Suggested Discussion Outline

[johnkarls]

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A. Non-Partisan Congressional Budget Office (“CBO”) Report on The Underfunding of State and Local Pension Plans

1. $0.7 TRillion underfunding and mushrooming at 12/31/2009 using the “Getting Away With Murder” Rule
2. $2.9 TRillion underfunding and mushrooming at 12/31/2009 using the Fair Value Rule required by the U.S. Securities and Exchange Commission for corporations.
3. As a point of reference, the CBO reported that the amount of state and local bonds outstanding at 12/31/2009 was only $2.4 TRillion -- so total state and local liabilities were really the $2.4 TRillion of bonds outstanding + the $2.9 TRillion of unfunded pension liabilities = $5.4 TRillion and mushrooming.
4. CalPERS uses the “Getting Away With Murder” Rule and admits only 26% of underfunding ($89.6 billion).
5. If CalPERS used the Fair Value Method, it would have to admit to 53% of underfunding ($288.7 billion).

B. Understanding The Two Methods

1. “Getting Away With Murder”
2. Fair Value

C. Municipal Bankruptcy Procedure

1. Municipal property owners’ income and assets are protected under Federal Bankruptcy Law even though their income and assets would be “on the line” if they had formed a partnership to provide themselves with municipal services and neglected to call the partnership a “municipality.”
2. States charter municipalities and can put any conditions they please on whether any of their municipalities can seek protection under the Federal Bankruptcy Law, including denying them such protection altogether.

D. The Tale of Three Cities

1. Detroit -- Earlier this year, the State of Michigan denied Detroit protection under the Federal Bankruptcy Law and the Detroit municipal government (mayor, city council, etc.) were replaced by a State-Appointed Dictator.
2. Stockton CA -- CalPERS supports Federal Bankruptcy Law protection for Stockton and bondholders oppose it because Stockton’s bankruptcy plan short changes bondholders disproportionately compared to CalPERS.
3. San Bernardino CA -- The opposite is true (bondholders supporting Federal Bankruptcy Law protection for San Bernardino and CalPERS opposing it) because San Bernardino’s bankruptcy plan would short change CalPERS and the bondholders the same proportionately.

E. The Drumbeat Begins For Federal Bailouts of State and Local Pension Funds

1. Chicago Mayor (and former Obama Chief of Staff) Rahm Emanuel last Fall during the Chicago teachers’ strike.
2. Illinois Governor Pat Quinn joined the campaign last Fall.
3. Other early examples.

F. Whether The Federal Government Can Afford To Bail Out State and Local Pension Funds

1. The U.S. national debt, even taking into account only the portion held by the public (vs. federal government agencies such as the Social Security Trust Fund) already exceeds the percentage of Gross Domestic Product at which Spain’s national debt came under attack by the markets and its interest rates sky rocketed.
2. The only reason why Europe’s “problem children” countries did not have to declare bankruptcy is because the U.S. Federal Reserve bailed them out in mid-2011 by guaranting 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).
3. However, 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.
4. If the markets challenge the value of U.S. debt obligations, just like bad-credit consumers who pay 30% on their credit cards, the U.S. would be lucky to find lenders at any rate much less 30%. This would mean that the entire federal government budget which is less than 25% of GDP would have to be devoted entirely to paying interest on the debt. Which is why the U.S. would be forced to default on its debt and accept the dollar as worthless as the U.S. is thrown into the same position as starving 1930’s Germany trying to run on the British Pound Sterling and starving 1990’s Russia trying to run on the U.S. dollar.

G. Should the Federal Government At Least Bail Out Our Inner-City Ghettos???

1. The Big Sort and local property taxes.
2. Moral and ethical considerations.

H. Possible Six-Degrees-Of-Separation E-mail Campaigns

1. Requiring state and local pension funds to use the Fair Value Method (vs. The “Getting Away With Murder” Method) of calculating their underfunding in order to shine a spot light on what the state & local Pols are doing before it is too late.
2. Other???

