More PSERS Hope and Hype

You may have heard recently that the Pennsylvania Senate passed HB2497. The PSBA recommended passage of the bill due to it reamortizing the liabilities of the PSERS system.

I linked to a great post on this bill back in June.

However, what you may have missed was why some of the opponents suggested voting against this bill.

Here is a snippet from The Pennsylvania Chamber of Business and Industry's John Callahan, Director of Government Relations:

Legislation to re-amortize both the Pennsylvania State Employee Retirement System’s (PSERS) and State Employee Retirement System’s (SERS) unfunded liability, allow for the smoothing of assets from 5 years to 10 years (PSERS only) and institute arbitrary collars on contribution rates was approved by the House Appropriations Committee on June 7, 2010. The PA Chamber believes this “reform” legislation would continue to defer already unaffordable costs and further underfund these plans leading to increased unfunded liabilities. According to a the Public Employee Retirement Commission (PERC) analysis this type of deferral will result in a $40 billion cost for PSERS and a $12 billion cost for SERS in order to ramp up the employer contributions over 10 years rather than over 3 years. This $52 billion burden on future generations and would do nothing to provide cost control, affordability or predictability to PSERS or SERS. Of significant note, these funding estimates are based upon the attainment of an 8% annual investment assumption.

The document with the above quote is worth a read. It makes some realistic, pragmatic suggestions for an actual fix to the current system. This house bill allows our government to continue to underfund liabilities therefore blowing a bigger bubble down the road that will be even more difficult to tackle. The frustrating thing is that in the near term, this will feel like somewhat of a fix to local taxpayers as the contribution rates to employers in the near term will be less than they need to be to fully fund the pension. This is "accomplished" at a significant cost, however. It's akin to putting a bandaid over a bullet hole.

Thanks for reading.

James

Quantitative Easing II and School Budgets

As you may know, the Federal Reserve announced yesterday another round of Quantitative Easing (QE2). The point of this QE2 is to make another attempt at "fixing" the economy.

As I posted in September 2008, this was the path that the Fed knew it was going to take even back then. Ben Bernanke has used every tool in his shed to fight deflation. The only thing more he can do is MORE of whatever he has done.

Be clear that the purpose of the QE1 and QE2 has been to stimulate asset prices, more specifically, to stimulate the stock market. One should ask whether the Federal Reserve's job is to stimulate stock prices. Here is the relevant quote from Bernanke yesterday:

Federal Reserve Chairman Ben S. Bernanke said resuming large-scale asset purchases should boost economic growth through lower borrowing costs and higher stock prices and that concerns about the strategy are “overstated.”

That statement should concern everyone. Gaming stock prices is something that is far outside of the Federal Reserve's mandate.

Before I go too far off on a tangent, I want to bring this back to school budgeting. QE2 is supposed to have the effect of lowering interest rates to the point that businesses will want to go out and get a loan and expand business and hire employees.

School districts, and most other government entities, only invest their money in very safe government bonds. This means that our budget will take a hit on the revenue side since our revenues generated from our investments will go down (as it did last year).

However, if QE2 has the added effect of goosing stock prices, this could have a beneficial effect on PSERS. PSERS is counting on 8% returns in its portfolio. Any gains over 8% could have the effect of lowering future PSERS contribution rates.

It is important to note that there are a number of economists out there that are suggesting QE1 and QE2 simply are an attempt by the FED to blow another asset bubble. In this case, the bubble appears to be in commodity prices (not good for HS construction costs) and stocks (good for PSERS). The FED again is forcing people to choose between no return on safe assets or mild yield on risky assets. This necessarily punishes savers, retired folks on fixed income, and the middle-class. And when the asset-bubble bursts (think NASDAQ 2001, home prices 2007-2008) the consequences far outweigh the short-sighted, short-term benefits. As Ludvig Von Mises said:

Inflation and credit expansion, the preferred methods of present day government openhandedness, do not add anything to the amount of resources available. They make some people more prosperous, but only to the extent that they make others poorer

.

My educated guess is that QE2 will have no impact on unemployment or business activity. Money is already quite cheap. Businesses that wanted a loan, already got a loan.

