The New York Times Covers The de Blasio Mayoral Campaign

Gearing up its coverage of the mayoral race, yesterday the New York Times in its New York section (page A21 in the print edition) ran a long article by Michael Barbaro on the campaign of Bill de Blasio.  de Blasio is currently Public Advocate, a city-wide elective office of no identifiable duties or purpose, serving only to give its occupant a platform to keep his name before the public and thereby try to make himself a candidate for mayor when the opportunity arises.

The Times article, like nearly everything that issues from that source, serves mostly to illustrate the New York conventional ignorance and what is wrong with it.   First, a short review of my own views of what is important in this race for mayor.  New York City government is ridiculously expensive, for reasons that have nothing to do with delivering a superior level of service to the people, and everything to do with paying back the employee unions for their support.  In a post late last year entitled Why New York City Is A High Tax Jurisdiction, I laid out the three main areas where we vastly overpay to get nothing of value:  public employee pensions (currently running a stunning $8 billion per year, 12% of the budget, and likely to double over the next ten years based on formulas already agreed to and desperately in need of reform); public schools (we spend about $20,000 per year per student, which is almost double the national average, the differential representing over $8 billion, which is 12% of the budget - and our student performance is worse than the national average); and Medicaid (we spend close to triple per beneficiary what is spent in California and Texas, for no better health results, although we are partially saved by the Feds and State picking up most of the tab; still, it is about a $2.5 billion issue in the City budget).  These three items together represent more than $15 billion in overspending for no value, about 22% of the budget down the rat hole, before getting to other large items.  This overspending is basically giveaways to favored constituencies, mainly the public employee unions, who contribute lavishly to their chosen mayoral candidates and are expert at bringing their voters out to the polls.  Every candidate for mayor needs to address this overspending issue as priority number 1.

With that in mind, let us look at the Times coverage of de Blasio's candidacy.  First of all, in an article spread over most of two full pages, there is not one word about the level of City spending, whether we are getting value for our taxes, or anything specific about worker pensions, school spending, or Medicaid spending.  Indeed, the article is almost completely devoid of substance on matters of policy.  So how can they even fill what amounts to a full page of text in the print edition without getting to any such subject?  Easy.  Here's how it starts:

Bill de Blasio drives a gas-sipping Ford hybrid and cultivates tomatoes and peppers from his backyard in brownstone Brooklyn.  He works out at the socially responsible Y.M.C.A. and opted for the all-hands-on-deck rigors of the Park Slope Childcare Collective.  His wedding was a multicultural billboard for the borough: under a pin oak tree in Prospect Park, he married an African-American writer who previously identified as a lesbian.  In the race for New York mayor, this is the new face of borough agitation.

From that inauspicious beginning, the article goes on point out that de Blasio is proudly the candidate from Brooklyn, and to spin the main issue in the race as being the guy from long down-and-out but now up-and-coming Brooklyn against all the other guys from Manhattan.  Quinn is from Chelsea, Thompson from Harlem, and Weiner now lives on Park Avenue.  But de Blasio hails proudly from progressive, multicultural Park Slope!  Well, so what?  What does he have to say about any issue of substance?

In an article of several thousand words, the entire portion on the substantive issues of the race appears in two paragraphs near the end: (apparently omitted from the on-line version, so I'm typing them out):

Mr. de Blasio . . . has amassed a running tally of the indignities and inequities in four boroughs: a yawning income gap, a surge in fines for small businesses, slighted schools and inadequate early childhood education.  He envisions an activist city government that addresses those disparities head on.  Alone among the Democratic field, he calls for a tax increase on the rich, to bankroll universal prekindergarten.

Typical of the New York Times, the reporter can conduct a lengthy interview with an apparently serious candidate for mayor, hear the candidate claim that the schools are "slighted," and not be able to ask the simplest question as to how the schools could possibly be "slighted" when we are already spending close to double the national average per student.  Even worse is de Blasio's call for "universal prekindergarten."  This proposal is of course the darling of the teachers' union, which sees in it a 10-15% increase in dues paying membership.  Meanwhile, expensive pre-K programs have never demonstrated any lasting educational benefit for the children.  For a mayoral candidate to sign on to this proposal is roughly the equivalent in competence for the job of mayor as for the CEO of Apple to agree to repatriate the $100 billion of overseas cash and gratuitously pay $35 billion in Federal taxes.  Indeed, at current wildly overgenerous pension formulas, the cost to New York City taxpayers of future pensions for the teachers in the universal pre-K program will be far more than $35 billion.  Frankly, I don't think either de Blasio or the New York Times reporter is remotely capable of doing this math.  But don't worry, he's going to pay for it with "a tax increase on the rich"!  Again, I don't think that de Blasio even knows that the entire City income tax only raises about $8 billion per year, so even a huge rate increase limited to "the rich" will only bring in maybe $1 billion, which will be extremely destructive to the economy and not remotely pay the cost of that universal pre-K program.

