Ivan Osorio

The Economist on “the muddle-headed world of American public pension accounting”

by Ivan Osorio on May 9, 2013 · 0 comments

in Bailout Watch, Economy, Labor

As state governments across the nation struggle to address a public pension underfunding crisis they can no longer deny, The Economist is the latest major news outlet to turn its gaze on the ongoing debacle. In the current issue, the magazine’s “Buttonwood” column draws a sketch of U.S. public pension accounting that is not only dysfunctional, but that runs against plain common sense.

American public-sector schemes discount their liabilities by the expected return on their assets. The riskier the asset mix, the higher the assumed return—and the lower the bill appears to be.

This is an odd way of thinking. Suppose a car company borrowed $10 billion in the form of a 20-year bond to build a manufacturing plant and planned to pay off the debt with the profits from running the plant. The car company will assume a higher return on capital than its financing cost (otherwise it should not build the plant). But it still has to recognise the $10 billion bond liability on its balance-sheet. It cannot say it owes only $2 billion because it expects a very high return.

The reason is clear. If the plant fails to earn a high return, the firm will still be liable to repay the bond. Similarly, if pension schemes fail to earn a high return on their assets, they still have to pay benefits. Final-salary pensions are a debt-like liability.

The Buttonwood columnist (currently Philip Coggan) notes recent changes to the nation’s largest public pension plan, the California Public Employee Retirement System (CalPERS), that would require greater employer contributions. But such changes will be ineffective in the long run unless they were to be accompanied by major reforms that address some of the structural factors that have made public pension shortfalls severe and chronic: payouts based on final-year pay, negotiation of benefits through collective bargaining, benefit increases through binding arbitration, politicized pension fund boards, and flawed accounting standards.

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The Costs Of Union Shareholder Activism

by Ivan Osorio on May 2, 2013 · 0 comments

in Economy, Employment, Labor, Regulation

Is shareholder activism a good or a bad thing? That depends on what any given resolution seeks to improve the company’s performance, and thereby increase shareholder value. That seems like a simple enough and easily understood measure to determine which shareholder resolutions merit consideration. But resolutions that do not meet that criterion are often introduced at public companies’ shareholder meetings, often by labor union pension funds.

A new study from Navigant Economics, commissioned by the U.S. Chamber of Commerce, analyzes resolutions scored by the AFL-CIO in its “Key Votes Survey” between 2009 and 2012, and finds “no conclusive or pervasive evidence that the shareholder proposals assessed in this study improve firm value or result in an economic benefit to pension plans and plan participants.”

Today, at a Chamber event to announce the study’s release, former Securities and Exchange Commission (SEC) Chairman Harvey Pitt. He noted that shareholder activism can be useful, but not when it seeks to advance social agendas. Moreover, successful shareholder activism should advance the interest of all shareholders.

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Separate Security Cameras and State

by Ivan Osorio on April 22, 2013 · 0 comments

in Personal Liberty, Precaution & Risk, Privacy

In his column today, The Wall Street Journal‘s Gordon Crovitz notes the significant help that video footage played in helping police identify the Boston Marathon bombers. However, he seems to miss what the Boston police’s success actually implies — that government-run security cameras are unnecessary for protecting public safety.

Boston is one of the less-wired large cities when it comes to surveillance cameras, so authorities relied largely on footage from private parties, such as the Lord & Taylor department store near the scene. The most recent estimate, from 2010, is that Boston and surrounding towns have some 150 police surveillance cameras, plus 400 in the subway. This compares with more than 3,000 government and networked private cameras in New York City’s financial district alone, and some 400,000 cameras in London.

While Crovitz doesn’t explicitly say so, the seeming implication that  Boston being “one of the less-wired large cities” may be a shortcoming is troubling and misses the real lesson of the search for the bombers — the value of the public’s engagement in helping to protect their own city. The Washington Examiner‘s Tim Carney, on the other hand, gets it right.

So it turns out we already have plenty of cameras on the street. They’re not government cameras, but rather cameras owned and operated by private individuals and businesses. In a bout of public spiritedness, these pedestrians and businesses willingly shared their videos with law enforcement. Even if the crime had not been so notorious, the police could expect public cooperation — what merchant wouldn’t share his surveillance tapes to aid in a murder investigation?

Indeed, until private surveillance and recording of events prove inadequate — and there is no reason to believe that they will — the burden of proof should remain on government on the need to expand its surveillance capabilities.

UPDATE: In a related topic, David Henderson at Econlog explains the value of decentralized, citizen-driven information in ensuring public safety (h/t Iain Murray).