Impacts on school district budgets will be difficult to judge in the near term. There will be some short term benefits (if stock prices remain elevated and that translates to lower PSERS contribution rates) but there will also be near term input price increases on raw materials (hurting us on the HS project).

The bigger problem here is the stubbornly high unemployment rate. The Federal Reserve has shot all its bullets and has not been able to make a dent in it. Until we can get people back to work, this economy will struggle through a quagmire for some time.

Thanks for reading.

James

Pittsburgh Pension Mess Makes Wall Street Journal

PSERS is not the only pension system that is seeking solutions. The Wall Street Journal has this article about the mess that is the Pittsburgh City pension.

From the article:

Pittsburgh's city council nixed a deal this week to lease its parking assets to a consortium led by J.P. Morgan Chase & Co. Instead, the council is proposing that the city's parking authority issue a 30-year bond and pay it off with parking-rate increases. Part of the proceeds would go to the pension plan.

Taxpayers in Pittsburgh should be absolutely outraged at the possibility of this unsustainable plan. This would mean the City of Pittsburgh would be borrowing money to pay its pension obligations. In the short term this might seem like a solution, but in the long term it will bankrupt Pittsburgh, if Pittsburgh is not bankrupt already. Floating 30-year bonds to fund liabilities without addressing the true problem of actual pension obligations is fiscal insanity. Mayor Luke Ravenstahl thankfully seems to have his head screwed on straight on this issue as he has announced that he does not support this plan.

Thanks for reading.

James Fraasch

Rise in Unemployment Rate Likely

A recent Gallup poll finds that the unemployment rate reported by the Federal Bureau of Labor and Statistics has been understating the unemployment rate. Gallup (and others) believe that shortly after the November mid-term elections the BLS will start to show the unemployment rate tick up. I am not at all suggesting this is some type of election year conspiracy, it's just that at some point the numbers cannot be managed anymore.

Please see the article by Gallup here. From the article:

Unemployment, as measured by Gallup without seasonal adjustment, increased to 10.1% in September -- up sharply from 9.3% in August and 8.9% in July. Much of this increase came during the second half of the month -- the unemployment rate was 9.4% in mid-September -- and therefore is unlikely to be picked up in the government's unemployment report on Friday.

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The government's final unemployment report before the midterm elections is based on job market conditions around mid-September. Gallup's modeling of the unemployment rate is consistent with Tuesday's ADP report of a decline of 39,000 private-sector jobs, and indicates that the government's national unemployment rate in September will be in the 9.6% to 9.8% range. This is based on Gallup's mid-September measurements and the continuing decline Gallup is seeing in the U.S. workforce during 2010.

It is interesting that both Gallup and ADP (which tracks only private company payroll data) see the same trends. Unfortunately, these trends are not picked up by the BLS and therefore the unemployment rate will most likely face a downward adjustment after the fact. This is standard operating procedure for the BLS. They revise their numbers every January and July.

This data from Gallup (and ADP for that matter) are just another way to suggest that this has been no ordinary recession. While the NBER has said the recession ended last summer (due largely to increased government intervention), the unemployment picture suggests we still have a long way to go.

It will be interesting to see how this chart from Calculated Risk changes in the coming months. I don't think we have seen the peak unemployment rate for this recession.



At last month's Audit Finance Committee meeting we looked at our Earned Income Receipts and they have been declining for two straight years. In addition to that worrisome development, we have seen a significant decline in Real Estate Transfer tax over the past 3-4 months. At Thursday's meeting we will go over the more recent Real Estate transfer tax receipts and talk about what, if anything, the trends mean.

Thanks for reading.

James

The Recession in Pittsburgh- Allegheny Institute Policy Brief

I received this interesting update from the Allegheny Institute in my inbox this morning. It paints the current picture of the state of recession in Pittsburgh (posted with permission from the author).

Policy Brief

An electronic publication of

The Allegheny Institute for Public Policy

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October 6, 2010 Volume 10, Number 55

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Has Recession Loosened Its Grip on the Pittsburgh Region?

