San Jose Mayor Working To Cut Government Pensions

Adam Taggart
By Adam Taggart on Thu, Oct 17, 2013 - 11:57am

From today's headlines (h/t to Saxplayer):

San Jose mayor wants ballot to let governments cut pensions (Sacramento Business Journal)

San Jose Mayor Chuck Reed filed papers Tuesday for a statewide ballot measure to allow governments to cut pensions for current workers.

The Pension Reform Act of 2014 would change the state constitution to cut pensions to current workers moving forward. Benefits already earned would not be cut.

Reed said skyrocketing retirement costs are pushing cities, counties and other government agencies to insolvency and crowding out other services.

“Public employee pensions are deferred compensation, a key part of the compensation of public employees, and a valuable tool for those employers who choose to use them,” said a response from the Sacramento-based California Public Employees’ Retirement System.

The CalPERS statement continued to say “courts have clearly established that California public employees have a vested right to the level of benefits promised to them when they are first employed."

File this in the "Expect To See Much More of This" folder.

Pension obligations are increasing exponentially while governments continue to deficit-spend during a stagnant economy, while municipal, state and federal debt levels accelerate from their already staggering sizes.

In short, way too much has been promised in benefits than can be delivered on. It's just simple math.

Per the recent Jim Kunstler piece, we need to focus on managing contraction: figuring out how the smaller pie can be most intelligently divided. But instead, we're still acting if there will be ample pie for everyone forever. And we're wasting precious time.

An easy prediction is that less will be actually given out in benefits than retirees are expecting. How much less is the critical question, and the only sure answer at this time is: The longer we ignore the issue, the less that will ultimately be left to go around.

Of course, there is one way honor the letter of the pension promise. But it betrays the spirit of it. Policymakers may indeed prefer to print the money to meet the obligations in nominal terms. But this is simply a default by another name. Is getting your full pension check each month worth it if the currency it's in is so badly debased that it buys you nothing?

Expect to see many more mayors, governors, and eventually Congressmen and Presidents follow Chuck Reed's lead; in form or in spirit. Government pensions simply cannot be honored as intended in the coming future.

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14 Comments

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 2379
Luckily Money is Not Contracting... (sarcasm)

http://www.goldmoney.com/en-gb/news-and-analysis/news-and-analysis-archi...

"The FMQ is therefore comprised of the sum of cash and coin, plus all accessible deposits, plus our bank’s deposits held at the central bank. This for the US dollar is illustrated in the chart below."

Fiat money quantity

"The dotted line is the long-term exponential trend rate, and it is immediately obvious that the FMQ is now hyper-inflating. It currently requires a $3.6 trillion contraction of deposits to return this measure of currency quantity back to trend."

Grover's picture
Grover
Status: Platinum Member (Offline)
Joined: Feb 16 2011
Posts: 799
It's about time

It is unfair to promise deferred compensation to a public employee ... only to yank it out in the future. It is unfair to the taxpayers to hide the real cost of any government service by delaying part of an employee's compensation into the future. The end result will be very bad for everyone and unexpected by most.

It is much better to offer simple compensation packages and let the market do its work. If too few people apply for the position, the salary is too low. If too many apply, the salary is too high. This may seem heartless to the defenders of the middle class, but please explain how the end result of our currently existing system is better.

Grover

Adam Taggart's picture
Adam Taggart
Status: Peak Prosperity Co-founder (Offline)
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Posts: 2933
FMQ

Jim -

The FMQ is a calculation created by Alasdair Macleod.

Chris will be speaking with Alasdair tonight for this week's Off the Cuff about the FMQ, among other topics. The discussion will be available on the site tomorrow.

 

thc0655's picture
thc0655
Status: Diamond Member (Offline)
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Posts: 1512
Detroit

A key battle ground for me and the Mrs' city pensions I've been watching is the Detroit bankruptcy.  Specifically, I'm watching to see what the final ruling will be re: the battle over whether or not Federal bankruptcy law trumps state constitutional protections for public employee pensions. If the Detroit judge ultimately rules that Federal bankruptcy law overrules Michigan's state constitution which protects pension benefits, it's going to be "Katy bar the door" for all the other public pensions thought to be inviolable because they are protected by the State constitution.  That's our situation in Philadelphia where public employee unions long ago changed the Pennsylvania constitution to say that public employee pensions cannot be reduced under any circumstances.