SEC Charges Illinois With Securities Fraud And Lets It Off With A Warning

by Ivan Osorio on March 13, 2013 · 1 comment

in Bailout Watch, Economy, Employment, Labor

This week, Illinois became only the second state in U.S. history to by charged with securities fraud by federal regulators (New Jersey was the first, in 2010). On Monday, the Securities and Exchange Commission (SEC) accused Illinois of deceiving investors regarding the health of its state employee pension funds, in a series of bond offerings from 2005 to 2009. In its cease-and-desist complaint, the SEC claimed:

Specifically, in numerous bond offerings from approximately 2005 through March 2009, the State misled bond investors by omitting to disclose information about the adequacy of its statutory plan to fund its pension obligations and the risks created by the State’s Structural Underfunding of its pension obligations. During this same time period, the State also misled bond investors about the effect of changes to that plan, including the Pension Holidays in 2006 and 2007.

Illinois settled immediately, without either admitting or denying the charges. The state did not have to pay a penalty, which, considering the extent of its pension funding shenanigans, is surprising, to put it mildly. [click to continue…]

Federal Pay Freeze Was Really A Pay Slowdown

by Ivan Osorio on March 12, 2013 · 9 comments

in Economy, Employment, Labor

The Huffington Post’s Dave Jamieson argues that Rep. Paul Ryan’s proposed budget “ignores” a two-year pay freeze for federal employees. But Jamieson also ignores another simple fact.

[T]he House Budget Committee chairman appears to get a simple fact wrong on recent federal worker pay. “Immune from the effects of the recession,” the budget reads, “federal employees have received regular salary bumps regardless of productivity or economic realities.”

In fact, federal employees have now been working under a pay freeze for more than two years, their part of a shared sacrifice toward budget control announced by President Obama in 2010 and backed by Congress.

While it is true that Obama imposed a pay freeze, that does not mean that federal employees could not get pay increases under the freeze. As my former colleague F. Vincent Vernuccio noted at the time of the announced freeze, federal workforce rules make many increases mandatory.

While Obama’s plan would stop the annual across-the-board cost of living adjustment (COLA) for all federal workers, it will not stop workers from getting raises altogether. The freeze will not affect pay raises for job classification upgrades. As an official at the Office of Management and Budget told Federal News Radio, “employees will still be eligible for step increases.”

Step promotions — also known as “within-grade increases” — are mandated by statute. They are nearly automatic as long as an employee performs his job adequately. The law governing federal employee pay states, “a within-grade increase shall be effective on the first day of the first pay period following completion of the required waiting period and in compliance with the conditions of eligibility.”

Here’s how the system works. Over 70 percent of the federal workforce (except for the military and postal workers) is paid according to the Office of Personnel Management’s (OPM) General Schedule (GS) pay scale. GS includes 15 wage grades that reflect the category and skill necessary to perform a job, with 10 steps within each grade.

According to OPM, new employees can expect to receive a step increase every year, mid-level employees every two years, and senior employees every three years. Step increases can range from $728.00 for a GS 3 to $3,321.00 for a GS 15. Grade increases can range from $2,214.00 for a GS 1 to GS 2 to $14,931.00 for a GS 14 to GS 15. These numbers represent the ‘base’ amount for federal pay. The government gives a percentage increase for different areas of the country to reflect local variations in cost of living.

Thus, like most spending “cuts” that get bandied around Washington these days, the “freeze” is really a slowdown in the rate of increase, which is precisely the problem. Digging slower is no way to get out of a hole.

Moreover, as the Cato Institute’s Dan Mitchell points out, the Ryan budget, while a step in the right direction, is hardly the meat cleaver approach Democrats would deride it as: “Federal spending will still be far too high. Indeed, the budget will consume a larger share of the economy than it did when Bill Clinton left office.”

For more on labor policy, see workplacechoice.org.

Free Trade Si, Regulatory Harmonization No

by Ivan Osorio on February 21, 2013

in Economy, Employment, Features, Labor

Post image for Free Trade Si, Regulatory Harmonization No

Politics ruins everything, and in few areas is that truer than in international trade. Over the last two decades, the term “trade agreement” has become somewhat of a misnomer, as trade deals have expanded to cover a widening array of policy issues beyond trade itself. And that’s where the potential pitfalls lie in the announced trade talks between the United States and the European Union.

As CEI’s Iain Murray warned recently, while a U.S.-EU trade agreement ideally should focus on trade, the likelihood of it including provisions dealing with labor and environmental standards, among other issues, is high.

The problem is not in Berlin or Washington, but in Brussels. That particular federal “capital” has shown a complete misunderstanding of the benefits of free trade, having turned what was once a good idea — the European Economic Community — from a free trade zone into a highly-regulated customs union. Early efforts at trade liberalization, which bore fruit and helped expand trade, were replaced in the 1990s with “harmonization” of the single market through the imposition of uniform regulations. Brussels (by which I mean the European Union institutions) turned from a facilitator of trade to a supranational regulator with ambitions of its own, as evidenced by the failed EU Constitution (most of which was enacted by backdoor means) and the continuing failure of the Euro currency.

