My Blog

Category: Finance

  • Quick Pension Analysis

    Ok, so I was getting asked about this the other day both in person and in the comments about why the pensions are really in such bad shape and what the latest GASB positions mean to the funds.  GASB first.

    GASB Changes
    I did some poking around and the recent GASB changes really mean nothing.

    After six years of research and about 400 pages of text, GASB’s statements 67 and 68 do little to provide enough meaningful information about the potential retirement costs faced by the taxpayers. The statements will force the worst of the worse, such as Illinois, to recognize a much larger liability.

    That’s like throwing the zombified Walking Dead under the bus to give the appearance of taking a serious step in providing transparency. Zombies are already dead. You can throw them under a bulldozer; it doesn’t make them more dead.  …

    The new standards still allow most pension funds to choose their discount rates when determining their pension liabilities. In other words, the sworn and civilian plans of the City of Los Angeles can wantonly throw caution to the wind and assume a 7.75% earnings assumption going forward, avoiding any consideration of risk.

    via City Watch LA.

    You can read the policy papers.  It’s pages and pages of nonsense summarized nicely with the zombie analogy above.

    But what the lastest GASB changes point out to us is the danger regarding the assumed internal rate of return.

    Interest Rate Issue
    For giggles I found the 2011 annual report of the Chicago Teachers’ Pension Fund.  It’s 116 pages detailing a underfunded, mismanagement, no financial understanding pension time-bomb with some lipstick.

    From page 13:

    As of June 30, 2011, investments at fair value plus cash totaled $10,456,912,118. This reflects a 16.8% increase from the $8,949,590,783 value of June 30, 2010. The Fund’s investment performance rate of return for the year ended June 30, 2011, was 24.8%, exceeding the projected return of 8% and reflecting a 82.3% increase from the 13.6% performance rate of return as of June 30, 2010. The ten-year rate of return posted by the Fund for the period ended June 30, 2011, was 5.7%, and fell short of the actuarial assumption of 8%.

    That’s a lot of information.  I draw your attention to the incredible swings in the rate of return of the fund over the years.  24.8% one year, 13.6% another, however the 10-year average is a mere 5.7%.   On page 25 we learn that the 5-year average is only 4.7%.  Yikes!!  But the fund assumes that over the long term it will average 8%.

    But what does that mean? So what?

    Well, the fund currently has net assets of $10.344 billion.  When invested at the given rate of returns at the end of 5 years we have:

    Year Value @ 4.7% Value @ 5.7% Value @ 8%
    0 $10,344,100,000.00 $10,344,100,000.00 $10,344,100,000.00
    1 $10,830,272,700.00 $10,933,713,700.00 $11,171,628,000.00
    2 $11,339,295,516.90 $11,556,935,380.90 $12,065,358,240.00
    3 $11,872,242,406.19 $12,215,680,697.61 $13,030,586,899.20
    4 $12,430,237,799.29 $12,911,974,497.38 $14,073,033,851.14
    5 $13,014,458,975.85 $13,647,957,043.73 $15,198,876,559.23

    If the next 5 years are like the past 5 years the fund will earn 4.7% on its assets.  So in 5 years it will have $13.014 billion.

    In the next 5 years are like the past 10 years the fund will earn 5.7% on its assets.  So in 5 years it will have $13.646 billion.

    However the plan assumes that over the next 5 years it will follow the 8% column and have $15.1 billion.  History is against them.

    If the fund earns 5.7% over the next 5 years it will be $1.55 billion short of projections.  That’s 10% less money available.

    If the fund earns 4.7% over the next 5 years it will be $2.18 billion short of projections.  That’s 14% less money available.

    If all the assumptions go on for 10 years:

    Year Value @ 4.7% Value @ 5.7% Value @ 8%
    10 $16,374,178,752.54 $18,007,050,537.73 $22,332,136,064.29

    Earning 5.7% the fund is $4.33 billion short or 19.3%.

    Earning 4.7% the fund is $5.95 billion short or 26.6%.

    So if the next 10 years are anything like the past 10 years from an investment standpoint we can expect the all the state pension funds to have about 20% less money than they’re projecting.  That could easily be another $40-50 billion that someone’s going to come looking for.

    – – –

    Now in all fairness, a historic average suggest that a return rate of 8% could be reasonable.  i.e. These funds may be able to earn an 8% return in the next 5 years.  Why?

    Interest Rates & Inflation.  In the last 5 – 10 years there has been very little inflation and interest rates have been low.  That’s generally accepted to be a good thing.  However it messes with the long-term analysis as to what something will be worth in the future.

    Given the amount of debt carried by the Feds, and the quantitative easing (a/k/a money printing) that been happening, it’s safe to say that very soon interest rates are going to start going up… fast and dramatically.

    When interest rates go up, the rate of return on these pension funds should go up as well.  If they get close to the 8%, then we’ll only have to worry about the current short fall of billions and billions and billions.

    Any questions?

  • 100 Days Until Taxmageddon

    Sunday will mark the start of the 100-day countdown to “Taxmageddon” – the date the largest tax hikes in the history of America will take effect. They will hit families and small businesses in three great waves on January 1, 2013:

    via Americans for Tax Reform.

    Here’s a list of some of the new and raised taxes coming:

    First Wave: Expiration of 2001 and 2003 Tax Relief

    • Personal income tax rates will rise on January 1, 2013.
    • Higher taxes on marriage and family coming on January 1, 2013.
    • Middle Class Death Tax returns on January 1, 2013.
    • Higher tax rates on savers and investors on January 1, 2013.