Personally, we're planning to have our benefits cut 50-90% at some point in the future to reflect the actual current net present value.  I'm "sure" of that.  What I'm not sure of is when this will occur.  Of most importance to me is not what year it occurs but where we will be in the pricing of gold and silver at that time.  In the long run, my macro expectation is that the same forces that will cause our promised pension benefits to be slashed will also cause gold and silver prices to shoot the moon.  As long as they happen at roughly the same time, we'll be fine.  Losses in our pensions will be WAY MORE than compensated for by appreciation in our precious metals.  However, the nightmare scenario for us will be if our pensions are cut and we need to live off of our PM investments but they haven't peaked yet.  For instance, if I was a retired Detroit police officer in December 2014 and my pension was cut by 50% but the price of gold was "only" $2,100/oz and silver $70/oz I would be in a jam.  By 2018 I might have burned through all my PM's and still have another 15 years to live (with PM's still not at their peak).  On the other hand, if the dollar and world economic system collapse in 2015 and gold hits $10,000/oz and silver $300/oz then I would happily retire in 2015 (5 years early) and not give much thought to what happens to our pensions either way!!

"Welcome to the Hunger Games.  May the odds be ever in your favor!"

ferralhen's picture
ferralhen
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Posts: 151
does anyone who comes to this

does anyone who comes to this site on a regular basis actually believe pension promises are going to be kept?

gillbilly's picture
gillbilly
Status: Gold Member (Offline)
Joined: Oct 22 2012
Posts: 423
No

Ferralhen, I would guess no. Local, state, and the federal governments forecast the rosiest of pictures when setting budgets so that they maximize tax revenues. I learned this first hand as an assessor. Budgets are always set at the levy limit at the local level (and I would guess this was learned from the top down) to maximum tax revenues. Or towns request over-rides from its residents to raise the levy limit. Under-rides are practically unheard of, unless a large amount of oil is miraculously discovered in town (another way the Es connect), but how often does that happen? Contrary to the left/right ideologies that are preached, all politicians want more money in the coffers (that's the dirty little secret...debt ceiling?...anyone who's worked in politics will tell you there is no such thing on either side of the aisle). But, not all reasons are selfish. Over the centuries, politicians have learned all too well that the future is unknowable and unpredictable, so it is better to have a cushion some where for those rainy days, hence the "rainy day" fund. So the budget projected outlays are inflated, including outlays for pensions. Econometrics are not an exact science (but hell, what is), so they can easily be massaged. Deep down they know the business cycles will take their toll.  But they also buy into the temptation to inflate the numbers as much as possible to keep their coffers full so that they can fund the inevitable expanding growth in addition to the rainy day fund I already mentioned. On one level they think they are being responsible, and on the same level they are, but trying to get them to wrap their minds around exponential growth and how it permeates our models and narrative is not an immediate concern when trying to fund the immediate public projects, intiatives, pensions, etc.

The human urge to please is a virtue and a curse. Many of these government employees are trying to please everyone (voters, businesses/contractors, land owners, etc), and in turn, wind up pleasing no one.

jtwalsh's picture
jtwalsh
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Posts: 263
Expectations

Ferralhen: My wife is a public school teacher nearing the end of her career. Not only has she worked for pay that is less then her education would allow her to earn in the private sector, but even part of that was taken from each check to put into the "pension fund".  Now the politicians are telling us that not only did they not match the employee contributions, as they were required to do by law, but that even the employee contributed funds seem to have shrunk, or largely disappeared.  I don't expect either social security or the public pensions will outlive us, but after paying for so many years that will be a bitter pill to swallow.  My biggest fear at the moment is that the school systems will implode before she can retire. Our mortgage is paid in four years.  Her retirement can begin in five.  Here's hoping the politicians can kick the can down the road for another forty-eight months.

jt

ferralhen's picture
ferralhen
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Posts: 151
jt i was a school teacher

jt

i was a school teacher years ago too...i know the system. it is the blood bath we look at square in the eye.--pensions promised made and not keep..our work cheapened or discarded so easily.our labor is being thrown away in flash. our value tossed aside..

thank you for responding...i too would like to see life as we know it continue just a little longer...on one hand...or both for that matter..i do have to be pragmatic tho..and that is how alot of us  wish it so.

i wish we on this site would talk more on this sort of reality than have experts predict what none of us are able to predict.where does that take us? i;d like to talk about our fears or lack of...but talk about change and how we plan to do that. realistically . middle classidly.humanly

i'm seeing  doctos of all sort leaving the profession this coming january..retiring because the rules are changing so much...i live in ann arbor...a couple big hospitals here....lots of retirement and lots of hoped for pension...maybe physicians first to try to bail before the fall

the only thing i see to manage is my own life--- in lieu of a collapse..which i amazingly so---- think i have...i will see shortly i'm sure..

