, the beneficiaries are Wall Street brokerages.

(9) The agenda of public sector unions is perfectly aligned with the goals of Wall Street banks. Create bigger government payrolls and pay government employees more. Borrow money and raise taxes to accomplish this. Issue interest bearing bonds to cover deficits and transfer tax revenue into pension fund accounts.

While arguing for more efficient government, it is important to explain how government spending impacts the middle class private sector worker who now has to pay half of their income in taxes (sales, property, income, and “hidden taxes” buried in every utility and telecom bill) so that middle class government employees can earn twice what they make, while Wall Street bankers get obscenely rich managing the government debt and government employee pension funds. And while having no bias against the wealthy, it is necessary to make a distinction between wealthy people who have earned their wealth through entrepreneurship, and those who are wealthy because they are part of the Wall Street cabal that enables and profits from the unionized government bias to tax, spend, and borrow.

The Contract on California

California’s state and local government workers, who enjoy pensions that average at least five-times what a social security recipient can hope to receive, love to claim they have a “contract” that makes reducing these pension benefits impossible.

They certainly do have a contract – sort of like the contract an underworld boss might order on a troublesome associate. Except in this example the underworld bosses are the public employee unions, the troublesome associates are the taxpayers, and the “contract” requires the taxpayer to cover public employee pension fund returns. That is, whenever these government worker retirement funds fail to achieve their projected returns, the taxpayer covers the difference with higher taxes. Nice deal for Wall Street brokerages, who get to manage all the money with no risk. Nice deal for California’s state and local government workers, who enjoy retirements that are, on average, five times better than social security. Really, really bad deal for the taxpayer.

Spokespersons for the government unions and the government worker pension funds have long stated that “the market has just been beat up a bit lately,” and “investment professionals assure us there is no cause for concern.” But the sobering truth is starting to emerge, and according to “contract,” taxpayers are going to get hit hard.

On December 20th the CalSTRS CEO, Jack Ehnes, in a rather convoluted acknowledgement on the “Ask Jack” section of CalSTRS website, admitted that funding to CalSTRS would have to increase by $3.8 billion per year for the next 30 years. Here is what he wrote:

“Recent media reports have suggested that to solve the unfunded liability the state will have to increase CalSTRS funding by $3.8 billion a year for 30 years for a total of more than $114 billion.

Although this is an accurate statement based on current projections, achieving adequate funding can occur several ways that would be phased in over time. The CalSTRS $56 billion funding shortfall can be managed, but it will require gradual and predictable increases in contributions.”

Despite the supposedly reassuring phrase “achieving adequate funding can occur several ways that would be phased in over time,” the fact that even the CalSTRS CEO is himself acknowledging this degree of funding shortfall should belie any thoughts that the number is overstated.

Putting aside for the moment the probability that this $3.8 billion per year is nowhere near the actual additional amount that will be necessary to adequately fund CalSTRS, how much does this latest salvo – pursuant to the contract on California taxpayers – cost per household?

First remember that of 12 million households in California, 47% of them pay no taxes. Also remember that at least another 10% of these households have a state or local government worker living in them. This means that 57% of California’s households are exempt from the contract on California, leaving 43%, or 5.2 million households to cover these new payments.

Second, remember that similar shortfalls exist within all government worker pension funds in California, and CalSTRS only covers teachers, which at most only comprise about 40% of California’s state and local government workforce. This means the $3.8 billion per year CalSTRS shortfall, applied to all state and local government worker pension funds, would expand to $9.5 billion per year.

Anyone who thinks CalPERS or the LA County pension fund, or any other local government worker pension funds in California are in any better financial shape than CalSTRS is welcome to dismiss this logic. Otherwise, according to their own spokespersons, we now are looking for another $9.5 billion per year of additional taxes to keep our unionized government worker pension funds in California solvent.

This equates to nearly $2,000 per year in additional taxes on those 5.2 million households in California who actually pay taxes. That’s just additional taxes, that’s just for pensions, and that is based on what is almost certainly the minimum amount it is going to take to establish financially sound pensions for California’s state and local government workers.