This is what we are dealing with here.

Go to de Blasio's campaign web site to find out what his campaign is really about.  It's one union endorsement after another, the biggest being 1199SEIU -- those are the hospital workers on the receiving end of the Medicaid spending.  The Times is just totally oblivious to this.

UPDATE:  In the online version of this article today, the Times ran a correction, noting that de Blasio is not the only candidate for mayor who has called for tax increases on "the rich," since Comptroller John Liu has also done so.

The SEC Catches Up To One Of The Small Fry

The Wall Street Journal has the story on this morning's front page:  The SEC has caught one of the biggest crooks in the sale of billions of dollars of fraudulent securities.  The crook?  It's the state of Illinois!  The problem?  Disclosures relating to the extent of its pension obligations.

Here is a link to the SEC release, which in turn links to the consent order. 

An SEC investigation revealed that Illinois failed to inform investors about the impact of problems with its pension funding schedule as the state offered and sold more than $2.2 billion worth of municipal bonds from 2005 to early 2009. Illinois failed to disclose that its statutory plan significantly underfunded the state’s pension obligations and increased the risk to its overall financial condition. The state also misled investors about the effect of changes to its statutory plan.

Good thing that the people who missed Madoff are starting to catch up to the Manhattan Contrarian in noticing the huge problems in pension disclosures in at least one state.  Perhaps they might notice the problems of California, New York and many others some time soon?  Why not -- this is free grandstanding.  Bondholders who weren't already aware of Illinois's pension problems should probably be declared too dumb to be allowed to invest.  The SEC settlement contains no penalties, of course.  Also, no admission of wrongful conduct.  Just a list of so-called "remedial measures," including such powerful remedies as "provid[ing] a hyperlink to a February 2009 COGFA monthly briefing in which COGFA provided certain negative information regarding . . . the State's pension system assets," and "commission[ing] a Pension Modernization Task force to evaluate the benefit structure, costs, and funding of the State's pension systems."  Yup, that'll work.  Meanwhile, the state legislature has met repeatedly to address the funding shortfall issue, and has very pointedly done exactly nothing about it so far.  But, in the SEC's defense, that's not their issue.

Meanwhile, in the grand Keystone Kop tradition of missing Madoff, can the SEC please explain why they haven't noticed that the Federal government's disclosures of its own pension and retiree obligations, aka Social Security and Medicare, is misleading to the tune of multiple tens of trillions of dollars?  (By contrast, the Illinois Policy Institute puts the underfunding of Illinois pensions in the range of $85 billion -- around 0.1% of the size of the Federal problem.)  As a potential investor in Treasury securities, the amount of the unfunded liability for Social Security and Medicare is number one at the top of my list of what is absolutely essential to know.  Well, of course, there is the even bigger fraud in Federal accounting, namely counting all Federal expenditures on goods, services and salaries as a 100 cent on the dollar increase in GDP.  But I guess that one doesn't go to its own solvency. 

State And Local Government Financial Data Are Also A Problem

The series over the past week on fraudulent government economic data focused on data published by the Federal government, the reason being that most of the economic data for the U.S. come from the Federal government.  But the state and local governments put out substantial amounts of data too, mostly about their own financial condition.  What is the level of trustworthiness there?  Not good.

Thankfully state and local governments have much less ability to practice financial fraud than the Feds, in part because they have restrictions on the incurring of debt, in part because they have statutory or even constitutional balanced budget requirements, and in part because they can't print their own currency to pay their debts.  But like all politicians, state and local pols have powerful incentives to use the public fisc to pay off favored constituencies today while hiding what they are doing from the voters, thus allowing obligations to accumulate out of view to spring upon the next generation after those who took on the obligations are long gone.

