Friday, August 31, 2012

High Speed Rail - Dead But Still Spending Money

Permanent Link:
The average legislative testimony is a real snoozer but I came across the most amazing video of testimony before a legislative committee by a high speed rail ADVOCATE, Joe Vranich in 2008.  Start to finish his testimony is only about 6 minutes long (which is amazing in itself) but he pulls absolutely no punches in saying the HSR analysis and the commission in CA is totally and completely fouled-up-beyond-all-recognition.  Honestly, even if you don't care one way or another about HSR, it is worth watching just for it's no-holds-barred fresh energy.

On a slightly more sedate note, you can see State Senator Joe Simitian give his reasons for not voting for the HSR bill.  Again, he's an advocate and isn't quite as forceful as Mr. Vranich but he goes into more detail.  If you have any interest in how politics works and what happened to HSR it is well worth the watch:

FWIW, I favor HSR in places where it makes economic sense, but California is very clearly NOT one of those places.  People talk of other country's HSR (like Japan) but in Japan it is very expensive and so is used only by business and the well-off (and tourists with a rail-pass).  It works fine but it has never made money so you have the absurd situation of 95% of the country subsidizing a HSR used by the upper 5% of the country.  Even a lot of business travelers don't feel like paying for it and send their people on buses and regular rail (as I observed when my rail pass expired).  HSR is also a money loser in Spain.  I think it makes money in a very heavily populated part of Germany.  Let's not get into China where economic data are filed under "Fantasy and Science Fiction"

- Michael Goldman

Tuesday, August 21, 2012

Buffett: Bond Insurance - I'm out; Moody's: Muni Bonds = Junk?

Warren Buffet has just divested itself of local govt. bond insurance.  "Credit-Default Swaps" became infamous as the primary cause of the 2008 crash but all they are is a form of insurance on an investment.  The problem was when insurer's couldn't pay the claims.

"“A decision by Warren Buffett's Berkshire Hathaway Inc. to end a large wager on the municipal-bond market is deepening questions from some investors about the risks of buying debt issued by cities, states and other public entities. The Omaha, Neb., company recently terminated credit-default swaps insuring $8.25 billion of municipal debt. The termination, disclosed in a quarterly filing with regulators this month, ended five years early a bullish bet that Mr. Buffett made before the financial crisis that more than a dozen U.S. states would keep paying their bills on time, according to a person familiar with the transaction. The insurance-like contracts, which required Berkshire to pay in the event of bond defaults, were originally purchased by Lehman Brothers Holdings Inc. in 2007, more than a year before the Wall Street firm filed for bankruptcy, the person said.”"

The recent CA city bankruptcies have got the municipal bond market worried, especially with LA rumored to be considering bankruptcy.  This is bad.  If cities can't borrow money because bond buyers don't trust them to pay their debts, then capital projects like fire stations, city halls,  and libraries won't get done.  This nation lives on credit - if everyone and every city and county had to pay cash for everything economic activity would freeze.  That is essentially what happened in the Lehman Bros. crisis which precipitated the 2008 crash.  Govts world-wide started backing up every bank and insurance co. on the ropes because of the fear of a complete credit freeze.  This current situation isn't that bad (yet), but it isn't good.

Moody's is thinking about downgrading all California debt or at least selectively downgrading some.

Sunday, August 19, 2012

College Tuition and Public Pensions

On Aug 18, 2012, at 12:52 PM, xyz  wrote:

"I also not sure why everyone is talking about the increases in College costs over the last 40 years as if it's some problem particular to California and it's evil unions. Costs have skyrocketed everywhere, in public and private universities. It might be worth thinking about a little more before immediately assigning blame to the unions. 

I don't think anyone is saying it is purely a California problem.  It is a problem around the country and for pretty much the same reasons in every state.  No state is immune and California is by no means the worst off (probably in the middle) in regards to pension's unfunded liability cutting into support for services.  And for the same reasons - the end of the housing & stock market bubbles and union's inability to face that reality. 

Limiting my discussion to pensions, it is true there are overall funding problems with the end of the bubbles but whereas the state is cutting services to the poor and middle class in all sorts of ways to make up for the loss in revenue, pension costs keep escalating - and dramatically so.  So, the cuts to services and increases in fees are much worse than they would be with sustainable pension costs.  The state budget alone has gone from $3B last year to $7B this year (out of a state budget of around $90B) for CalPERS and CalSTRS (the teacher's pension fund).  This is due to their inability to make 7.75% annual returns.  I don't know what the additional bill will be for all the cities and counties but it was over $7B last year and has gone up by about $1B every 2 years.

Is it anti-union to say "retiring on 90% of your final year's income (counting overtime & traveling expenses in some districts) is unsustainable - 60% is doable - can you accept that" ?  Is it a liberal position to say the poor, college students, and everyone else should receive less and pay more so some public employees and school administrators can retire on $200,000 and above?  In this, one of the most liberal of states, most people don't think so which is why it is so hard to get a tax increase through.  Fix the pension problem and you can get a tax increase.  "Taxes are what we pay for civilization" according to Oliver Wendell Holmes, Jr.  Maybe in his day, but not right now.

There are over 21,000 public retirees getting over $100K/year with annual increases for cost of living.  147 of them from Sunnyvale city & schools.