all the talk of hitting a wall now, soon or already..well frankly, that only fuels fear...do i see rosey in the future---- not if i use my life right now as a standard to judge by.   it is already hard, alot of work and i expect it continue to be so, especially as i age further. tired legs walking in sand...

i have created a life here on 14 acres that should sustain me...with little or no cash, gold. money.

instead of stock piling money, gold, food....i've tried to set up a place that uses very little of that and instead uses  alot of my ingenuity and hard work.and grace of g-d.

i'd like to see the philosophical onslaught of musings taper off into practical pragmatic embracings of life ..

 

but i'd like to see much

 

 

 

 

 

thatchmo's picture
thatchmo
Status: Gold Member (Offline)
Joined: Dec 14 2008
Posts: 432
happy collapse

if the dollar and world economic system collapse in 2015 and gold hits $10,000/oz and silver $300/oz then I would happily retire in 2015

I can't seem to noodle out how it may be possible to be happy if the dollar and the world economic system collapses, no matter how much PM you have...lest you have plenty friends and a close community..... and something to eat.  Aloha, Steve.

davefairtex's picture
davefairtex
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Posts: 5058
fiat money quantity

Its great to come up with these calculations - there's CURRENCY, and M1, and M2, we had M3 but we don't calculate it anymore (my guess: its around 14 trillion) and now we have FMQ which is yet another variant, which purports to show incipient hyperinflation.

Sometimes I get the sense people come up with metrics that exist to simply prove, Texas-Sharpshooter-style, what they "know" to be true at the outset.

From what I can tell, FMQ = BASE + DEMDEPNS + SAVINGS

which translates to currency + excess reserves + demand deposits + savings, more or less.

If it were my goal to get a chart showing imminent hyperinflation, the number one component I'd include would be BASE.   That's because BASE is mostly comprised of a very dramatic-looking pile of excess reserves that just gets bigger and bigger the more QE the Fed does.  It all looks very hyper-inflationary.

Except there is just one problem.  We aren't in hyperinflation.  We aren't even in inflation.  If you track non-monetary measures of inflation, to see if this mad increase in BASE correlates to prices in the real world, are there any correlations?  I haven't been able to find any.  CCI is trending down, not up.  Nominal GDP is 3% - not exactly on fire.  Money velocity is constantly dropping.  None of it even says inflation, much less hyperinflation.

So I'll use Dave's Theorem of Useless Charts, which I just made up:

Unless it can be correlated to something that you care about, the chart/indicator means nothing.

I do not believe that charts of FMQ, uncorrelated to prices in the real world, will get that managed money off the sidelines and back into paper gold.

Of course, a falling buck, due to No Taper for the forseeable future, linked to some crazy Congressional actions that is just about guaranteed to reprise in another three months might well get them off the sidelines.  And it might be doing that right now.  USD now 79.56 and falling.

Grover's picture
Grover
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Posts: 799
Promises

Tom, jt, and others who are held hostage to the pension promises,

I was talking with an elderly neighbor yesterday who retired from the local school system in 1982 after 35 years of teaching. I brought up the subject of pensions. He admitted that he relied on the pension and social security to get by. He said that the pension promise was included as part of his total compensation package so the teachers would accept lower base pay. He said that at the time, companies offered pensions to employees in order to keep them when they were the most productive. Pensions and other perquisites were just a cost of doing business.

As far as he knew, the school never budgeted for the pensions. Their reasoning was that wages were lower than could be had in other industries. It all changed when inflation started to rear its ugly head in the late '60s. The teachers were tired of having less purchasing power and demanded raises. In the '70s, raises were given, but at the same time, contributions were required to fund pensions and health care. At first, it was nominal. The trend accelerated throughout the '70s.

He said the school board was sympathetic to the teachers as they were hit by the ravages of inflation as well. The schools were predominately funded by property taxes. Property values were soaring, so taxes could increase while the levy amount actually decreased.

I asked him if he would prefer to have a system where pensions were included or to have a larger base pay and be responsible for all personal costs. He said that is the way things are going today, except that wages are staying stagnant and pensions are being cut. He also said that when he started he wanted to focus on teaching rather than trying to figure out where to invest his money.

We talked for about an hour about a variety of subjects. As I was leaving, he said that he doesn't have an answer to the pension problem. He remembered buying McDonald's burgers for 10 cents each when the first one opened for business in the area. He said that giving a pension is like paying an additional penny per year for each burger. After a while, those burgers aren't so cheap.

