Dylan Ratigan on State/Local Public Pension Reforms Posted on January 15, 2011 by Yves Smith Dylan Ratigan had an informative segment today on public pension underfunding, with San Diego as a case study in government responses. Visit msnbc.com for breaking news, world news, and news about the economy Post navigation ← Greenspan Put, aka “Be Nice to Banks”, Trumped Recognition of Housing Bubble in 2005 More Reasons Why Banks Should Worry About Ibanez Decision → Subscribe to Post Comments 25 comments Bryan Price January 15, 2011 at 2:57 am Didn’t they learn anything after Enron? Fool me once, shame on you, fool me twice, shame on me. Paul Tioxon January 15, 2011 at 3:01 am I have seen this on cable today. Of course, the temporary downtown in the economy is a crisis put to good use by the republicans to instill fear and resentment of the public against the government workers. The problem, other than the obvious lack of revenues as a result of economic depression is that business, large and small, pay little and in many cases no taxes. The tax burdens are relative to the states with no taxes, like the corporate haven of Delaware, which was getting some Congressional scrutiny as the on shore off shore tax haven for rich. But more importantly, if even in the best of times, we can not find evidence of corporate America taking its full share of responsibility for the nation state which secures its existence, its maintenance and its political cover in bad times, how can we expect the state to fund its other equally valid obligations to pensions? Without the state bureaucracy staffed by well paid, reasonable people, who can make a career out of public service, and plan on retirement, the private sector will suffer as well, breeding a government of short term bribe takers, instead of long term technocrats and bureaucrats. Take for example this study by the GAO. http://www.gao.gov/new.items/d08957.pdf Foreign Corporations and US based Corporations are compared. In the 8 years from 1998 through 2005, large FCDCs in a panel data set that we analyzed consisting of tax returns that were present in the SOI corporate files in every year were more likely to report no tax liability over multiple years than large USCCs in the same panel data set. As figure 2 shows, about 72 percent of FCDCs and 55 percent of USCCs reported no tax liability for at least 1 year during the 8 years. About 57 percent of FCDCs and 42 percent of USCCs reported no tax liability in multiple years—2 or more years—and about 34 percent of FCDCs and 24 percent of USCCs reported no tax liability for at least half the study period—4 or more years. A correspondingly higher percentage of USCCs reported a tax liability in all 8 years, 45 percent for USCCs and 28 percent for FCDCs. A Greater Percentage of Large FCDCs Reported No Tax Liability over Multiple Years between 1998 and 2005 Large FCDCs and USCCs reporting no tax liability in 2005 arrived at that result in similar ways on their tax returns, as shown in figure 3. At a high level, corporate tax returns are organized to (1) calculate gross profit as gross receipts or sales minus the cost of goods sold; (2) calculate total income as gross profit plus other types of income; (3) report various Large FCDCs and USCCs Were Similar in Where on Their Tax Returns They Established Zero Tax Liability Page 8 BUT THAT IS NOT ALL. EVEN WHEN TAXED, TAXES ARE NOT TURNED OVER TO THE GOVERNMENT, SEE WITH HOLDING TAXES KEPT BY CORPS. http://www.gao.gov/new.items/d081034t.pdf Testimony Before the Permanent Subcommittee on Investigations, Committee on Homeland Security and Government Affairs, U.S. Senate TAX COMPLIANCE Businesses Owe Billions in Federal Payroll Taxes Statement of Steven J. Sebastian, Director Financial Management and Assurance Our analysis of IRS’s records showed that, as of September 30, 2007, over 1.6 million businesses owed over $58 billion in unpaid payroll taxes, including interest and penalties. As such, payroll taxes comprise over 20 percent of IRS’s $282 billion inventory of outstanding taxes, penalties, and interest owed by businesses and individuals at September 30, 2007, and over 50 percent of the total amount owed by businesses in IRS’s inventory. Our analysis showed that 70 percent of all unpaid payroll taxes are owed by businesses with more than a year (4 tax quarters) of unpaid federal payroll taxes. In addition, over a quarter of payroll taxes are owed by businesses that have tax debt for more than 3 years (12 quarters). Because unpaid payroll taxes include amounts owed for Social Security and Hospital Insurance (Medicare Part A) taxes,6 the federal government may have to transfer higher amounts from the General Fund to the Social Security and Hospital Insurance trust funds to make up for the amounts businesses fail to remit. IRS estimated that for the tax debt it had in its inventory of unpaid assessments as of November 1, 2007, the General Fund had transferred $44 billion to the trust funds over what IRS collected because employers failing to remit withheld taxes on employee wages. Summary IRS has a number of powerful tools at its disposal to prevent the accumulation of unpaid taxes and to collect the taxes that are owed. However, IRS acknowledges that its traditional collection methods