If your goal is to pay off your political supporters while not revealing for many years the obligations you are incurring, then probably the perfect vehicle for you is the defined benefit pension plan.  In a state or local government defined benefit pension plan, the sponsoring entity takes on obligations that are not due to be paid for 10, 20 or even up to 80 years.  It is perfectly appropriate that the obligations due many years out are valued today based on a discount rate, the idea being that you can put money aside today against the discounted value, and the money will then earn the assumed rate of return over the years, resulting in sufficient funds to pay the obligations when they come due.  Nothing wrong so far. 

Now just think like a politician for a moment.  The higher the discount/return rate that you assume, the lower today's liabilities will appear to be.  If you assume an aggressive rate of return today, then you can promise generous pensions while putting aside little money to fund them.  However, when the markets fail to produce the assumed rate of return, required contributions will gradually accelerate, but over many years.  With any luck, you will be long gone.

The states with the worst pension problems today are probably Illinois, California and New Jersey, in that order.  New York is not far behind.  (Does anyone notice that these states have in common their deep blue politics?)  Anyway, I'll use New York City as an example, because I live here and I follow it closely.

New York City has five main pension funds for its workers:  New York City Employees' Retirement System (ERS), New York City Teachers' Retirement System (TRS), New York City Police Pension Fund (Police), New York City Fire Department Pension Fund (Fire), and New York City Board of Education Retirement System (BERS).  All have long assumed an 8% discount/return rate for valuation purposes.  Such returns can only be had in the stock market or even riskier investments like hedge funds, and any such investments can go down as well as up.  In fact, the stock market, after recent large gains, is only now approaching the records achieved in early 2000 -- that's 13 years with no gains whatsoever, against the 8% assumption.

What's the result?  In fiscal 2002, when the contributions were set based on the stock market values in 2000, New York City made required pension contributions of right around $1 billion, which was about 2.5% of a budget of then about $40 billion per year.  By 2012, with the stock market flat for a decade, required contributions had soared to $8.4 billion out of a budget now at $70 billion -- 12% of the total. 

In 2012 Richard North, chief City actuary, issued a report recommending lowering the assumed discount/return rate all the way to 7%.  Believe it or not, it takes an act of the state legislature to make that change!  A bill was presented in the 2012 session of the legislature, and it never came to a vote.  I guess the legislators understand where their interest is on this matter, namely continuing to keep the public in the dark.

In his actuarial valuations for the funds that came out in October 2012, North went ahead and used the rogue 7% rate.  The result was to reveal dramatically lower funding levels than previously advertised using the 8% rate:  ERS funding went from 78.6% funding to 64.2%; TRS from 64.1% to 58.9%; Police from 71.3% to 60.1%; Fire from 56.8% to 48.2%; BERS from 68.7% to 57.8%. 

But isn't even 7% rather aggressive for a public pension fund?  In a very valuable blog, John Murphy, the long time (1990 - 2005) Executive Director of ERS, commenting on the dramatic declines in funding resulting from use of the 7% rate, wrote on January 9, 2013 as follows:

The historical rate of return on stocks is 6.8% and for bonds it's 3.5%. Actuaries should not be playing with these rates. A standard prudent pension plan should operate within a 50/50 range of stocks and bonds depending on the level of annual benefit payments that the plan is required to make. A 5.15% interest rate should be almost a mandatory upper limit for interest rate assumptions.

We outsiders don't have the data available to make a precise calculation, but based on average funding declines of close to 10% resulting from a 1% drop in assumed discount/return, it would be a good bet that taking the assumed return rate down to 5% would cause further declines in the funding ratio in the range of 15-20%, dropping funding ratios into the mid-30s to low 40s.  Or to put it in dollar terms, the five funds have total assets of around $105 billion.  Valued at 7%, the actuary put their liabilities at around $171 billion.  Valued at 5%, those liabilities are likely to be more like $250 - 300 billion.  In short, there are huge, huge increases coming in the required pension contributions.  While the data to figure this out are publicly available, they can be quite hard to fine.  Few people know about it.

PS.  I have submitted an op ed to the New York Times on this subject.  They say they are going to run it, but they have been sitting on it for months.

The Mayoral Candidates Are In For A Rude Surprise

Yesterday Christine Quinn -- Speaker of the City Council and a leading contender to be the next mayor -- delivered a "State of the City" speech.  I don't find a transcript anywhere, but the Gothamist web site has one of the more detailed accounts, as well as a link to a video if you want to watch the whole thing, and also another link to a report issued at the same time by Ms. Quinn titled "The Middle Class Squeeze."