[Pat]

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Since the meeting-version of the Suggested Discussion Outline proposed two different Six-Degrees-Of-Separation E-mail Campaigns (the second was not included in the bulletin-board version above but is described in the other posting in this section which is entitled "100%-Unfunded U.S. Gov Pension Liability = $10.4 TRillion") and neither of them was adopted, it is worthwhile to record what happened at the 5/8/2013 meeting in case these topics are ever re-visited.

Both proposals, of course, are founded on the premise that the U.S. Government is past the point in terms of debt-to-GDP where Spain found itself when its national debt came under attack by the markets (for further details please scroll down this Bulletin Board to the Discussion Outline for our 3/13/2013 meeting regarding How To Regain Our Competitive Edge And Boost Our Global Standing).

[NB: The only reason why Spain and Europe’s other “problem children” countries were not forced to declare bankruptcy in 2011 was that the U.S. Federal Reserve Bank bailed them out, but there is no Celestial Reserve Bank that can bail out the U.S. Government’s debt and currency, the latter of which, after all, comprises nothing but zero-coupon infinite-maturity debt obligations.]

With respect to our Six-Degrees-Of-Separation E-mail campaigns, we take great pride in the fact that each of our official recommendations has been approved unanimously at one of our meetings or, at most, received only one dissent (in which case we say there was a "consensus" rather than "unanimity").

That is why the E-mail on National Debt and Annual Deficits following our 3/13/2013 meeting was NOT official and why 5 of the 20 E-mails posted in the First Section of this Bulletin Board were not official.

In other words, on 3/13/2013 two of our members had “drunk the Kool Aid” that the U.S. has nothing to worry about with regard to our national debt and our annual deficits for the next 10 years, as President Obama has claimed, for example, in a 3/13/2013 interview with George Stephanopoulos.

At our meeting this past Wednesday (5/8/2013), there once more was more than one member who had “drunk the Kool Aid” which meant that neither proposed Six-Degrees-Of-Separation E-mail Campaign could achieve the required consensus.

Bill Lee then challenged John Karls regarding what he would propose given that impediment.

John immediately posited that anyone who believes that our national debt and currency will soon be worthless and that we will soon be in the same position as starving 1930’s Germany trying to run on the British Pound Sterling and starving 1990’s Russia trying to run on the U.S. Dollar, should hope that s/he has a young daughter who can be a successful-enough whore to put bread on the table as starving America tries to run on the Chinese Yuan.

[NB: The reason why it takes a starving 1930's Germany or a starving 1990's Russia about 10 years to get back on its feet economically is that a decade is about the time period required for it to export enough to acquire sufficient foreign currency for its economy to begin creaking again, because farmers are unlikely to barter with city dwellers who have only worthless local currency to offer and because nobody in their right minds, foreign or domestic, is going to loan anything to the national government, including accepting its zero-coupon infinite-maturity debt obligations known as currency, whether or not Old Currency or New Currency.]

While John also posited that since, in his opinion, America has a moral obligation to finance its inner-city ghettos to provide its inhabitants (particularly its children) with “equal opportunity” and “equal protection,” then if we truly don’t believe America has a national-debt or an annual-deficit problem for the next 10 years, we should simply print all the money that would be required to transform our inner-cities!!!

Now there was nobody “drunk on Kool Aid” that our national debt and our annual deficits are not problems!!!

Though it didn’t mean, however, that the objectors to the two original e-mail proposals weren’t still sufficiently “tipsy on Kool Aid” to continue blocking official approval for the two proposed E-mail Campaigns.

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The CalPERS “Getting Away With Murder” Rule

There was a consensus that there should be outlawed the “Getting Away With Murder” Rule which permits state & local pension plans to assume any rate-of-return on their assets that they please -- which makes it “child’s play” to assume a sufficiently-large rate-of-return to eliminate the perception of reality (that is, the perception of underfunding).

Which would mean, of course, that state & local pension funds would be required to use the “Fair Value” Rule which is required by the U.S. Securities and Exchange Commission for annual reports filed by corporations.

However since, as explained above, there was no consensus on whether the Federal Government has the financial capacity to bail out all the state & local pension plans, no consensus could be reached for the rationale for federal legislation that would require state & local pension plans to use the “Fair Value” Rule.