Is the recession loosening its grip on the Pittsburgh area? According to the latest payroll employment data for August, the answer may be “yes”. August marked the third straight month that total private jobs showed a year-over-year increase. The August 2010 figure of just over one million jobs bests the August 2009 figure of 994,300 by more than one-half percent. This follows on the heels of small year to year increases in June and July. While relatively miniscule, these gains represent the first positive upswing in the year-over-year payroll employment since October 2008.

The seven-county area showed an increase of 5,800 total private jobs from August 2009 to August 2010. Which sectors led the growth in jobs?

Leading the way, professional and business services posted a pickup of 3,800 jobs in the August year-over-year tally. The biggest gainer in this sector was administrative and support services with a rise of 2,900 jobs. These are clerical, security, and other office administration functions. Hiring support personnel might be a signal that companies see the end of the recession and are willing to hire support staff.

Construction is also notable for meaningful job improvement with 2,000 jobs added from August 2009 to August 2010. Considering that most major projects in the area—such as the new PNC Tower and Consol Energy Center—have been completed, this increase is somewhat unexpected. It’s possible that road and bridge projects are propping up construction employment. It could be also attributed in part to construction and site preparation of Marcellus Shale gas drilling sites that use construction companies to do some of the work. While these gas drilling sites are not common in Allegheny County, they are plentiful in Fayette, Washington, and Westmoreland Counties which are part of the Pittsburgh MSA.

Nonetheless, it is important to bear in mind that the 57,100 construction jobs in August are still seven percent below the 61,400 recorded in August 2008.

What has happened to jobs in the mining and logging sector of the economy? This sector, which includes coal mining as well as natural gas extraction, gained 400 jobs in August compared to the twelve month earlier level. Back in August 2005 there were 5,000 employees in this sector. By August 2010 jobs had risen by 900 —just under 20 percent. The Marcellus Shale gas formation may be a great source of employment in years to come, but the types of jobs created will be dispersed throughout various sectors such as construction, manufacturing and transportation as well as mining, making the jobs impact of the gas drilling hard to pin down with great accuracy.

Other sectors with large jumps in year-over-year employment include “retail trade” with 1,800 more jobs and “educational services” gaining 1,500. The “health care and social assistance” sector added another 1,000 people to payrolls led by 600 new jobs in “social services”. As we have mentioned in previous Policy Briefs, the social services subsector has been steadily adding jobs, growing more than 50 percent since 2000. But keep in mind that social services is very heavily dependent upon government spending and typically does not offer many high paying jobs—and therefore is not a good indicator of economic growth or labor market strength.

While some sectors showed year-over-year job gains, several sectors did not fare very well. Manufacturing continues to shed jobs as another 2,000 were lost between August 2009 and August 2010. The recent total of 84,900 manufacturing jobs is the lowest August count in at least two decades. Meantime, “financial activities” shed 1,700 jobs and the “government” sector lost 1,300 with local governmental education jobs dropping by 700.

Overall, payroll employment data seem to suggest the recession is loosening its grip on the Pittsburgh area—albeit very slowly and unevenly. Some sectors are showing signs of an upturn while others are still losing jobs or remaining flat—not an uncommon picture for the early stages of an economic recovery.

Clearly, the stability and recession resistance shown by education and health related jobs together with the huge decades long decline in the proportion of the area’s jobs in manufacturing and the absence of a housing boom have helped dampen the region’s employment losses during the current recession. Still, that is little consolation in light of the fact that employment remains well below levels reached in 2000.

More PSERS Pension Reform

I check in on Paul Fisher's blog over at PrideandPromise.com from time to time. He has been terrific on giving updates on PSERS. I headed over there yesterday only to find out that he resigned his school director seat "To regain his first amendment rights". Good to know, however, that he intends to keep the site going.

He added a great article from CapitolWire that analyzes the latest attempts to reform the Pennsylvania State Employees Retirement System. There is still a lot of confusion about what is happening at this level. That article sort of sets the record straight. The fact is that there is still a lot of negotiating to get done. Some people want to pay what we owe sooner than others, but the thing to take away from the negotiations is that nobody thinks there is a magic bullet. The only thing that will significantly change the PSERS cost curve is significantly positive returns on the PSERS portfolio of stocks, bonds, real estate and other investments. PSERS projections are based on 7.5 or 8% annual returns in a diversified portfolio. Like I have said before, if someone ever promises you 8% annual returns, LOCK IT UP because it is almost impossible to do.

