Coastal Post Online

 

DONATE TO US

SUBSCRIBE TO US

ADVERTISE WITH US

 

**** COASTALPOST'S LOGO ****

 

DONATE TO US

SUBSCRIBE TO US

ADVERTISE WITH US

 

MARIN COUNTY'S NEWS MONTHLY - FREE PRESS
(415)868-1600 - (415)868-0502(fax) - P.O. Box 31, Bolinas, CA, 94924

July, 2005

 

Pensions And Marin's Public Balance Sheet
By Niccolo Caldararo

The good news is Marin's median income is the highest in California. Marin's real estate market is as hot as ever. The bad news is that County and municipal governments are in trouble. The State has been siphoning off local property tax and gobbling up an increasing share of other tax revenue. In addition due to losses in the stock market and a continuing underperforming economy there is a widening gap in County/city pension assets.
There is nothing unusual about this situation as private and public pension funds across the nation are underfunded as reported by Greenwich Associates recently (see Stephen Shurr's article in the Financial Times, 5/17/05). With private companies defaulting on their pension plans in a great wave in the past 5 years, the Pension Benefit Guaranty Corporation of the US government is now in deficit of $23.5 billion this year alone in defaulting private pension plans. It lost $14.3 Billion in the four years before 2004 (Amy Yee, FT, 5/28/05). It covers 31,000 private-sector company's pension plans that are in trouble or already defaulted. These are companies whose managers failed to provide the legal asset requirements or illegally "borrowed" from their funds or otherwise depleted them. These "bad" companies are dragging down the well managed ones, and their debts are being paid by the American taxpayer. The GAO estimates that another $450 billion in private sector plans are underfunded.
We hear all the worrying over Social Security when the real present danger is a flood of red ink by America's business community. We constantly are told that the County and the towns of Marin should be run like a business, yet the examples are hard to find that are not in trouble, like GM, Ford, United.... Worse yet most private personal 401K accounts are underfunded as reported by the Wilshire Research Co. of Santa Monica. Most of this is due to the same problem plaguing the County and towns, the fall in the stock market. It points out how changing Social Security to private accounts is simply a fallacy and will result in disaster. Worldwide pension plans are in an unsustainable condition according to a World Bank report released last month.
A new County-wide plan needs to be devised to halt the ballooning cost of pensions. At the turn of the last century towns and counties in California financed public enterprises including water and power. Such publicly owned enterprises like the Marin Municipal Water District produce value in terms of a product (water, energy, etc.). The existence of these assets allowed many towns to avoid the financial affects of the last energy crisis. Marin needs a taskforce to be put together of County and municipal officials, with the cooperation of the unions, to develop a new plan for the 21st century that will provide for Marin's pension liabilities and yet produce a reasonable financing package. Such a plan is needed for the State as well and will be necessary to avoid default by pension plans nationwide in public entities, currently estimated at around half a trillion dollars.
Adam Smith discussed the history of annuities for retirement that people bought in his day. The returns on these financial instruments were based on the degree of stability of the national economy and the tradition of responsibility of the managers of firms who sold them. Since the beginning of the 20th century an increasing percentage of retirement plans have been based on the assumption of rising values in equities (and after the 1960s, REITs or real estate investment trusts). The volatility of these instruments has increased to the risk levels of gambling as B.B. Mandelbrot has described in his 1997 book, Fractals and Scaling in Finance.
Pension plans are only as solid as the assets they invest in, including stocks, bonds, property, etc. As the value of these assets varies so does their ability to provide for the payments for their beneficiaries. For example, New Jersey's pension fund with over $70 Billion in assets returned a 30% profit in 1999, but it lost more than $20 Billion in 2000 and 2001. This was a 28% loss in assets. Almost 1/3 of every dollar that the New Jersey employees had paid in or the appreciation of these contributions was lost. In the past 2 years the bulk of investment dollars has been in speculation and most of that in hedge funds, derivatives and similar risk spreading devices. The return curve has become flat which has driven investors to seek increasingly risking funds. This means less investment in new technologies and actually brick and mortar industry. The assets of these paper investment tools, are increasingly backed by junk bonds or hedge funds of hedge funds Last week alone $976 million was invested in hedge funds by US investors alone. Put this next to the fears of a real estate balloon and we are in a very slippery situation. Liquidity problems are already reported in both the hedge fund and bond markets with fails occurring where bonds were used as collateral but are not being returned in the June futures contract deliveries. Several funds have gone out of existence recently and liquidations are increasing.
A new plan based on a stable relationship between the standard of living costs and the financial stability and health of towns and cities is needed to produce a sustainable future for our country's retirees and at reasonable cost to taxpayers. In addition to investing in public power and other real wealth creation projects, the County and municipal governments could undertake the Townsend Plan. This was a plan devised by a retired physician in 1930 to provide a monthly pension for every American over 60 of $200. It was to be financed by a 2% transaction tax. This is a tax on all purchases, from factories to pencils. By 1935 the Plan had been in operation in a number of municipalities, but was made obsolete by the institution of Social Security. The Plan was intended to not only provide a pension but to encourage older workers to leave the workforce and make way for younger workers. During the Depression this was intended to reduce unemployment and to decrease labor costs.
Today the Townsend Plan would benefit small businesses by providing pensions and it could be extended to support Medicare producing a national health care funding source. The beauty of the Plan in the 1930s was that it was a means by which states and counties could provide for adequate levels of care for the elderly and administer the costs and tax locally. Social Security took the taxation power to Washington and reduced the possibilities of local control.

Coastal Post Home Page