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The 100%-Unfunded U.S. Government Pension Liability of $10.4 TRillion

There was consensus that it was an abomination for the Pols to be haggling over a few financial tweaks (relatively speaking) to Social Security and Medicare when the Federal Government has provided NO FUNDING WHATSOEVER for the pensions of either its military personnel or its civilian workers!!!

There was also consensus that the under-funding estimate of $10.4 TRillion might be a bit high, but that we are justified in going forward with that amount in the light of the refusal of the Federal Government to provide adequate financial disclosure that would permit a more precise estimate.

Our discussion also included some initial confusion over whether there was any funding for Federal-Government pensions.

The reason for the confusion was that there used to be a Civil Service Retirement System (CSRS) which was replaced in 1986 by the Federal Employees Retirement System (FERS) which did provide for some funding.

However, the funding provided by FERS can best be understood by looking at the two types of retirement plans offered by corporations = (1) a “defined benefit” plan which is the old-fashioned type of pension that pays a set amount/month until the death of the retiree, and (2) a “defined contribution” plan which is typified by the Sec. 401(k) plan into which a set amount per month (or per year) is contributed -- which may not be adequate to provide for the employee’s retirement and with which it is up to the employee at retirement to manage (a prudent employee might use the funds to purchase from an insurance company a life-time annuity, which would be the equivalent of an old-fashioned pension, and if the monthly payments from such an annuity would be inadequate, to accept whatever employment might be available for a Senior Citizen).

FERS does NOT involve ANY FUNDING for the old-fashioned pensions that the Federal Government has promised its military personnel and its civilian workers.

FERS, however, does provide a Sec. 401(k)-style “Thrift Savings Plan” which would supplement the UNFUNDED pension of the retiree.

Indeed, it is from this Sec. 401(k)-style “Thrift Savings Plan” that U.S. Secretary Timothy Geithner commandeered its entire $156 billion at NO interest back in January to provide the Federal Government with an additional month or so before it hit its Statutory Debt Limit.

[Unlike corporate “Thrift Savings Plans” which can be invested in corporate stocks, the Federal Government’s “Thrift Savings Plan” can be invested only in U.S. Government debt obligations which are not available to the general public. However, those debt obligations are still included in the overall U.S. Governmental Debt subject to the Debt-Ceiling. So Treasury Secretary Geithner was simply playing the game that has been played six times over the last two decades that when the Pols want to delay the date at which the Federal Government has reached its Debt-Ceiling limit, it simply forces the Federal-Government “Thrift Savings Plan” to accept a non-interest-bearing IOU that is not subject to the Debt-Ceiling as payment for all of the U.S. Government debt held by the Thrift Savings Plan that is subject to the Debt-Ceiling limit!!! In other words, this is nothing more than raiding your children’s Piggy Bank!!!]

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Sympathy For USPS Workers

During the course of our discussion, the plight of USPS workers was noted.

As stated in our Q&A-28 which is posted in the Participant Comments section of this Bulletin Board, state & local employees and their unions have accepted the pension promises of the Pols with EYES WIDE SHUT (borrowing the title of the famous 1999 Stanley Kubrick movie starring Tom Cruise)!!!

As have Federal Government military personnel and civilian employees!!!

However, the U.S. Postal Service and its employees have no control over their own destiny!!!

Although it is forced by the Pols to operate as a business, Congress still retains authority for approving major changes in its operations such as the amount of postage the USPS is permitted to charge and whether it must continue to deliver mail on Saturday.

As a result, the USPS has been forced by Congress to incur horrendous losses in recent years!!!

And the horrendous losses have been financed by a failure to make the otherwise-required payments into the employee-benefit plans!!!

After all, it’s one thing for state & local employees and their unions to accept pension promises of Pols with EYES WIDE SHUT!!!

But it’s another thing for Congress to banish the USPS to Never-Never Land -- a Purgatory in which the USPS must operate as a business while having no control over the basic policies that determine whether it will operate at a loss -- AND FOR CONGRESS TO EFFECTIVELY SUBSIDIZE USPS CUSTOMERS WITH THE SUBSIDIES COMING FROM THE USPS EMPLOYEE-BENEFIT PLANS!!!