October 21, 2013 3:13 PM
Across the nation, state and local governments in dire financial straits face great difficulty in their efforts to bring their budgets under control. Pensions are one of the biggest drivers of deficits, and therein lies the problem. Many states treat pensions not as a form of compensation, but as a contractual obligation to the employee. As a result, states and cities that have tried to bring pension obligations under control have seen roadblock thrown up in court by government employee unions. As the Manhattan Institute's Steven Malanga explains:
In the private sector, pensions are governed by the federal Employee Retirement Income Security Act. Although a private employer may not cut benefits that a worker has already earned, ERISA allows a business to change the rate at which a worker accrues future benefits.
ERISA, however, doesn’t apply to government employee pensions. Instead, in the states, local laws and court decisions govern how public-worker retirement systems are treated, and in many cases the states depart, sometimes radically, from the standard set by the law.
In many states, that means that pension promises are treated as sacrosanct.
Many legal protections given to public-sector pensions arise from court decisions that treat laws governing public retirement systems as a contract between the state and a worker. That puts pensions under the jurisdiction of the contract clause of the U.S. Constitution, or under state contract law.
In California, a state teetering on the fiscal precipice due in large part to pension liabilities, San Jose Mayor Chuck Reed is leading an effort to amend the Golden State's constitution to give governments there greater flexibility to make changes to employee retirement benefits. Reed faces a tough fight -- Malanga describes his effort as "an uphill campaign" -- but he already deserves plaudits for bringing needed attention to this issue.
October 21, 2013 10:40 AM
Recently, The Washington Post reported that J.P.Morgan will pay $13 billion to settle lawsuits against it by the federal government and two state attorneys general. Judging from the story, the proposed settlement contains provisions that rip off taxpayers and punish the very investors victimized by the misconduct alleged. This is depressing, but perhaps not surprising from an administration that has used past mortgage settlements to rip off innocent mortgage investors, and enrich real estate speculators and irresponsible mortgage borrowers.
In the principal lawsuit that led to this proposed settlement, the government accused the biggest four banks -- including J.P. Morgan Chase -- of selling risky mortgage bonds to the government-sponsored mortgage giants Fannie Mae and Freddie Mac that were worth less than it appeared due to a greater-than-predicted risk that borrowers on those mortgages would default. Defaults on those mortgages later cost Fannie and Freddie money, and when those failing mortgage giants got taken over by the Federal Housing Finance Agency (which became their conservator), the FHFA sued the banks for billions (some of the many billions the federal government spent bailing out Fannie and Freddie, whose own government-backed recklessness contributed both to their own failure, and the larger financial crisis).
Instead of protecting the value of these mortgages -- which the government had a duty to do as conservator for Fannie and Freddie, which owned mortgage bonds backed by those mortgages -- the government does just the opposite in the proposed settlement. The Washington Post reports that the settlement requires J.P. Morgan to make the risky mortgages worth even less still, by reducing the value of those mortgages through mortgage write-downs worth $4 billion.
This "remedy" for J.P. Morgan's conduct is worse than the disease. The government's lawsuit alleged that the big banks ripped off mortgage investors like Fannie and Freddie by overvaluing the mortgages they invested in, mortgages whose value dropped in the mortgage crisis; now, the government is seeking to reduce the value of those mortgages even more.
October 11, 2013 10:52 AM
Cross-posted from Newsbusters.org
“U.S. Government Shutdown Threatening Housing Recovery,” screams the Oct. 2 headline of a shutdown scare screed in Bloomberg BusinessWeek.
Wade into the story, however, and we see that what’s really at hand is a mere delay of processing of mortgages because of some employees furloughed at the Federal Housing Administration.
Furthermore, as the article explains, the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac will remain completely open because ” the government-controlled mortgage aggregators fund operations through fees collected from private lenders”
Actually, it’s unfortunate that the shutdown won’t hit Fannie and Freddie. The GSEs fueled the housing boom and bust that led to the financial crisis we have been living through the past five years, and are on track to fuel another financial crisis. But readers wouldn’t know that from Bloomberg BusinessWeek or other establishment media outlets.