do not always bring taxpayers into compliance and that there is a major compliance problem with the large number of businesses that repeatedly 6 These amounts are collected pursuant to the Federal Insurance Contributions Act. 26 U.S.C. ch. 21. Page 3 The problem, in addition to assaults on Social Security as being ticking time bombs, the conflation of greedy, overpaid and under worked, inefficient and corrupt government employees, who won’t even shovel snow for OT with politicians who are crooks that hire more crooks, is that the corporations, on a regular basis, even when the economy is booming, refuse to pay taxes. Businesses have become little more than plundering schemes, taking profits out the nation and reinvesting everywhere around the world and paying mininmum or no taxes. Is it any wonder that state governments and city governments go begging? TC January 15, 2011 at 3:11 am How public sector pensions “got into this position” is no different than how the entire national economy arrived: by the allure of a Ponzi scheme. I have no doubt that, public pension underfunding represents a strategic flank by which the stranglehold of borderless, unaccountable, concentrated financial power can be broken. It starts with political will to cut in on those most dependable revenue streams whose increasing utility over recent decades, indeed, has been in support of the Ponzi scheme whose continued unraveling is further revealed with this public pension underfunding issue moving front and center. States could be well-served monopolizing certain aspects of the insurance industry particularly fitting that very cause for which government, indeed, is necessary: that all citizens may benefit. Again, this is just for starters. How states safely leverage these new, dependable revenue streams is a dialog on how to make tax receipts rise, tax rates fall, the size of government shrink, and every living pensioner sublime with certainty they will be well-provided. MikeNY January 15, 2011 at 7:32 am Agreed — honest, and he has a brain. mannfm11 January 15, 2011 at 4:24 am Where did they find this guy? He sounds like something I thought extinct in the US, an honest politician DownSouth January 15, 2011 at 7:28 am “…an honest politician…” Oh really? It sounds to me as if he’s pretty much aping right-wing talking points. Take this from his interview, for instance: People are prosecuted for fraud if they’re in the private sector. If you happen to be a big state pension system you’re simply told you made a mistake. So “people are prosecuted for fraud if they’re in the private sector”? What planet does this guy live on? This comment fits the simplistic black and white myth that right-wingers have propagandized so successfully: Public sector (government) = bad, private sector = good. And of course defined-benefit plans are more expensive than defined-contribution plans, that is 401(k) plans. Why does he think the private sector went to them? As Jacob S. Hacker points out in The Great Risk Shift: The New Economic Insecurity and the Decline of the American Dream: [T]he one singular virtue of 401(k) plans became all the more irresistible: 401(k)s are dirt cheap. In the late 1970s, employers devoted more than 4 percent of workers’ payrolls to pensions. By the late 1980s, they were contributing around 2.5 percent. Most 401(k) contributions, after all, are made by workers, not employers. There seems to be a built-in assumption on the part of our good mayor that defined-benefit plans are bad and defined-contribution plans are good. But good for who and bad for who? There are winners and losers here, difficult choices that need to be made. Of course one would never know that from what Mayor Sanders says. The eradication of defined-benefit plans from the private sector is almost complete. As Hacker goes on to point out: “As recently as twenty-five years ago, more than 80 percent of large and medium-sized firms offered a defined-benefit plan, today, less than a third do, and the share continues to fall.” Once private sector workers got murdered, it was almost a foregone conclusion that public sector workers would be next to face the firing squad. The double standard that exists in public pensions and private pensions is difficult to defend. But this evades the underlying question, and that is: Was the move from defined-benefit to defined-contribution plans in the private sector a “good” thing? Would it not be fair to say that it was good for capital but bad for labor? Would it not be fair to say that the shift from defined-benefit to defined-contribution plans is a factor in the growing inequality in America? And then there’s the whole issue about the past and the future. Ratigan wanted to talk about the past—-pension liabilities, promises (and contractual agreements?) that had already been made. Mayor Sanders deftly switched the discussion so as to talk about the future. Undoubtedly, if all public sector pensions were to immediately be switched from defined-benefit to defined-contribution plans, the future savings would be immense. But that leaves the $3.2 trillion question unanswered. So it seems Sanders dodged another difficult question. If Sanders were “an honest politician” then he would lay out the facts and let the people decide. This