When it comes to pensions, if nothing else, the unionized government worker’s “contract on California” must make everyone who crows about the inviolability of contracts quite proud.

Agroforestry is Regreening the Sahel

The African Sahel is the arid belt of land that forms a buffer between the Sahara desert to the north and the more temperate savannahs to the south. From the coast of Mauritania and Senegal to the west, the Sahel stretches over 3,500 miles to Sudan and Eritrea’s Red Sea coast to the east. Over 500 miles wide, this vast area forms the biggest front line on earth in the relentless battle against desertification.

For decades there has been nothing but bad news. Population increase led to overgrazing and unsustainable harvests of fuelwood. Equally if not more harmful to the Sahel ecosystems were the imposition of western methods of agriculture and forestry, techniques that began under colonial administrations and have been perpetuated over the past 50 years by well-intentioned aid agencies. A fascinating article by Burkhard Bilger in the December 19th issue of The New Yorker, entitled “The Great Oasis (subscription required),” documents a new and hopeful trend in the Sahel that may reverse over a century of environmental decline.

Back in the 19th century and through the first half of the 20th century, French colonial administrators in the Sahel attempted to develop commercial agriculture according to Western techniques that worked well in temperate zones, where sunlight needed to be maximized, but were disastrous in the arid Sahel, where crops responded better if they were beneath a protective tree canopy that attenuated the sunlight. The areas designated as forest were considered state property and were protected, but because farmers were prohibited from allowing trees to grow on in their agricultural fields, they would poach the trees in the protected woodlands because it was their only source of firewood. The new independent governments, backed by NGOs, continued these policies. The practical result was there was no incentive for people to sustainably nurture the forest reserves because they had no legal right to the trees, and since it was a crime to grow trees on farmland, the farmers had no choice but to steal the trees in the forest. And because the trees were necessary to preserve topsoil and filter the sunlight to crops, absent these trees the topsoil blew away and the crops failed.

In “The Great Oasis,” Bilger recounts the experiences of an Australian missionary, Tony Rinaudo, who recognized the destructive impact that well-intentioned aid efforts were having on the Sahel when he was working in northern Niger in the mid 1980’s. Here is Rinaudo’s insight:

“What if things were backward? Every year, the villagers cleared the brush to make room for crops, and planted trees around them. And every year the plantings failed and the brush resprouted from its old rootstocks. What if they just let it grow? What if they cut back only a portion of the native trees, let the rest mature, and planted crops between them?”

For over 25 years this reviving of the traditional practice of farming beneath a canopy of valuable trees that protect the crops by filtering the sunlight, preserving the topsoil from wind, and absorbing runoff has slowly caught on. So much so that just in Niger, over 12 million acres (nearly 20,000 square miles) have been reclaimed.

The photo below shows a satellite image of the Seno Plains in Central Niger, about 400 miles east northeast of the capital Bamako. In this 600 square mile image, the reforested areas can be seen as small nodes of green surrounding the towns. If you zoom closer, using Google Maps, you can see stands of trees spreading literally everywhere on this plain. Twenty five years ago the entire area was denuded of vegetation. The darker area in the upper left of the image is the Dogon Plateau, which is separated from the plains by the cliffs of Bandiagara. Standing on those cliffs today, Bilger writes:

“I could see the thatched roofs of a village tucked among some mango trees below. Beyond them, to the south and west, airy groves of winter thorn and acacia stretched to the horizon. The wind whipped across the plains so steady and sharp that it made my eyes water. But there was no sand in it.”


Another fascinating insight to emerge from Bilger’s report is the hopeful reality that more people did not equate to more environmental stress. Merging traditional agroforestry with access to modern agricultural techniques, the land reclaimed in Niger – and also in Mali and Burkina Faso – supports a far larger population than could have survived there in the past. As Dennis Garrity of the World Agroforestry Centre told Bilger, “It’s counterintuitive, but it’s true; the more people, the more trees.”