Politicians and the establishment media are weaving an epic tale of the events that froze the markets five years ago this fall and led to massive bailouts of the biggest financial firms. Yet, their retelling of the financial crisis, to use a filmmaking analogy, leaves a lot on the cutting room floor — namely, the role of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac in fueling the subprime boom.
September 30, 2013 3:02 PM
In Tennessee, Obamacare will triple men's premiums, and double women's, in the market for individual health insurance. Nationally, Obamacare will increase men's premiums by 99 percent, and women's by 62%.
Kathy Kristof of CBS MoneyWatch describes experiencing a 67 percent spike in her premiums, for a worse policy than she had before:
The promise that you could keep your old policy, if you liked it, has proved illusory. My insurer, Kaiser Permanente, informed me in a glossy booklet that “At midnight on December 31, we will discontinue your current plan because it will not meet the requirements of the Affordable Care Act.” My premium, the letter added, would go from $209 a month to $348, a 66.5 percent increase that will cost $1,668 annually. . .the things that mattered to me — that I would be able to limit my out-of-pocket costs if I had a catastrophic ailment — got worse under my new Obamacare policy. My policy, which has always paid 100 percent of the cost of annual check-ups, had a $5,000 annual deductible for sick visits and hospital stays. Once I paid that $5,000, the plan would pay 100 percent of any additional cost. That protected me from economic devastation in the event of a catastrophic illness, such as cancer.
Kaiser’s Obamacare policy has a $4,500 deductible, but then covers only 40 percent of medical costs for office visits, hospital stays and drugs. Out-of-pocket expenses aren’t capped until the policyholder pays $6,350 annually.
Meanwhile, some wealthy early retirees have figured out how to qualify for Obamacare subsidies at taxpayer expense. They do this by living on tax-free income and deferring their receipt of taxable income—an option not available to people who have to work for a living. As the commenter Alan Lovchik noted yesterday,Hey you RICH early retirees who are not on Medicare yet and are buying your own medical insurance!! The Affordable Care Act of 2010 (Obamacare) will give you TOTALLY FREE insurance coverage. You must be rich enough to take advantage, so the poor and middle class are probably left out of this wonderful opportunity.
September 19, 2013 11:27 AM
When it comes to reporting on the 2008 financial crisis, many journalists are experts at ignoring the elephant in the room: the government's role in spawning the crisis through perverse mandates and incentives. Peter Wallison, who predicted years earlier that mortgage giants Fannie Mae and Freddie Mac would run into trouble, highlights this in The Wall Street Journal. As he observes, on "the fifth anniversary of the Lehman Brothers collapse, the media have been full of analyses about what happened in those fateful days." But "any discussion of the government's central role in the disaster is neatly avoided. This historical airbrushing is something of a feat, given the facts."
As he points out, "At the time of Lehman's failure, half of all mortgages in the U.S.—28 million loans—were subprime or otherwise risky and low-quality. Of these, 74% were on the books of government agencies, principally the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac." But the media barely mentions this, as if "the vast majority of the subprime mortgages that the" government-sponsored mortgage giants "bought didn't exist." For example, they ignore the key role of the federal Department of Housing and Urban Development in causing the mortgage crisis:
In 1992, Congress adopted the ironically named Federal Housing Enterprises Financial Safety and Soundness Act, also known as the GSE Act, giving HUD the authority to administer the legislation's affordable housing goals. The law required Fannie Mae and Freddie Mac, when they acquired mortgages from lenders, to meet a quota of loans to borrowers who were at or below the median income where they lived. At first, the quota was 30%, but HUD was authorized to raise the quota and over time it did, eventually requiring a quota of 56%. In those heady days, HUD was pleased with its work.
