Suggested Answers to the Short Quiz

[johnkarls]

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SUGGESTED ANSWERS TO THE SHORT QUIZ

Question 1

How much does the non-partisan Congressional Budget Office estimate is the amount by which state & local pension funds are under-funded?

Answer 1

The most recent CBO Report (entitled The Underfunding of State and Local Pension Plans) was issued May 2011 and is posted on in the next section of this bulletin board under Reference Materials.

It would appear that the amount by which State and Local Pension Plans were under-funded at 12/31/2009 according to the CBO was $2.9 TRillion. [For further details, please see Q&A-18 through Q&A-22 below.]

As a point of reference, the CBO Report notes that the total of State & Local Bonds outstanding at 12/31/2009 was $2.4 TRillion. So total liabilities, funded and unfunded, would be $2.4 TRillion + $2.9 TRillion = $5.3 TRillion.

Question 2

Has the State of Illinois already begun a campaign to have the Federal Government take over the under-funding of the Illinois State and Chicago Municipal pension plans?

Answer 2

During last fall’s Chicago teachers’ strike, the drumbeat from both the Illinois Governor and the Chicago Mayor (President Obama’s former Chief of Staff Rahm Emanuel) began for a Federal bailout.

Question 3

Could the Federal Government undertake the financing of the short falls in state & local pension funds without becoming bankrupt itself?

Answer 3

Probably not.

As noted in the unofficial Six-Degrees-of-Separation E-mail Campaign to President Obama on Annual Deficits and Accumulated Debt following our 3/13/2013 meeting (please scroll down on this bulletin board to the sections dealing with our 3/13/2013 meeting for the text of that e-mail), http://www.CIA.gov data demonstrates that the U.S. is already past the point at which Spain’s sovereign debt came under severe attack in the markets even if there is only taken into account the portion of the U.S. national debt not held by the U.S. government itself (e.g., the Social Security trust fund).

Moreover, as noted in that E-mail Campaign to President Obama, the only reason why Spain and Europe’s other “Problem Children” countries survived financially is that they were saved in mid-2011 by the U.S. Federal Reserve which guaranteed all debt issued (1) before 12/31/2011 by the Spanish and Italian Governments, and (2) before 2/1/2013 by all European banks (not just Spanish or Italian banks) -- but that there is no Celestial Reserve Bank that can bail out the U.S. Government the way the U.S. Federal Reserve was able to bail out Europe.

Question 4

Should the Federal Government bail out state & local pension plans?

Answer 4

Let’s consider the following Q&A’s before reaching our conclusion on this in Q&A-29 through Q&A-31.

Question 5

Who charters (aka licenses) municipal governments?

Answer 5

State governments.

Question 6

Can a state revoke or modify the charter of a municipal government at any time for any reason?

Answer 6

Yes, as a theoretical matter.

However, politics and practicalities have a bearing.

Question 7

Did the State of Michigan pursuant to its inherent power over its municipalities, deny the City of Detroit bankruptcy protection and instead appoint a “Dictator” to replace the Detroit City Government?

Answer 7

Yes.

Question 8

Did the Detroit Mayor announce a new city budget on 4/12/2013 calling for $1 billion of spending with a $328 million deficit?

Answer 8

Yes.

Question 9

Did the State-Appointed Detroit Dictator immediately on 4/12/2013 issue a press release rebuking the Detroit Mayor and reminding him that he has no authority?

Answer 9

Yes.

Question 10

Why does Chapter 9 of the Federal Bankruptcy Act which governs municipal bankruptcies, give a “free pass” to municipalities that the homeowners of a municipality would not have enjoyed if they had neglected to call the partnership they had formed to provide schools, fire/police protection, etc., a “municipality” rather than calling it the “partnership” that any municipality truly is?

Answer 10

God only knows!!!

Question 11

What is CalPERS?

Answer 11

CalPERS is the abbreviation for the California Public Employees’ Retirement System.

CalPERS is the largest governmental or corporate pension fund in the U.S. (and probably the world).

It manages the pension and health benefits for current/retired employees of the State of California (30.4% of total employees/pensioners covered), local California school boards (38.8%) and local governments (30.8%).

Question 12

Why does CalPERS support the bankruptcy petition of Stockton CA while Stockton’s bondholders oppose the petition?

Answer 12

Stockton’s proposed bankruptcy plan would short change bondholders disproportionately when compared to CalPERS.

Question 13

Why is the reverse true of the bankruptcy petition of San Bernardino CA (CalPERS opposing and bondholders supporting)?

Answer 13

San Bernardino’s proposed bankruptcy plan would short change bondholders and CalPERS the same proportionately.

Question 14

Are municipalities in other states required to insure their employee-pension plans with a state agency the same way that California municipalities are required to insure with CalPERS?

Answer 14

No.

Question 15

Does an insurance policy such as each California municipality has with CalPERS or such as a municipality elsewhere in the U.S. might have with a private insurance company, relieve the municipality of its primary liability to its employees to pay their pensions?

Answer 15

Not unless the employees agree to absolve their municipal employer or state law so dictates.

Question 16

As the largest insurer of state and local pension plans, what is the value of the total assets of CalPERS?

Answer 16

$254.9 billion as of 1/31/2013, the most recent date for which this statistic is disclosed.

Question 17

What is the amount to which CalPERS admits to being under-funded?

Answer 17

The value of CalPERS assets were only 74.8% of the present value of CalPERS liabilities as of 6/30/2011, the most recent date for which this statistic is disclosed.

Question 18

Can CalPERS (and the governments in the other 49 states) “assume away” any under-funding by assuming an unrealistically-large rate of return on their assets?