12,338 public retirees (87 from Sunnyvale) getting over $100,000/year in retirement benefits = total at LEAST $1.3B - top 3 over $300K/year.

6,609 public school retired administrators (27 from FUHSD, 5 from Sunnyvale SD, 28 from CUSD) getting over $100,000/year in retirement benefits = total at LEAST $0.7B - top 4 over $290K/year.

2,129 retired University of California Employees getting over $100,000/year in retirement benefits = total at LEAST $0.2B - top 3 over $300K/year.

When the bill finally comes due and all the crazy bookkeeping tricks can't hide it any more, there is a major fiscal train wreck coming around the US and public employees will be hit worst.  Denial is not a viable problem-solving strategy.  

A man is falling from a 100 story building.  Someone shouts out as he goes by the 50th floor - "How are you doing?"  He answers with a smile - "So far so good!"

Thursday, August 16, 2012

CSU Grad Schools Barring CA Residents

I was as dismayed by CSUs closing grad schools to California residents as anyone.

So here are a few observations:  You can download a spreadsheet of the CSU budget and for campus after campus you see academic salaries comprise less than 50% of the budget, and salaries are 85% of costs.
CSU Budget spreadsheet:

You can look up a professor's salary and it is only a tiny bit more than the average public school teacher, (looking at the avg with 15 years experience). All that work to get a Ph. D. and you make little more than a 3rd grade teacher.  Yet senior administrators make around $300,000 or more.

Voters can look at cops and senior city and county officials retiring on over $200K/year at 55 and wonder "if the govt can afford that with their tax dollars why can't they afford to pay for more professors?"  (CalPERS took in $7 Billion from state and local govts last year to make up for their inability to make their 7.5% earnings).  Hence a reluctance to vote for new taxes because the people who you want to get it aren't going to - it will go to those with the richest unions, not for whom you intend it.

In 1999 retirement benefits for highway patrol and other state employees were substantially boosted and state and local govt's were encouraged to do the same with the promise that the state and local govts wouldn't have to pay anything - it would all come from CalPERS and CalSTRS investment earnings.  That lasted one year and then the earnings fell short and every year since then they have gotten worse and worse and this year the state bill alone is over $7 Billion.  Cities and counties are putting in even more which is coming from libraries and parks, and the sale of city property.  To put that in context, ALL tuition money from ALL students for ALL CSU campuses = about $4.5 Billion.  The figures for the UC system are $3 Billion.

In other words, tuition at CSU and UC's could be COMPLETELY AND TOTALLY FREE!, even with the bloated administration if the state didn't have to pay so much for retirement benefits that aren't sustainable from employer-employee contributions.

UC  (page 7)

Employees should have a retirement benefit that is self-sustaining and provides a reasonable retirement.  That is why I support Gov. Brown's proposal for a hybrid plan that would provide 60% of salary at a reasonable retirement age.  No one "needs" to retire at 55 with 90% or more of grossly inflated salaries.

- Michael Goldman

Monday, August 13, 2012

The Coming Recession and Will CalPERS Take a Hit?

Recessions happen pretty regularly every 4.2 years so we are about due for one - it is 4 years since the 2008 decline.  This could be a tipping point for many cities and states trying to pay pensions, etc. as they see tax revenue decline further.  As Buffet said, "you don't know who's swimming naked until the tide goes out."  A likely cause fo the next recession is a Euro break-up.

Arguing that the wisest course for the weaker Euro-zone countries is to leave the Euro: 
The significance of this article is that it appears in the very serious "Financial Times" of London and that it is written by an American adviser on the President’s Council on International Activities.  In agreement in greater detail is "The Economist" for this week: and

This affects pensions because ING (a large Dutch bank) estimated that a breakup of the Euro would result in a decline in GDP of Euro-zone members of about 8% the first year and about 4% the second year.  The US GDP's decline was estimated at about 4% the first year and about 2% the second year.  For comparison, the US GDP declined about 4% in the 2008 recession 4 years ago.  A similar decline in GDP with a concomitant decline in tax revenue this time around would likely put a lot of US states, counties, and cities over the edge into bankruptcy, now that that wall has been breached. 

The numbers for GDP decline are falsely precise.  No one really knows what would happen, but there is general agreement by all who have looked at it that it won't be pretty.  Eventually, there will be a strong bounce back but it could be years for that to happen.  For example, Greece would overnight become 50% cheaper as a vacation destination but it would be saddled with crushing debts denominated in Euros.  It won't be able to pay them and a default - whole or partial - will bring down big banks and investors (like pension funds) who will see a substantial portion of their assets disappear in a poof of drachmas.  Greece won't benefit because without loans it will have to lay off over 100,000 govt employees who were hired simply as payback for bringing in votes (25 votes got you a govt. job). further depressing the Greek economy.

In separate news, CalPERS is at risk of not being paid by their debt by cities in bankruptcy if the municipal bond insurer's win their suit against Stockton.  The bond insurers are saying that (simplifying here) if they have to take a hit, so should CalPERS, especially since one of the bonds Stockton wants to default on was to pay off the unfunded liability arising from CalPERS inability to make the 7.5% they assume.  When CalPERS doesn't make their 7.5% return on investment, that becomes an "unfunded liability" that the state, cities, and counties have to make up.