would involve presenting an honest assessment of the pros and cons of defined-benefit plans vs. defined-contribution plans. He wouldn’t dodge the extremely difficult question about what to do about all the promises to public sector workers that have already been made. And surely, wouldn’t he admit that the private financial sector bears at least some responsibility for the poor investment performance of the pension funds? Grinder January 15, 2011 at 8:38 am “There seems to be a built-in assumption on the part of our good mayor that defined-benefit plans are bad and defined-contribution plans are good.” Conversion from DB to DC plan transfers retirement risk from the employer to the employee. That’s the name of the game. With DC, if you or the plan structure fails to adequately fund retirement or the value of the underlying investments decline sharply then it’s your problem. With DB, it’s the employers problem. Private sector workers no longer make the wages to fund public pensions in there current form and businesses have become more mobile and cannot be forced to pay the taxes required to fund such a scheme. Something has to give. DownSouth January 15, 2011 at 9:08 am “if…the value of the underlying investments decline sharply…” “Private sector workers no longer make the wages…” But who’s to blame for those things? Public sector workers? I think not. Instead of blaming public sector workers, why don’t people place the blame for the GFC where it belongs, which is on the financial services industry? Do you see Mayor Sanders doing that? All I can say it’s a good time to be an American you’re in the top 10%. And if you’re in the top 1%, why it’s pure nirvana. But if you’re in the bottom 90%, it’s elbows and assholes. DownSouth January 15, 2011 at 9:20 am Grinder said: “Something has to give.” I agree. But why is it that capital, and especially the custodians of capital, have to give nothing and workers have to give everything? It hardly seems fair to me. Grinder January 15, 2011 at 10:50 am DownSouth, I have a phrase I use all the time, It is what it is. I don’t view things as to lay blame, I’d rather just coldly understand the situation to understand the implications. The custodians of capital have all the options. They can choose whichever climate best rewards capital. Global businesses can pit countries against each other to secure the best deal. Highly mobile workers can pit state governments against each other. Don’t like NJ taxes and your mobile and educated then move to TX. NJ loses enough 100K plus workers they’ll rethink their policies. The US for years is transitioning away from capital intensive businesses domestically and its impacts are really being felt in the last few. As such business and the people working for those businesses aren’t tied to the land anymore. Twenty years ago, the state of CT could tax its major employers at will because it was too expensive to relocate it’s physical plant out of state. Since then these companies have been steadily shifting production to China probably to the point where they are now self-sufficent overseas. CT has a 3.5 billion budget shortfall but I guarantee they will not raise taxes one penny against its major employers for fear of the consequences to employment. From my perspective, that check is a good thing. Spending in my state got totally out of hand and now the state has to deal with the consequences of its fiscal mismanagement in an environment where its businesses and people just “don’t have to take it”. Lowell Weicker, who introduced the CT income tax a number of years ago over fierce opposition, is quoted as saying CT residents just need to take their castor oil. No more. Illinois will learn this lesson in the coming years. DownSouth January 15, 2011 at 1:10 pm • Grinder said: “I have a phrase I use all the time, It is what it is. I don’t view things as to lay blame, I’d rather just coldly understand the situation to understand the implications.” Now you’re starting to sound just like Barak Obama. Seriously though, it’s necessary to properly assess blame so as to know who to punish. Societies that don’t punish are pathological societies. I don’t know what your cup of tea is, but if you like science there’s this essay from Hillard Kaplan and Michael Gurven: We propose that multi-individual negotiations result in the emergence of social norms that are collectively enforced. We base this proposal on a result obtained by Boyd and Richerson (1992), and treated more recently by Bowles and Gintis (2000), in which cooperation is modeled with punishment. They found that cooperation can be stable in large groups, if non-cooperators are punished and if those who do not punish non-cooperators are also punished. As Hannah Arendt points out in The Human Condition, however, it is imperative that we distinguish between “punishment” and “vengeance” (or “revenge”): [F]orgiveness is the exact opposite of vengeance, which acts in the form of re-acting against an original trespassing, whereby far from putting an end to the consequences of the first misdeed, everybody remains bound to the process, permitting the chain reaction contained in every action to take its unhindered course… The alternative to forgiveness, but by no means its opposite, is punishment, and