Thanks for reading and please be sure to check out the CapitolWire article. It is full of good info as well as all the names of the players in the PSERS reform game.

James

Taxing Something Doesn't Make it More Valuable

From an article in the Wall Street Journal:

Last year, Congress sharply increased the federal excise tax on "little" cigars—filtered, often sweetly favored products that are similar in size and shape to cigarettes.
...
Sales of products listed as "little" cigars fell by 79%.

The projected increase in tax revenues generated by this tax increase on little cigars was supposed to be used to help finance the expansion of a children's health-insurance program backed by President Barack Obama. But with the decrease in sales, the money just wont be there.

This is just common sense. Taxes create market distortions because those who would otherwise pay the taxes have an opportunity to change their behavior by buying something else (a replacement without the tax- see the story about how consumers have changed their purchasing behavior) or somewhere else where the punitive tax does not apply.

Thanks for reading.

James

PlanConD Vote

Last night I voted against accepting the Pennsylvania Department of Education's approval of PlanConD.

Part of the purpose of part D is to determine the ability of local taxpayers to actually be able to afford the debt payments associated with the construction project. Unfortunately, due to the inability of the PDE to update their forms, our PlanCon D documents reflect old and stale data. However, if we understand the intent of PlanCon D, then we should be able to roll numbers forward and come up with our own calculation of affordability.

As an example, let's say you want to buy a house for $187,000. The loan officer says it should be no problem to get the loan as long as your payment stays below 35% of your monthly income of $2000. At 5% interest, a $187,000 loan would be about $1,000 a month.

You knew going into it that it would be close, that it would be a stretch to your budget to try to afford this size and price of a home. But what the heck, why not aim for the fences.

You fill out all the paperwork and you get approval from the loan officer. However, when the documents get back you realize that something seems amiss. The documents given to you that outline your debt/income ratio do not reflect the payment on the house you are about to buy. The loan officer did a calculation on your debt/income ratio WITHOUT INCLUDING THE DEBT PAYMENT FROM THE HOME YOU ARE ABOUT TO BUY. So now, even though your debt payments will exceed the loan officers' 35% income limit, you still walk out of that office the owner of a new home.

How does this work? Well, the Pennsylvania Department of Education hasn't updated their PlanCon D forms for a number of years. That means that when the District fills out its forms, it is entering in income and debt payments from past years and these numbers DO NOT reflect the reality of the current project. In fact, the PDE even changed the numbers for us to reflect an Aid Ratio that is no longer relevant and skews the numbers even more to look like the District can afford this project.

When I asked in June to have the District prepare our documents to reflect the current known information, we were given information that created even more confusion when some numbers were changed and some stayed the same.

The information to fill our these forms does exist. but it is in many different places on the PDE website. Please see the link here for a copy of the form that was voted on last night. Page D-18 is the one that deals with affordability. Based on my own analysis of the numbers, I believe the District will be very close to or even exceed what the State says is the maximum allowable budgeted local effort for this project. When you look at D-18 note that the Market Value Aid Ratio has been changed by the PDE to .4154 instead of our current .49. This has the effect of reflecting an increased aid ratio from the State when this is not the reality.

Note also in Section B that the Budgeted Local effort for this project shows a big, fat $0 since we have no debt service payments for this project in 2009-2010 (our payments start in 2010-2011). The intent of the form was to look a few years out from the floating of bonds to determine whether the District is putting too much stress on local taxpayers.

When the PDE changes the form to reflect an incorrect and artificially inflated aid ratio and then ignores actual debt payments that will come due for the project they are supposed to be evaluating, I am not sure how one can realistically evaluate whether this form should be approved or not.

That being said, if the District had made a determined effort to reflect TRUE numbers and the TRUE local effort for this project, I would have been much more inclined to vote in favor of PlanCon D.

Thanks for reading.

James

Debt and Deflation

I came across a terrific economics article written by Steve Keen at Steve Keen's Debt Watch website. The title of his article is, "What Bernanke Doesn't Understand About Deflation".