In 2000, for example, when then-HUD Secretary Andrew Cuomo was raising the quota to 50%, the agency actually sounded boastful about its role. Describing the gains in homeownership that had been made by low- and moderate-income families, HUD noted: "most industry observers believe that one factor behind these gains has been improved performance of Fannie Mae and Freddie Mac under HUD's affordable lending goals. HUD's recent increases in the goals for 2001-03 will encourage the GSEs to further step up their support for affordable housing." Credit scores or down payments were not relevant; only income and minority status would satisfy the goals.
HUD was still at it in 2004, stating that "Millions of Americans with less than perfect credit or who cannot meet some of the tougher underwriting requirements of the prime market . . . rely on subprime lenders for access to mortgage financing. If the GSEs reach deeper into the subprime market, more borrowers will benefit from the advantages that greater stability and standardization create."
That statement is all you need to understand why, in 2008, 74% of the subprime mortgages outstanding in the U.S. financial system were on the books of government agencies, particularly Fannie and Freddie.
But then Lehman folded, and suddenly the government [changed its tune]. Instead, in 2010, the new HUD secretary, Shawn Donovan, told the House Financial Services Committee: "Seeing their market share decline [between 2004 and 2006] as a result of a change of demand, the GSEs made the decision to widen their focus from safer prime loans and begin chasing the non-prime market, loosening longstanding underwriting and risk management standards along the way."
September 4, 2013 12:08 PM
One of the challenges in addressing the underfunding of public pensions is determining how big the funding gaps are. Estimates vary because of disagreement over accounting methods. State pension actuaries calculate pension plans' future funding using discount rates based on high rates of expected returns on investments. State officials have an incentive to engage in this kind of fudging because higher expected returns tomorrow mean lower contributions into the pension funds today.
This has resulted in states low-balling their future pension obligations. Now a new State Budget Solutions (SBS) report goes some way toward clarifying the picture. The report, by SBS' Cory Eucalitto, estimates the nation's state-level defined benefit pension plans to be underfunded by $4.1 trillion, with a funding ratio of only 39 percent -- well below the 73 percent shown through official reporting.
The SBS report arrived at this estimate by focusing not on expected investment returns, but on the fixed nature of the liability itself:
Current public sector practices involve discounting a liability according to the assumed investment returns of plan assets, typically around 8 percent. Yet with discount rates tied to expected investment performance, plan sponsors can easily take on greater risk in order to make liabilities appear smaller. This reduces the resources required today to pay for the promises of tomorrow.
Accurately accounting for a pension system’s liability requires incorporating the nearly certain nature of benefits. That is, once promised, the chances that benefits will not have to be paid are extremely low.
MoveOn admits: "[I]f younger, healthier people don't participate, then costs will skyrocket and Obamacare will fail."August 30, 2013 1:14 PM
MoveOn.org yesterday sent me an appeal asking for $5 to help fund a $250,000 social media campaign supporting ObamaCare targeted to reach young adults. Here’s why they need my five bucks:
[R]ight-wing groups have launched a multi-million-dollar campaign to torpedo Obamacare before it even gets started. Their plan: Mislead young people about how the law works so they get scared and don't enroll. The problem is that it really could work because if younger, healthier people don't participate, then costs will skyrocket and Obamacare will fail. [Emphasis in original]
MoveOn.org footnotes a Washington Post article, which explains that last sentence. From the Post Wonkblog article by Sarah Kliff: “Young adults tend to have lower medical bills, which would hold down premiums for the entire insurance market. If only the sick and elderly sign up, health costs would skyrocket.”
So, as MoveOn itself acknowledges, ObamaCare is based on using insurance premiums from younger, healthier people to subsidize health care for older, sicker people. Yet, that is exactly the correct information free market and conservative groups opposed to ObamaCare are trying to get to young folks, so that they understand the racket they are being cajoled to join.
So then what does the “multi-million dollar right-wing misinformation campaign” aimed at young adults entail? It seems that the purpose of MoveOn.org’s social media campaign is to keep the wool pulled over young people’s eyes to protect them from the painful reality that ObamaCare is a con game designed to fleece them. Otherwise, why would they sign up for it?
