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    Who are the NERD fund donors Mr Snyder?

    Raise the curtain.

    Pensions & Fiscal Child Abuse


    By JGillman, Section News
    Posted on Fri Dec 27, 2013 at 10:14:13 AM EST
    Tags: Damocles Sword, Debt, Pensions, POB, Obligation Bonds, Chris Radu, Mike Gillman, Traverse City, Grand Traverse County, Deficits, Shortfalls, Fiscal Child Abuse, Government, Arbitrage, ROI, SB1129 (all tags)

    "Live now, pay later," might have easily supplanted the national motto of "E Pluribus Unum," instead of its supposed replacement, "In God we trust."

    Aside from the obvious reference to unearned hedonism and individual irresponsibility, it should be noted that governments derived from such careless individuals as the "live now" crowd can bring all of us even closer to being debt slaves.  Yet even without the notion of pleasure as an advance reward to leadership, the function of government runs unabated. One might find it differently in private enterprise however, according to Jack Spencer at Cap Con:

    "In the private sector, businesses can't ignore economic reality by giving in to unrealistic union demands. They open their books and say, "look, we've had a lousy couple of years. We have to cut back or go under. We can't give you what you want." That reality check doesn't apply to government, which is always bargaining with other people's money. Those "other people" are us, the taxpayers. Over the decades, when faced with unpopular choices of cutting services or raising taxes, government officials have given unions most of what they asked for and left the tab to be picked up by future generations."

    In a nutshell, that is it.

    I've been there.  In fact, I have been in both places simultaneously.  At the business owned by my wife and I, folks haven't received raises in three years, yet as a county commissioner in 2012 I was present while union employees received automatic 1.5% increases. It made no sense to me that it should be so easy for a nearly unanimous Republican board to approve of such a thing, but over the years we have discovered that fiscal insanity is a scourge that has set upon both Capulet AND House Montague.

    And it is generational too.  So much so, that entire infrastructures are collapsing from the weight that has long had its supports removed.  Pensions as a part of governmental financial negligence as referenced in the Cap Con piece above are responsible for cities literally falling apart, and legitimate public safety services being eliminated.

    So what have we done to solve this?

    Go below the fold to find out how we can actually make bad stuff, worse.

    Last year, as a 'solution' for cash strapped municipalities wrestling with pension liabilities, and particularly as a solution for those who have not yet wholly funded the pensions promised to their employees, the state legislature passed SB 1129.  The bill was designed to authorize local "pension obligation bonds" and give the municipalities yet another tool to work with in managing flagging revenue to expense ratios, particularly when affected by pension issues.

    The plan was to help those suffering local units to ride the lean years of diminished revenues, and eliminate the emergency equity requirements of MERS; by allowing the local governments that have changed from defined benefit pensions to defined contribution pensions to literally borrow money to pay for money they already 'owe.'

    In Grand Traverse County, the 46% funded employee pensions would become 100% funded if a board decision to bond the remainder was done instead of the decision to take money out of general fund reserves.  The 'easy path' it seemed, would be to borrow the money, stabilize the cash flow situation, and pray like hell for revenue increases as well as a decent return in the retirement system.

    Piece of cake, right? Maybe, but we'll get back that shortly.

    First, a primer.   Grand Traverse County is not alone in the region with such troubles.  Traverse City itself faces a similar (tens of $Millions) situation; one that precipitated this presentation.  Two years ago, City Commissioner (at the time) Michael Gillman provided a look at the developing pension crisis, while providing some historical perspective and layman's translations.

    The first few minutes are a must for those who need to get up to speed on this issue.

    If nothing else, one might take seriously his show ending admonition of "Fiscal Child Abuse" by a failure to recognize and act on the danger of 800 lb pension gorillas.

    Fast forward to Grand Traverse County only a couple of weeks ago, where the county board wrestled with the possibility of bonding.  As mentioned already, it seemed as though the 'easy path' offered by such a plan would be taken by a board unwilling to otherwise cut services. In fact, the 'fait accompli' as it was presented in the local paper drew attention from concerned 'detractors' and those who have financial interest in keeping certain county programs alive. (employees and their families)

    One particular 'detractor' Chris Radu, noticed one of the headlines announcing the potential borrowing while paying for gas.  Revealing [a lesson for another day] that if it had not been on the front page, its likely he may not have noticed the issue at all until the deal was done.

    It was probably a good thing [for county taxpayers, that] he did.

    Chris Radu makes his living as a financial analyst and adviser.

    Mr Radu made it a point to do something he had apparently never done; speak to a local unit of government during budget discussions, and explain to them why pension obligation bonding might not be such a good idea.  In fact, he made sure that the next several meetings of the board were blessed by his presence so he could properly educate members about the risk they were considering.

    During that first budget meeting he attended,  I advocated consolidation and even elimination of certain services, other folks were wailing against the potential disasters to our community if (Heaven forbid) we were to actually close the pool, or reduce parks programming.  In the meantime, the rampaging elephant in the room and on the mind of commissioners was that they were facing a $1.5 million shortfall.

    And interestingly, while bond counsel for the county was passing along the good reasons for 'managing' such a shortfall (curiously, never revealing that his daughter might be the bonding agent) Mr Radu tamed the beast; at least to the point where going to bonding was rejected as an unwise path.  Without his input, the county would have engaged in further "Fiscal Child Abuse" as described previously.  As it was, the chosen path was to spend down money reserves from the general fund. A move that has potential effect on future bonding costs; one that also revealed the inability to shed unnecessary expense until forced to do so.