A fair summary of Ms. Quinn's speech is that the City must "help" the middle class by passing out one after another of various grants, subsidies, tax breaks, handouts, free stuff and other goodies and graft from our benevolent masters.  Front and center was her proposal to have the City finance the building of 40,000 new "middle income" apartments per year for the next decade.  Next in significance was her proposal for tax breaks for landlords who make their apartments "affordable" for middle income families.  For both these purposes, middle income is defined as going well above $100,000 per year.

Completely lacking from the speech was any recognition that these kinds of proposals have a cost, and that the payment of the cost must inevitably come primarily from the very "middle income" people who are supposed to benefit.  It is not possible for anything close to a majority of them to come out ahead -- the programs are just transfers from most of them to a small minority of the politically connected.  Of course, a prime idea behind these sorts of programs is to keep the cost as opaque as possible so that no one can figure out that they are getting screwed.  But to take just the top example, the 40,000 units of middle income housing per year is completely unachievable; a realistic number might be around 10,000.  After ten years of that, you'd have 100,000 units that might house about 3 - 5% of the population.  If you assume that the "middle class" is half the population, that leaves 45% that get nothing from this program and must pay.

Of course, the other leading candidates for the Democratic party nomination immediately came out criticizing Quinn for not proposing enough handouts and subsidies.  Hey, this is New York.

But don't worry, because there is a very nasty surprise coming down the road for whoever is the next mayor, in the form of vastly increased pension contributions.  The state legislature has passed one pension sweetener after another over the past 20 years for the municipal unions, the cost of which has been largely hidden by adoption of deceptive 8% returns assumptions by the pension plans.  Failure to meet those return assumptions has led the City's annual contributions to the pension plans to go from about $1 billion per year in 2002 to $8.4 billion in 2012.  That number may hold for a while given good stock market performance in the past 12 months, but the chance of achieving 8% annual returns indefinitely is about nil.  So the $8.4 billion per year could easily shoot upwards by multiple billions during the next mayor's term.  That will wipe any new spending initiatives right off the agenda.

I don't think that any of the Democratic candidates for mayor understands the pension plans well enough to know what is coming.  (One of the Republican candidates, Joe Lhota, probably does.  He may even have a chance to win!)

Meanwhile, there is another obvious way to benefit the middle class far more than the subsidy/handout/tax break/free stuff model of Quinn and her compatriots.  And that is, lower costs for everyone, by some combination of reducing taxes and reducing the restrictions on building that limit the supply of housing in New York.  Even as that would benefit the middle class far more, it would also have far less opportunity for graft for the politicians.  This is not a model that Democratic politicians in New York find acceptable.

More Convictions In The Long Island Rail Road Disability Pension Scam

Generally at the Manhattan Contrarian we try to limit our focus to the big scams of, say, a trillion dollars and up -- Federal financial statements, the "poverty" rate, and so on.  But if the conduct is egregious enough, we're willing to consider even small ones in the billion or so range.

The New York Post reports this morning on two additional convictions in the Long Island Rail Road disability pension scam.  That brings the total of guilty pleas in the scam to 6.  It's a start, but only a small one.  The number of participants in the scam seems to be well over 1000, and the amount stolen per person around $1 million and up each.  This is not small time.

The basic idea is that if you are honest, you can retire and get your already generous pension, but if you are in the know, you can get a "disability" pension, which means you can retire earlier, get a higher payout formula, and also exemption from at least state and local income taxes.  One small hitch -- you are supposed to be disabled. 

But the most amazing thing is how universal it was.  According to this report from the National Legal and Policy Center, the scam started in the 1990s, and by 2000 and after, the percent of LIRR workers retiring with disability pensions was in the range of 93 - 97%.  Is there any chance that this was not orchestrated by the labor unions?

My big question:  Who are the 3 - 7% who were actually honest?  I guess it's good to know that there are at least a few such people still out there.

According to the Post story, the Federal prosecutors have offered an amnesty program to the estimated 1600 remaining scammers, in which they can avoid prosecution by admitting wrongdoing and foregoing future disability payments.  In other words, even though you have been collecting fraudulently for 5 or 10 years or more, you don't even have to give back a dime.  Way too lenient in my view.  But the Post says that only 44 of the 1600 have taken it so far.