August 21, 2013 1:04 PM
The bankruptcy of Detroit is an unusual event, but its uniqueness lies mainly in its severity. Municipal governments across the nation are struggling to bring their own finances under control, and for many of them, unfunded pension obligations are a huge driver of deficits. If other municipalities want to avoid a similar fate (even if in milder form), they first need to get a handle on the size of the problem.
The good news is that this is possible. The bad news is that efforts to clarify the pension obligations picture will meet stiff resistance from government employee unions. Yet, the union can only kick against fiscal reality for so long.
In Detroit, a major point of dispute between public pension funds and the city's state-appointed emergency manager is just how large is the pension gap -- specifically, how it is calculated. Pension officials have argued that they are adequately funded, but those claims appear based on overly optimistic projections of future investment returns.
In July, emergency manager Kevyn Orr argued that the city's pensions face a shortfall of at least $3.5 billion -- five times the figure of previous estimates, according to The Wall Street Journal. But the shortfall is likely much greater.
August 16, 2013 12:32 PM
Public awareness of the scope of the state public pension crisis seems to be growing every day. That's a welcome development, in that it has led to state officials to look for ways to reform their underfunded pension systems. The question they face is: How?
For ideas for reform, they should look to a new report by former Utah state Senator Dan Liljenquist, who led his state's wide-ranging and successful pension reform. The report, published this week by the American Legislative Exchange Council (ALEC), puts forth ideas for reform based on some basic principles. First, all new employees should join a defined contribution (DC) system. Second, payments that are due under state's current pension systems must be paid and reasonable adjustments to current benefits should be made, as courts allow.
For specific reforms, the study offers three basic options: 1) defined contribution plans, such as 401(k) plans; 2) cash balance (CB) plans, which have aspects of both defined benefit (DB) and defined contribution plans; and 3) hybrid plans, in which the employer makes a fixed contribution, as in a defined contribution plan, and employees have the option of joining with other employees to create a defined benefit option.
August 13, 2013 10:17 AM
A recent item in The Washington Post explains "how Georgetown Law gets Uncle Sam to pay its students’ bills," averaging $158,888 over three years, taking advantage of perverse incentives in a federal student-loan program. A federal income-based repayment plan forgives the student loan debt of law students who go to work for the government or a "public interest" law firm 10 years after they graduate, as long as they pay a small percentage of their income in the first ten years after graduation towards paying off part of their student loans. Typically, much of those law students' loans are not paid off by the end of 10 years, and thus are forgiven at taxpayer expense. But Georgetown has figured out a way to take things even further and make taxpayers pick up the entire tab through creative accounting. Under its Loan Repayment Assistance Program, a student can get his law degree "absolutely free of charge," and entirely on the taxpayer's tab. As the Post notes,
Georgetown has found a very clever way to exploit recent reforms to federal student loan programs so as to greatly reduce the price of law school for students without costing the school anything either. Georgetown Law students who use LRAP use loans from Grad PLUS — the federal government’s student loan program for grad students — to fund the entire cost of going to law school. That includes not only tuition and fees but living expenses like housing and food. Grad PLUS has no upper limit on the amount you can borrow, so there isn’t any constraint on how much you take out.
Once out of school, the students enroll in an income-based repayment program, in which, if they’re working for a nonprofit, the federal government forgives all loans after 10 years. For that 10-year period, however, the borrower has to pay a share of their income. But under LRAP, Georgetown commits to covering all of those payments.
Upon first glance, it looks like what’s happening is that Georgetown is paying for part of the cost of law school and the federal government is forgiving the rest. But as Jason Delisle and Alex Holt at the New America Foundation discovered, Georgetown’s cleverer than that. The tuition paid by new students — tuition they’re often paying with federal loans — includes the cost of covering the previous students’ loan payments.
So Georgetown is ultimately paying its share with money its students borrow from the federal government. The feds are paying back themselves. At no step in the process does Georgetown actually have to pay anything. The feds are picking up the entire bill.