Agroforestry has proven potential to reclaim arid regions everywhere. When editing EcoWorld, I reported on successful examples of agroforestry reversing deforestation in India’s Rishi Valley (India’s Rishi Valley Renewal,  1996), El Salvador (Reforesting Central America with TWP, 2000), and Costa Rica (Profitable Reforesting, 2005).  Back in the 1990’s I enthusiastically wrote about agroforestry as a financially sustainable way to restore deforested regions, with posts such as “What About Sustainable Nurseries?” and “Autarky After the Roar“. Indeed, the stated mission of EcoWorld for the 14 years that I was editor was “To double the timber mass of the planet within 50 years” (by 2045).

Not only is agroforestry a financially sustainable way to reverse deforestation – with all that implies: enthusiastic local adoption, profitability, ability to increase the land’s carrying capacity, improved and sustainable agricultural output – but reversing deforestation may help increase rainfall in arid regions. In the post “Hydraulic Redistribution” references are provided to theories that mingle the disciplines of forestry and climatology. By extending the canopy of trees that transpirate water vapor, cloud formation is stimulated. When these clouds condense into rain, low pressure is created in the inland areas above these forests which pulls in maritime winds, bringing more clouds. It would be interesting to explore and hopefully uncover additional research in this area.

Meanwhile, agroforestry is a proven way to improve the quality of life for people living in the Sahel, at the same time as it restores the water tables, moderates the climate, and slowly revitalizes the Sahel as the vast buffer against the encroaching Sahara.

How Wall Street Bought the Public Employee Unions

Earlier this week, on December 7th, 2011, as reported by the San Jose Mercury, the “San Jose City Council votes 6-5 to place pension reform on June ballot.”

This plan is drawing fierce resistance, but there are two financial considerations that most critics of pension reform don’t take sufficiently into account when making their arguments:

(1) Pension contributions are very sensitive to how much the fund can earn. A pension that earns 3% per year, i.e., allows someone who works for 30 years to retire with a pension equivalent to 90% of their final salary, will require a 10% increase in annual required contributions (as a percent of pay) for every 1.0% the earnings on the pension fund drop. That is, if the contribution to a firefighter’s pension is currently 35% per year (based on employer and employee contributions combined), and CalPERS lowers their expected rate of annual return by just 1.0%, from 7.75% to 6.75%, then the required annual contribution as a percent of salary goes up to 45% per year.

(2) The rate of return being currently maintained by most pension funds, 7.75% per year, is much higher than can be sustained going forward. A key reason for this is because equity growth over the past 20-30 years, and especially over the last 10-15 years, was fueled by increasing debt. By enabling massive borrowing – consumer, commercial and government – more consumer spending was in-turn enabled, which increased corporate profits which increased equity values. Now global debt has reached its maximum, we are going to deal with slower growth and hence lower rates of return for pension funds. The other key reason for the inevitability of lower pension fund returns is demographic. With baby-boomers now beginning to retire, and with public sector workers now retiring with these far more generous pension plans (they were only raised about 10 years ago), there are more people selling equities than ever before in order to finance retirements. Equity values are a function of supply and demand, and public sector pensions are going to be doing a lot more selling to finance pension payouts than ever before. The chances that the major pension funds in the United States can continue to earn 7.75% year after year are virtually zero.

Pension reforms such as San Jose Mayor Chuck Reed’s proposal should be supported.

The San Jose proposal may actually do enough to restore financial solvency to a public employee pension plan. Eventually raising the employee’s withholding to as much as 25% of their pay begins to contribute enough money to fund these plans, especially when combined with accruing benefits at no more than 2.0% per year, and deferring retirement to age 57 or higher.

Here are a few questions and answers about public sector pensions:

QUESTION: Aren’t pension critics, or “reformers,” if you will, trying to ignore the contractual commitments they made as taxpayers, simply because they become more costly than originally expected?

ANSWER:
Nobody “agreed” to these contracts as they have turned out. When pension upgrades were sold to politicians by Wall Street lobbyists they were represented as being nearly free to taxpayers because market based returns would cover the costs. Politicians didn’t understand the financial risks and voters were never told about it. To be fair, even the union leadership had no idea what they were getting themselves into.