...

Another friend is an airline pilot. The airline he flew got bought out by another airline. When it did, he was able to keep his job, but his pension was canceled. He told me that if he had been able to retire before the buyout, he would have received $4K per month for life. Now, that promise is totally gone and he has the opportunity to contribute to a 401(k) with some company matching funds. That is it. He contributes to receive the match. Otherwise, his strategy now is to cut his living expenses drastically and save up outside of the system. He is very bitter, but acknowledges that it is "water under the bridge."

...

Pensions are nothing but promises. These promises will be kept as long as it is convenient. When circumstances change sufficiently, the promises will be altered. It is scary to be responsible for your own future. To me, it is scarier to plan on a promise that could disappear when you need it most. The economy hasn't recovered from the 2008 crisis and likely will continue to diminish as long as energy remains expensive.

The sooner you accept that things have changed, the more options you'll have to minimize the disruptions. San Jose's mayor is taking the sanest approach that he can. I applaud his actions. As Tom says:

"Welcome to the Hunger Games.  May the odds be ever in your favor!"

Grover

jtwalsh's picture
jtwalsh
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Joined: Oct 1 2008
Posts: 263
Promises, Promises

Grover:

There are so many thoughts I have in response to your comments.  Here are a few.

On a personal level, once I came to an understanding of what had happened in the economic disaster of 2008, I began taking a series of steps to secure our situation.  Paper assets were liquidated to be turned into hard assets.  Debt was paid off.  We moved to a cash only purchasing policy.  I have my own business so I am not beholden to any politician or corporate management for my income.  We have real estate we own free and clear and within forty-eight months will own our primary residence without debt.  We have purchased a bug-out, retirement property, free and clear.  We are stocking up on necessaries for the long haul. The only part of this situation which is untouchable is the contributions my wife has made to her pension fund over the years.  On one level I don’t care if we ever get a penny from the tax payers.  I would just like to see them return what she has already paid.   I have not, and in light of the present reality would never, advise anyone to think private or government pensions, or social security will still be there over time.

You stated:  “Pensions are nothing but promises.  These promises will be kept as long as it is convenient.  When circumstances change significantly the promises will be altered. “  

I want to tear my hair out when I hear this line of reasoning.  Civilization is based on promises. The most basic social structure of a village is premised on the underlying assumption that I promise not to kill you and your children in the night to get your stuff and you promise the same to me and mine. 

When my wife started her career thirty years ago we were a society that kept promises.  The bitterness I spoke of comes from seeing how far we have fallen.

A large part of our present problems are based on the failure to keep promises and the failure of anyone to make the promise breakers account for their broken promises.  For two generations we have joked about the politicians not keeping their campaign promises.  We let banks and stock brokers sell nearly worthless securities while promising that the investment was safe and would return high income.  When that course of action almost collapsed the system we bailed out the very people who made and broke the promises they had no intention of keeping.  We let MF Global gamble and lose money it had promised to hold on account for its customers.

The reality of our social and legal structure is based on layers of interlocking promises.  Your bank account is a promise the bank will be able to return your money.  A share of stock is a promise you share in ownership and profits of a corporation. The title to your car and the deed to your land are promises from the legal system that when challenged, your rights will be recognized and upheld.  The Bill of Rights is a promise that the government will not interfere with our natural rights.

On a practical level you may be correct.  The damage is done.  Many promises, some made in good faith, some in bad faith for political gain, will not be honored.  This is all the more reason to re-evaluate where we stand and to try and return to a society where we only make promises we can keep, and then we put all our effort into keeping them.  A society where promises can be made, and broken without consequence, is already a tyranny, a banana republic.

Lastly. I know many people firmly believe that the best government is the least government.  I know many people see public education as a bloated, ineffectual system draining massive resources from the government coffers.  I understand those sentiments and in some respects I agree (for example, there is absolutely no need or reason for the Federal Government to maintain a Department of Education).  I would like to end this with a thought and a warning that we think before we overturn or allow the collapse of the whole system.

I was born, brought up in, and still live in New England.  Although, by virtue of my family’s recent immigration, I am not a Yankee, I have watched and learned and adopted some of their better traits and ideas.  Public education has been a part of life here since the beginning.  In some towns and cities that amounts to nearly four hundred years of continuing efforts to educate people.  At first the reasons were largely religious.  To be a good Puritan you had to be able to read your bible.  As time went on the reason to support this expense became more social and political.  An informed electorate can only come from educated citizens.  Conversely, an ignorant, feral child grows up to be an ignorant, feral and dangerous adult. There are certain things a society must organize and administer to survive and I believe education is one of them.