Answer 18

Yes.

Indeed, the non-partisan U.S. Congressional Budget Office Report on The Underfunding of State and Local Pension Plans described in Q&A-1 above reported that state and local governments (1) give themselves permission to assume whatever rate of return on their assets that they please in determining whether they are adequate to meet projected liabilities, and (2) on average, were assuming an 8% annual return on their assets.

Question 19

Can corporations “assume away” any under-funding by assuming an unrealistically-large rate of return on their assets?

Answer 19

Of course not!!!

Corporations are required to follow the “fair value” method which the CBO Report states “can be thought of as what a private insurance company operating in a competitive market would charge to assume responsibility for those [pension] obligations.”

The CBO Report proceeds to state that if the state and local governments had assumed a 4% rate of return on their assets (as a private insurance company might have) instead of the 8% they did assume, then the amount by which their pension plans were underfunded as of 12/31/2009 was $2.9 TRillion.

Question 20

Why can CalPERS (and the governments in the other 49 states) “get away with murder” compared to corporations in “assuming away” any under-funding of their pension liabilities?

Answer 20

Because Pols rarely subject themselves to the same laws that they impose on everyone else.

Question 21

What is the average rate of return assumed by state and local governments in evaluating the under-funding of their pension plans according to the non-partisan Congressional Budget Office?

Answer 21

8% as of 12/31/2009, the most recent data available for the May 2011 CBO report.

Question 22

What is the rate of return that CalPERS assumes will be earned on its assets in calculating the extent to which it admits it is under-funded (please see Q&A-17 regarding the extent to which CalPERS admits it is under-funded)?

Answer 22

CalPERS does not disclose that rate.

However, it has disclosed that the “total return” (which would include both income and appreciation) on its assets for the 5-year period ended 1/31/2013 was only 2.2% (or 0.4%/year).

Question 23

Does CalPERS issue annual reports?

Answer 23

Yes.

Question 24

How long has it been since CalPERS has issued an annual report?

Answer 24

The most recent one is for the Fiscal Year Ended 6/30/2011 -- which, of course, ended 22 months ago!!! Its most-recent Fiscal Year ended 6/30/2012 and an annual report has not yet been issued after 10 months!!!

Question 25

How long does a corporation have to file its annual report with the U.S. Securities and Exchange Commission?

Answer 25

Large companies have only 2.5 months and small companies have only 3.0 months -- with no exceptions and no excuses!!!

Question 26

Are CalPERS’ annual reports audited?

Answer 26

Of course not!!! Do you think for a moment that Pols like criticism any more than they like to subject themselves to the same laws they impose on every one else???

Question 27

Since Chapter 9 of the Federal Bankruptcy Act gives a “free pass” to municipalities (when contrasted with what would have happened if homeowners had formed a partnership to provide schools, police/fire protection, etc.), should municipality employees merit any sympathy when they accept pension promises from the pols who are only too happy to promise future benefits that will never be paid?

Answer 27

What do you think???

Question 28

In other words, didn’t the employees accept the promises of the pols with EYES WIDE SHUT (borrowing the title of the famous 1999 Stanley Kubrick movie starring Tom Cruise)?

Answer 28

So it would seem.

Question 29

We have studied many times in the past about how the United States denies a decent education to inner-city children because, inter alia, K-12 education in America is financed primarily with property taxes and our inner-cities do not have a significant property-tax base -- therefore, isn't the inability of Detroit and Chicago [and all of our other large inner cities -- a category in which I would NOT include Stockton CA or San Bernardino CA but rather a category which would comprise the ghettoes of our dozen or two largest metropolitan regions, e.g., NYC’s Bed-Sty, Harlem & South Bronx, Chicago’s South Side, L.A.’s South Central] to finance basic municipal services such as police and fire protection just another aspect of the same problem of being unable to provide inner-city children with a decent education?

Answer 29

Of course!!!

Question 30

Accordingly, doesn’t the State of Michigan owe the City of Detroit the $398 million short fall in the Detroit Mayor’s proposed $1 billion budget?

Answer 30

Of course!!!

Question 31

And doesn’t America as a country owe our inner cities at least basic fire and police protection, even if we refuse to provide the children in those inner cities with a decent education?

Answer 31

Of course!!!

Indeed, the point of Q&A-29 through Q&A-31 is eloquently reinforced by a book which was recommended by Thomas Chancellor (one of our regular attendees and a retired U/U Law School Professor) and on which our 9/15/2010 meeting focused.

The Big Sort: Why The Clustering Of Like-Minded America Is Tearing Us Apart by social-commentator Bill Bishop and Retired U/Texas Sociology Professor Robert Cushing (Houghton-Mifflin 2008) expounded on how America’s super-wealthy people cluster together in super-wealthy communities, citizens who cannot quite afford a home in a super-wealthy community cluster together in a nearly-super-wealthy community, and so forth all the way down to our inner-city ghettos.

One point of The Big Sort is that the residents of each class/caste of community never meet anyone whose politics differ from their own.

But another consequence of The Big Sort is that residents of super-wealthy communities pay only a pittance for police/fire protection, schools, etc., while the residents of our inner-cities where there is no significant property-tax base, have deficient municipal services including no decent education for the children.

[If you have trouble getting your mind around that concept, please stop and consider that if the cost of municipal services were spread over nothing but multi-million-dollar mansions, the property-tax rate to finance the municipal services would be a rounding error. While in the inner-cities which have no significant property-tax base, the property-tax rate to provide comparable per-person municipal services would have to be virtually infinite.]