On this blog I have hit a number of times on the problem with having too much debt. On a national level people (Secretary of State Hillary Clinton for one) are even saying that our debt represents a national security threat. On an economic level, economists such as Steve Keen are making the argument that the deleveraging process following a borrowing and spending boom like the one we have witnessed from 1987 to 2009 will take years to play out.

Keen argues and illustrates that:

Debt reduction is now the real story of the American economy, just as a real story behind the apparent free lunch of the last two decades was rising debt. The secret that has completely eluded Bernanke is that aggregate demand is the sum of GDP plus the change in debt. So when debt is rising demand exceeds what it could be on the basis of earned incomes alone, and when debt is falling the opposite happens.

There are a number of charts and math involved that Steve uses to prove his point. And logically, it makes sense. When you borrow, you have to pay it back. If consumers have indeed increased borrowing over the last 22 years by $34 trillion and GDP has only grown by $9 trillion, then we are in for quite a period of economic staleness, especially if the deleveraging process continues. What happens when the consumer appetite for debt goes away? Surely the GDP growth cannot be sustained.

This is what part of last year's stimulus was intended to do; stimulate aggregate demand. Since consumers have clearly and demonstrably started to become net savers instead of net spenders, the government was looking for a way to increase GDP. Any kind of government spending will have a positive impact on GDP. As I have said many times before, the problem with debt is that it needs to be paid back at interest. This payment is a tax on future production and future spending.

When you max out the amount you can borrow, the consequences are long lasting and staggering. Other, normal expenses will come under stress while a less fool-hardy approach would have produced better long-term results.

Thanks for reading.

James

New Teacher Contract Approved

The Mt Lebanon School Board last night approved a new 5-year contract with the Mt Lebanon Education Association.

Please see these links:

School District Press Release
Post-Gazette Article
Mt. Lebanon Education Association Information (information about the ratification procedure)

As I said at the meeting last night, this vote was a tough, tough call. I truly feel as if there are two realities in place at the moment. One reality is where private sector workers are doing whatever they can to remain employed. This may mean taking smaller pay increase, no increases, or reductions in pay. We are in an era of wage stagnation and teetering on wage deflation in the private sector. The reality in which our Board and negotiating team had to operate in negotiating the contract with the MLEA was one in which public sector unions have had more "traditional" wage increases. It's almost as if the recession has not hit home for these unions based on many recently settled contracts.

So how does one balance across this chasm between private and public sector union pay?

For me, it starts out by looking at the entire contract and not just the headline number. The headline number of 4.15% average wage increase per year for five years in today's economic environment seems unreasonable on the surface. And quite honestly, if it was just about this salary increase there is no way the contract would have had my support. It is beneath the surface where things start to get interesting. Here is my checklist of why I supported the contract:

1) No step or pay increase for a teacher that receives and "unsatisactory" rating. This puts us on a path to discussing merit pay, something that very few Districts across our State can say they have in their contracts. As a former union member/shop steward myself, I can tell you that this is a very significant gain for the District and a testament to the MLEA's willingness to do what's best for our students.

2) Healthcare contributions rise to 10% of total premium and employees will need to cover the difference if they choose the PPO plan (more expensive) over the HMO plan. The 10% number, while not large compared to the private sector, is towards the higher end of comparator school districts.

3) Two additional teacher days per year plus 15 minutes more per day of instructional time. The increase in instructional time will allow more teacher/student "face-time" and again shows the District's and MLEA's understanding that increased achievement should be a goal for both of us. I believe the added face time has the potential to help increase test and achievement scores and lead to better educational outcomes for all students.

4) The District has negotiated increased management rights in being able to have a say in Extra Duty Responsibilities. EDRs are an added cost to the District and being able to rein in some of the expense associated with the EDRs with result in a long-term net benefit to the District.

It is my opinion that in order to gain the rights/concessions outlined above as well as a number of other management rights throughout the contract, it was necessary to award a raise higher than I initially thought was my limit.

At the end of the day I had to ask myself whether our negotiating team did the best they possibly could at the table. Given recent arbitration awards and other recently settled teachers contracts, I do feel that this was the best we could do while maintaining a good labor relationship with the MLEA.

Thanks for reading.

James