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Stirrings of Pension Reform in Montana

by Ivan Osorio on February 20, 2013

in Bailout Watch, Economy, Employment, Labor

Pension obligations’ strains on state budgets have made pension reform a priority for state policy makers across the nation. Over the last couple of years, states from Utah to Rhode Island have implemented pension reforms once considered politically nigh-impossible. Montana may soon join the ranks of states with pension shortfalls where fiscal reality trumps politics as usual.

Last week, Montana legislators heard testimony from pension experts who painted a bleak picture of the current situation. Taken together, the state’s pension plans are only 64 percent funded.

David Draine of the Pew Center for the States said, “If not addressed, Montana’s growing pension debt of $4.3 billion will threaten public workers’ salaries and benefits and will crowd out essential state services.” He added that to pay off the $4.3 billion debt — equivalent to about half the state’s annual budget — all at once would cost every Montana household $10,600.

Gary Buchanan, co-owner of an investment firm in Billings and former chairman of the State Board of Investments, said, “Pension shortfalls should be direct reductions against any surplus,”  and criticized the state’s actuarial assumption of average 7.75 percent annual investment returns as “totally unrealistic.”

Of course, this is just a hearing, but the fact that Montana lawmakers are having this discussion is encouraging.

For more on public pensions, see here.

CalPERS: Model Of Pension Dysfunction

by Ivan Osorio on February 20, 2013 · 3 comments

in Bailout Watch, Economy, Employment, Features, Labor

Post image for CalPERS: Model Of Pension Dysfunction

Few state governments are as in as much fiscal trouble as California’s, so it’s not surprising that few state pension funds have been as mismanaged as the California Public Employee Retirement System (CalPERS). But worse than that, CalPERS — along with its sister fund, the California State Teachers’ Retirement System — has led the nation in implementing shoddy investment and management practices that have exacerbated led to billions of dollars in losses and foregone revenue.

Now, as policy makers in other states consider ways to address their own pension deficits, CalPERS — the nation’s largest pension fund, with about $230 billion in assets under management — offers an example of exactly what not to do. They would do well to read “The Pension Fund that Ate California,”  Steven Malanga’s article on the fund in the current issue of City Journal. Malanga, a senior fellow at the Manhattan Institute, recounts CalPERS’ history — which can be characterized as a fall from fiscal rectitude that only seems to get worse.

Even worse yet, CalPERS actively lobbied state lawmakers to implement many of the risky practices that have spelled so much trouble for it.

“When California’s government-employee pension system was established in 1932, it was a model of restraint,” writes Malanga. “With the 1929 stock-market crash in mind, California opted for a cautious investment approach, allowing the fund to buy only safe federal Treasury bonds and state municipal bonds.” That strategy worked while it lasted, but it began to unravel with the rise of unionization among government workers.

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A Peek Into The Statist Mind

by Ivan Osorio on February 7, 2013 · 1 comment

in Culture, Politics as Usual, Zeitgeist

Commuting into the office on the D.C. Metro this morning, I had to endure one of the common annoyances of public transportation: loud talkers, specifically two men who carried on a conversation during my entire ride, loudly enough for everyone around them to hear. In fact, they were loud enough that they were hard to ignore, much as I tried, while reading the paper.

Politically, they were both clearly on the left, which isn’t surprising in this town. But when they started rattling off the policy laundry list they’d like to see President Obama push in his second term, one of them seemed to forget he was in a public place. “There’s a lot you can do through executive orders,” he said, adding that Obama could “issue 100 of them; half of them will stick.”

That brutal honesty made them even harder to ignore. That Obama (like other recent presidents) would try to overreach his authority — and that his supporters would cheer him for doing so – isn’t surprising. But it’s not every day that you hear it expressed so bluntly.

Former California SEIU Boss Convicted Of Embezzlement; What Did SEIU’s National Leadership Know?

by Ivan Osorio on February 6, 2013

in Economy, Employment, Labor

While the January 28 conviction for embezzlement of Tyrone Freeman, the former president of the Service Employees International Union’s (SEIU) largest local in California (and second largest in the nation), closes a chapter in one of the worst recent cases of union corruption, it should open a new round of questions regarding Freeman’s relationship with the SEIU national headquarters, and specifically, the union’s notorious former head, Andrew Stern.

Freeman was designated by SEIU’s national leadership to lead a forced consolidation of California locals — including some that resisted the consolidation, leading one Oakland-based local to break away from SEIU altogether, alleging heavy-handed tactics by SEIU operatives. So, now is a good time to review the road that led to Freeman’s conviction.

On August 9, 2008, The Los Angeles Times broke the scandal story, reporting a series of dubious expenses totaling around $300,000, including: payments to a company owned by Freeman’s wife; a golf tournament at a Four Seasons resort, which brought in at least $123,000 less than what the union spent on the tournament; nearly $10,000 at at the Grand Havana Room, a cigar Beverly Hills cigar club, recorded as “lodging” in the union’s financial report (a Grand Havana spokeswoman told the Times the club does not provide hotel accommodations).

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