Grover's picture
Grover
Status: Platinum Member (Offline)
Joined: Feb 16 2011
Posts: 799
Bankers and Lawyers
jtwalsh wrote:

On a personal level, once I came to an understanding of what had happened in the economic disaster of 2008, I began taking a series of steps to secure our situation.  Paper assets were liquidated to be turned into hard assets.  Debt was paid off.  We moved to a cash only purchasing policy.  I have my own business so I am not beholden to any politician or corporate management for my income.  We have real estate we own free and clear and within forty-eight months will own our primary residence without debt.  We have purchased a bug-out, retirement property, free and clear.  We are stocking up on necessaries for the long haul. The only part of this situation which is untouchable is the contributions my wife has made to her pension fund over the years.  On one level I don’t care if we ever get a penny from the tax payers.  I would just like to see them return what she has already paid.   I have not, and in light of the present reality would never, advise anyone to think private or government pensions, or social security will still be there over time.

jt,

I didn't want to rub salt in the wound with my last post. I mostly agree with your post. I felt that my original post on this thread was a bit terse and wanted to share some illustrative anecdotes. My neighbor's story seemed very apropos. He was quite bitter about the way things have progressed. Due to the way CPI has been managed to hide true inflation, his pension and social security have been eaten by little cuts in purchasing power.

This country was set up to protect liberty and allow people to pursue their dreams. (It wasn't perfect.) It has been commandeered by the bankers and lawyers. The excesses that were the hallmark of last century were only possible due to cheap and abundant resources - particularly energy. Those days are past. The new reality is that the promises that were made cannot all be fulfilled. Your sentence (that I bolded) says to me that you understand this quite well.

I applaud the San Jose Mayor for bringing the issue to the forefront. He is a rare breed. Most politicians are more than willing to simply make additional promises that "other people's money" will have to back. They get the momentary glory and others foot the bill. What kind of promise is that? They kick the can until they get a better offer. Does anyone blame them for past mistakes? Sure. Can you hold them accountable for their actions? They're very skilled at deflecting the personal damage. I'll bet that the Mayor will not be reelected.

I applaud you for taking the steps you listed. It is a shame that reality has gotten to the point that prepping is necessary. You've seen through the tissue of lies and prepared yourself to be resilient just in case. From what I've seen, most prospective pensioners don't share that view. They expect that they'll receive what they've been promised regardless. They don't care to understand the fragility of the system.

Lastly, I just want to correct one point you made: "Your bank account is a promise the bank will be able to return your money." Actually, when you deposit money in a bank, you are literally loaning them the money. At that point, you are an unsecured creditor. If they become insolvent, the bank shareholders and bondholders will be made whole before you see anything. You and the other depositors will split whatever remains. Theoretically, FDIC will cover you up to $250,000. They have about 2% of backing for all the funds being insured . If you bank at one of the big banks, they alone would exhaust the entire FDIC balance ... were they to default. In my book, this isn't right. Unfortunately, that is the way it is.

Grover

jtwalsh's picture
jtwalsh
Status: Gold Member (Offline)
Joined: Oct 1 2008
Posts: 263
More Promises

Grover:

Your neighbor’s disappointment and bitterness probably comes partially from the fact that he has seen two generations where pension promises were honored and people were able to live modest retirement lives on a combination of a pension and social security.  My own parents are in their eighties and live well on the pension my father receives.  I understand the problem and still feel resentment.  Just imagine what is going to happen when the tens of millions of people who expect these promises to be met find out that they have been duped.  Combine that with the growing frustration of twenty somethings, for whom the choice is crushing student loan debt or unemployment, or both.  This is a prescription for massive social unrest.

As to a person’s position with their bank.  Legally, you are absolutely correct.  However, even an unsecured loan is based upon a promise to repay.  It is a less enforceable promise, but it is a promise.  You are also correct about the FDIC.  What savings we do keep in a bank, are in a local credit union which is owned by the depositors.  They are insured by the NCUA but, more importantly, the institution is locally managed and does not participate in all  the practices of the commercial banks.

If I were in a better mood about all this I would probably agree that the San Jose mayor should be applauded for telling the truth.  That truth is just a little too personally painful.

Thanks for the reply.  I am glad you were not offended by my sort of yelling out my views.  I really like the intellectual stimulation of having to think about and defend my positions.  (I may even get to the point where I can occasionally admit I have been wrong!)

JT

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