    Radu had a clear understanding of the retirement system, and many from one of our local groups recognized this; inviting him to speak on this issue at one of their meetings.  See the video of his presentation below. (thanks to Dick Nottage of Dining Room Productions)

    One of the attendees at this meeting was Michael Gillman who in a followup email to Radu, complemented him on the presentation and offered a few comments as well.  He writes:"

    Good Morning Chris, I enjoyed your presentation to the "912" group on Tuesday, and since I am probably snowed in for the day, thought I would provide some supplemental comments. You might get called upon by other organizations (I hope so!), and you might want to incorporate or consider some of the following.

    As regards the cost of pension bonds (new 4% bond interest added to the 8% "needed" by MERS) there is another reason the objectives can't be reached. Pension funds are usually under mandate to make only safe investments. When we read about the Dow or S&P being up 20% or more in 2013, it includes some of the high flyers like Netflix, Tesla, etc. It is highly unlikely that any pension funds had the courage or authority to get into equities having those levels of PE multiples. All pension funds include bonds for balance, and that portion of those portfolios won't be earning over 3% for a long time.

    In your presentations, as you acknowledged, you can't get too "wonky". I suspect about 50% of the audience Tuesday could not follow technical portions of the presentation. Broad themes will work best.

    A good example of theme applies to teachers, a subject you obviously have an interest in. About 2-3 years ago, the Legislature made a bad decision (yes, even Republicans can do so) by authorizing early retirements of older teachers. While that cut education costs slightly in the following year as younger and cheaper teacher were hired, it put into the retirement system thousands of simply middle-aged teachers, who will now receive pensions for 30 years instead of 20-25 as they might have without the early-out option. Big long range cost there.

    When you are addressing the GT County pension situation specifically, you should point out that the County Board in 1996-7 made a good decision, then neutralized it with a bad decision. I had always been pleased to know that GT County joined the State of Michigan and Oakland County by abolishing defined benefit pensions in favor of defined contribution pensions around that time. That should be the goal of all government pension managers. However, based on a conversation with Dave Benda during the past year, I learned the Board decided to "soften" that decision by negotiating relatively huge defined contributions. Dave told me the contracts since that time have called for over 11% (of pay) contributions toward the new portion of retirement benefits. Obviously negotiating that size contribution DOWNWARD in subsequent years is nearly impossible. The current crisis is a product of paying both DB and DC, AND the actuarial curve that follows elimination of defined benefit plans. GT County is approaching the peak of that curve as dictated by MERS policy of accelerating payments on closed DB plans.

    Here is where I would depart from your stated belief that MERS is a relatively innocent party to the current pension crisis. In addition to insisting that 8% is a valid every-year future for investments (even CALPERS has reduced its number), MERS has been very resistant to efforts toward DC plans. I spent 3 hours at the Lansing MERS office in 2010 with three staffers assigned to "explain" to me that DB plans were "better for employees" and who were puzzled by my attempt to explain that MERS was to implement policies and plans as desired by members, not set policy itself. When MERS policy requires a 27-year smoothing of pension investments and member payments down to a 13-year pay schedule by municipalities following a switch to DC, it creates a cost element that acts to bar switching to DC plans.

    Understand as well, that 50% of the MERS Board is to be made up of employees, and that NO Board member can be an elected member of a municipality Commission or Board (ie: real policy makers). Think of how much fun it would be to negotiate with the UAW on behalf of General Motors, if 50% of the GM Board was made up of employees.

    Chris, obviously I care about this issue, and wish you well in bringing it to the attention of the pubic. I had attempted to do so from 2007 to 2013, and am glad someone plans to carry the flag. Let me leave you with two "don'ts". Do not get discouraged when you get patted on the back, congratulated for your research efforts, and then ignored. The public does not like bad news, particularly if it might negatively impact those around them.

    Also, do not hold out false hopes for relief. As I indicated in my question at the conclusion of your presentation, cutting benefits currently promised is rarely going to happen, probably only in bankruptcy settings. The unpaid bill sitting out there will be paid, and only higher taxes and reduced current services will achieve that goal. It should happen quickly though, so that the urgency of changing the system for the future becomes crystal clear. Good luck in playing your role.

    Mike Gillman


    We don't have to like the higher taxes part, but the reality is there; and its likely.

    We can face the hard decisions now, or force our children to pay for them.  The elder Gillman carries a particular view that debts should be paid as close to the generation that incurs them as possible. Kicking the can down the road is maybe not so good an idea.

    Government 'rule' has been made too easy.  Perhaps for too long the power enjoyed through management of such riches and power has not come with a certain Damocles threat that should rightly accompany it.  For too long, the threatening sharp edge of insolvency has not hung over the heads of decision makers like it ought to have, making the "king's" seat perhaps a bit too comfortable.

    An owner of a private business lives under the constant reality that poor money decisions will lead to fiscal pain and distress. The sword held by a horsehair thread ever present in the mind

    However, our elected and appointed leaders don't carry enough personal responsibility for the long term outcome of their supposed benevolence. They have abused us, we have endured it,  and now we have brought our children into this relationship.

    < Twelve Days of ObamaCare | Sunday Divertere - If I Were The Devil >


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    I'm still a little fuzzy on the rationale behind.. (none / 0) (#1)
    by KG One on Wed Jan 01, 2014 at 08:05:30 AM EST
    ...Sen Colbeck's bill?

    Giving LU's the means to borrow money without consequences is EXACTLY what pushed Detroit over the tipping point and caused them to go into bankruptcy.

    Why would Lansing want to replicate that experience numerous times over across Michigan?


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