both have in common that they attempt to put an end to something that without interference could go on endlessly. It is therefore quite significant, a structural element in the realm of human affairs, that men are unable to punish what has turned out to be unforgivable. This is the true hallmark of those offenses which, since Kant, we call “radical evil” and about whose nature so little is known… But in addition to assessing blame, it is also necessary to assess intent. As Arendt explains: The reason for the insistence on a duty to forgive is clearly “for they know not what they do” and it does not apply to the extremity of crime and willed evil… • Grinder said: “The custodians of capital have all the options. They can choose whichever climate best rewards capital. Global businesses can pit countries against each other to secure the best deal.” Only if we allow them to. Externality provided this link the other day that gives the history of how we arrived at this dismal state of affairs. We got here because bad political decisions were made. There’s nothing inevitable or immutable about it. kievite January 15, 2011 at 3:58 pm “The custodians of capital have all the options. They can choose whichever climate best rewards capital. Global businesses can pit countries against each other to secure the best deal. Highly mobile workers can pit state governments against each other. “ My impression is that big businesses require state protection as they are usually pretty inefficient and infected with internal power struggle and bureaucratic perversions. In a way big business means state capitalism and everything that this term means. And if some member of GM, Citi or Excon brass became too cozy with say China Party brass or Indian outsourcing mafia (beyond what is politically correct) there are multiple ways to show that his/her choice was wrong :-). MikeNY January 15, 2011 at 7:37 am Oops – sorry, meant that reply here. Right wing talking points? WTF?? Ponzi economy means there isn’t the cash. Gov’t unions don’t get a pass so their members can retire at 55 — while the private sector chumps work til they drop dead to fund it. DownSouth January 15, 2011 at 8:12 am MikeNY, You’re drawing the battle lines in the wrong place. You do that because you wrongly identify the enemy. The enemy of the private sector worker is not the public sector worker, but capital. And where did I ever say that unions should get a pass? You’re setting up straw men. I think there’s plenty of blame to go around for the $3.2 trillion shortfall. But go back and listen to what Sanders says. He places all the blame on the unions and exculpates the private financial services sector, making the nonsensical statement that “people are prosecuted for fraud if they’re in the private sector.” Of course anyone who’s been following the GFC knows that is not true, as Bill Black, amongst others, have made abundantly clear. Grinder January 15, 2011 at 8:55 am DownSouth, San Diego is a prime example of the problem with public sector DB plans, and it was briefly touched on in Dylan’s video. San Diego refused to raise taxes to fund their obligations, hiding the true cost from the taxpayer and from public debate. Unions recognized that by agreeing to this arrangement they were taking on risk and agreed to this in exchange for richer benefits and favorable benefit calculations. It was politicians and union bosses colluding against the taxpayer. DownSouth January 15, 2011 at 9:27 am And none of it had to do with the outsized investment returns being promised by the investment bankers? Who was the con artist and who was the mark here? Since the investment bankers wound up with the money and the pension funds wound up with what the little boy shot at, isn’t the answer to that question rather obvious? Grinder January 15, 2011 at 11:02 am The con was actually run by the Federal Reserve. If pensions looked elsewhere for return because rates were too low then they didn’t pass finance 101. The higher the return, the higher the risk regardless of what the salesman says. But foreign banks and trusts fell for the same line so pensions have good company. DownSouth January 15, 2011 at 1:25 pm Grinder said: “The con was actually run by the Federal Reserve.” Now you’re starting to sound like Milton Friedman and Anna Schwartz. But seriously though, who was responsible for the creation of the Federal Reserve? Who has a monopoly of power at the Federal Reserve? Please don’t tell me you believe it’s public service workers or their unions. Karen Bernier January 15, 2011 at 8:27 am Let me get this straight, so we’ve finally found an honest politician who claims that “people are prosecuted for fraud if they’re in the private sector.” Really? Notice how he’s not mentioning any names. This reminds me of the joke: a child, an honest politician, and Santa Claus all spot a $20 bill on the ground. Who picks it up? The child, since the other two don’t exist. Bil G. January 15, 2011 at 9:25 am We need to immediatley have government workers contribute 10% of their pay to their own pensions and raise taxes on everyone to fund the remaining shortfall. Pensions need to use 4% as their target earninge each year to determine the shortfall. Jim the Skeptic January 15, 2011 at 10:36 am Paul