Let’s put it this way – if somebody sold you a car, and said the payments would be $250 per month, then five years later said the payments would be raised to $1,000 per month, then five years after that said the payments would be raised to $2,500 per month, would anyone “like” that? And how would the holder of the loan appear – when they say “a deal is a deal” and try to force you to pay up?

In any event, opponents of pension reform should review the two financial points made earlier, because bankruptcy will void these contracts, and bankruptcy is staring every city and county in California in the face.

QUESTION: Everyone agrees that some kind of public pension reform is unavoidable, and that is exactly what is underway now. But can people who want to change public sector pension benefits legitimately claim that Chapter 9 is a magic bullet that will suddenly relieve everyone of the legal obligations that have been made on their behalf by their elected representatives?

Now that the bill for pension obligations is coming due, wouldn’t reneging on these obligations constitute theft?

ANSWER: “Theft” is how public sector unions have stolen our democracy and “negotiated” these unsustainable pensions with politicians they elected. Public sector pensions, on average, are five to ten times better than social security. The arcane and onerous details of pension obligations were buried in the fine print of these “contracts.” To imply that taxpayers are somehow the thieves for wanting to reduce pension costs down to the levels they were originally ignores the sheer scale and generousity of these financially unsustainable pensions. The 2010 annual reports from CalPERS and CalSTRS document that the average pension for a newly retired government worker in California after 30 years of work is nearly $70,000 per year. If every Californian over the age of 55 received that much in retirement it would cost $700 billion per year, nearly 40% of the entire GDP of the state! It’s impossible. It can’t go on. It is oppression and a recipe for economic ruin.

The bottom line is this – public sector unions and Wall Street are now in bed together, betting trillions of dollars in the markets with their pension funds, trying to eke over-market returns through aggressive fund management, with the taxpayers forced to pay up when they can’t hit their numbers.

From the CalSTRS Annual Report, page 135:

CalSTRS participants who retired during the 12 months ending June 30th, 2010 (the most recent data), earned pensions as follows:
25-30 years service, average pension $50,772 per year.
30-35 years service, average pension $67,980 per year.
35-40 years service, average pension $86,736 per year.

From the CalPERS Annual Report, page 151:

CalPERS participants who retired during the 12 months ending December 31st, 2009 (the most recent data), earned pensions as follows:
25-30 years service, average pension $53,182 per year.
30+ years service, average pension $66,828 per year.

QUESTION: Isn’t it true that the longer someone works in any pension system, the higher their eventual benefit is likely to be? Doesn’t it work that way with Social Security, up to the cap?

ANSWER: The social security cap is about $31K per year after 40+ years of full time work, which equates to well less than 20% of the payee’s annual income. There is no cap on public sector pension payments, which are averaging nearly $70K per year, and they are averaging over 66% of the payee’s annual income, after only 30+ years of work.

Nearly everyone in America was purchasing more than they could afford during the internet/housing bubbles, but lobbyists hired by public sector unions, alongside lobbyists hired by Wall Street, are trying to make our politicians enshrine the pension liabilities – sold by Wall Street lobbyists to union-backed politicians – permanently into our tax code. And together, Wall Street and public sector unions have made public sector agencies collection agents for Wall Street. Wall Street hedge funds now bypass brokerages to manipulate market liquidity and asset values, and public sector pension funds are the biggest players on Wall Street. This is a corrupt system and cannot be fixed until taxpayer backed pension funds that can extract by “contract” 7.75% returns – either from investment returns or from taxpayers – are dissolved. And why shouldn’t public sector pension funds be the biggest players on Wall Street? Not only do they control about $4.0 trillion in assets, but they have the full backing of the public sector unions, the politicians they control throughout America’s states, cities and counties, and the taxpayers as the final guarantors.

Public sector pension funds and the social security fund should be all merged into a single fund, and the combined assets should be systematically moved into either cash or treasury bills, eliminating the speculators, eliminating most of the expensive financial bureaucrats of all stripes, and getting the government and Wall Street out of the business of fleecing taxpayers. And one, uniform and financially sustainable retirement incentive formula would be offered to ALL retired American workers, public or private.

For much more on the benefits and the feasibility of merging all public employee pension funds with social security, read “Merge Social Security and Public Pension Funds.”