Tioxon says: “Without the state bureaucracy staffed by well paid, reasonable people, who can make a career out of public service, and plan on retirement, the private sector will suffer as well, breeding a government of short term bribe takers, instead of long term technocrats and bureaucrats.” I agree with that but it is not the worst problem. Without a long term hook, the public sector will lose it’s best employees as they acquire more experience. This happens because the public sector always seems to adjust it’s pay scales by doing surveys of the private sector and they are not done very often. So public pay does NOT keep up with the private sector. Of course the least motivated and least competent will stay on forever! And the private sector can offer more money for a particularly outstanding employee with good experience. Government should be able to compete for that particular employee but they just haven’t found a way to do it. The authority to give a pay raise never seems to exist at the level where performance can be honestly assessed. Merit raises have been tried but there is always the perception that a supervisor’s best friend gets the raises. Inter divisional politics add to this problem. Up till now at least some of those highly competent and experienced employees stayed with the public job because of the pension. Without them the agencies will have to adjust policies. There will be more rigid ‘Standard Operating Procedures’ which force more decision making up to the supervisor. Everything will slow down just a little. It is already aggravating to deal with some public agencies. Expect that to get worse. In my state, there was a special statewide raise to be awarded based on individual merit proposed, and funded by the legislature. The Governor eliminated those raises because he had other priorities. Politicians say they want to reward merit but actions speak louder than words. The next time you are in a government office, look around. Who is answering your questions, filling out your paperwork, or fining your business. Do you really want this person’s position to be filled by a new employee every 2 years? Or to be filled by someone so incompetent that they can’t find other jobs? But I have to give this guy some credit. He is talking about changing the pensions for new hires, not taking away benefits earned years before. Michael Cain January 15, 2011 at 10:46 am Wasn’t it just over a decade ago that the Cato Institute was touting San Diego’s pension system as the model for the future? r cohn January 15, 2011 at 12:23 pm i live in N.Nj.Property taxes average 2.5% of the value of a house.Last year they increased 6.5%.At that rate of increae, in 20 years property taxes will equal about 8.5% of the value of a house.For a $500,000 house that would equal to $42,500/year.Mortgage payments with a 20% down ,30 year,5% would be about $26,000/year.Because pension and health benefits are now the biggest driver in property tax increases,housing prices will have to decrease dramatically (probably by at least 2/3s if pensions and health costs for public employess are not also reduced dramatically.IT DOES MATTER WHAT YOUR POLITICAL PERSUASION IS, THE NUMBERS ARE THE NUMBERS Jim the Skeptic January 15, 2011 at 2:02 pm r cohn said: “i live in N.Nj.Property taxes average 2.5% of the value of a house.Last year they increased 6.5%.At that rate of increae, in 20 years property taxes will equal about 8.5% of the value of a house. …” My real property tax was 2.41% in 2007 and was raised to 2.4855% by 2010. I make that a 3.135% increase over 3 years. My assessment has stayed constant during that time. So that would be an increase of $75.50 per hundred thousand dollar of assessed home value. I’d guess that this increase in rate is to compensate for stagnant assessments and other revenues falling. r cohn said: “Because pension and health benefits are now the biggest driver in property tax increases,housing prices will have to decrease dramatically (probably by at least 2/3s if pensions and health costs for public employess are not also reduced dramatically” I would agree that wages and benefits need to be trimmed to compensate for lower tax receipts. My only reservation with that statement is the “dramatically”. Frankly the cost of health care is going to destroy this country. Telling a significant part of the population that they will have to die early of diseases that are treatable but they can’t afford the treatment is not a formula for peace and tranquility. As costs continue to rise even the middle class will be denied needed health care. Paul Repstock January 15, 2011 at 5:18 pm Every one of you previous posters is falling into the ‘Trap’. Here you are busy pointing fingers and saying ‘They get more than we get.” and ‘Why should I have to pay for someone else’s mess?’ The real point is that the whole country has been mislead, lied to, and cheated. And nearly everone has gone along with the scam because there has always been a bit of icing on this cardboard cake. The ‘Vote buyers’, have played one group against the other. Now you continue their program for them by engaging in “Class Warfare”. Thus the Middle Class destroys itself by fighting over crumbs! Comments are closed. Tip Jar Please Donate or Subscribe!