    Second Wave: Obamacare Tax Hikes

    • Some Obamacare have already gone into effect: tanning tax, medicine cabinet tax, HSA withdrawal tax, W-2 health insurance reporting, and the “economic substance doctrine”
    • The Obamacare Medical Device Tax
    • The Obamacare Medicare Payroll Tax Hike
    • The Obamacare “Special Needs Kids Tax”
    • The Obamacare “Haircut” for Medical Itemized Deductions

    Third Wave: The Alternative Minimum Tax and Employer Tax Hikes

    • The AMT will ensnare over 31 million families, up from 4 million last year
    • Full business expensing will disappear
    • Taxes will be raised on all types of businesses
    • Tax Benefits for Education and Teaching Reduced
    • Charitable Contributions from IRAs no longer allowed

    … So at least we have that to look forward to.  Right?

     

  • Rahm: Higher Cigarette & Amusement Taxes

    Mayor Rahm Emanuel is considering an increase in city taxes on cigarettes and entertainment to help close an anticipated $369 million gap in next year’s budget, City Hall sources said Wednesday.  …

    It’s unclear how much the cigarette tax might be raised. A city tobacco tax increase would come on the heels of a $1-a-pack state hike that took effect July 1. The city last increased its cigarette tax by 20 cents — to 68 cents a pack — in 2006.

    Taxes on a pack of cigarettes in Chicago total $5.67, the second-highest per-pack tax in the nation, behind New York City’s $5.85 a pack. The city expects to bring in $18.7 million in cigarette taxes this year, compared with $32.9 million just six years ago, according to city financial records.

    via Chicago Tribune.

    Cook County has already proven that when you raise cigarette taxes you lose revenue.  The city’s own numbers are another example of that.

    Does Rahm have any plan to cut ANY spending?  Anything other than police officers?

    Why don’t we shut down the TIFs?  Take fund necessary to pay off the bonds and do so; take the rest of the funds and return them to the general fund.  That would be quick and easy.

    Enough with the !@#$^ taxes.

  • Mitt Romney on the Federal Reserve

    “Yeah, it’s interesting…the former head of Goldman Sachs, John Whitehead, was also the former head of the New York Federal Reserve. And I met with him, and he said as soon as the Fed stops buying all the debt that we’re issuing—which they’ve been doing, the Fed’s buying like three-quarters of the debt that America issues. He said, once that’s over, he said we’re going to have a failed Treasury auction, interest rates are going to have to go up. We’re living in this borrowed fantasy world, where the government keeps on borrowing money. You know, we borrow this extra trillion a year, we wonder who’s loaning us the trillion? The Chinese aren’t loaning us anymore. The Russians aren’t loaning it to us anymore. So who’s giving us the trillion? And the answer is we’re just making it up. The Federal Reserve is just taking it and saying, “Here, we’re giving it.’ It’s just made up money, and this does not augur well for our economic future.

    via Glenn Beck.

    You can only live on borrowed money for so long.  After awhile someone comes looking for what you owe… plus the vig.

    Refi that house now because if you think it’s bad now but wait until we have 9.0% unemployment and 9.0% inflation.

    The wheels are falling of the bus.

  • Ald. “New Tax” Cardenas Wants $5/mo

    Chicago should impose a “safety and security fee” — as high as $5 a month on homes and businesses — to generate the $70 million needed to hire 700 additional police officers, an influential alderman said Thursday.

    Ald. George Cardenas (12th), chairman of the City Council’s Health Committee, said Chicago desperately needs a surge in police hiring to ease a severe manpower shortage that has hamstrung the city’s ability to stop a surge in homicides and shootings.  …

    Police and Fire are the very definition of general funds.  This is nothing more than a $60/year tax on everyone.

    Fraternal Order of Police President Mike Shields said he would welcome “any new source of revenue” that could be used to bolster a police force that stands at 11,799 after a three-year hiring slowdown.

    Through Aug. 15, 420 police officers had retired, but only 127 new officers had been hired, he said.

    But, Shields said, “Why is it that we have to go to another source of revenue to pay for these officers? Policing is a basic city service that should be in the budget without a new fee. The mayor eliminated 1,252 police vacancies. The 2012 budget should not have been balanced at the expense of public safety. Those vacancies should have been filled.”   …

    Cardenas is the aldermen who championed Chicago’s nickel-a-container tax on bottled water.He also proposed an anti-obesity plan to tax Chicago consumers of soda pop, energy drinks and other sugary beverages anywhere from 15 to 30 cents-a-contain to a penny-an-ounce.

    via SunTimes.

    How about we eliminate the TIFs and put all that money back into the general fund?  Then we’d have money for police, fire, and all kinds of other services.  Heck, we might even be able to fund the teachers’ pensions.

    Ald. Cardenas, we’re taxed to death already!  Enough.

  • One Word for CPS Teachers: Save

    Save.

    Save as much money as you can.

    Live well below your means.

    The pension time-bomb is coming.

    One of the most vexing problems for Chicago and its teachers went virtually unmentioned during the strike: The pension fund is about to hit a wall.

    The Chicago Teachers’ Pension Fund has about $10 billion in assets, but is paying out more than $1 billion in benefits a year — much more than it has been taking in. That has forced it to sell investments, worth hundreds of millions of dollars a year, to pay retired teachers. Experts say the fund could collapse within a few years unless something is done.

    via NYTimes.com.

    and;

    “Each day we wait to enact comprehensive pension reform, the problem gets worse,” Quinn said in a statement. “The unfunded liability will grow to more than $92 billion by the end of next fiscal year. Illinois is currently on track to spend more on pensions than education by 2016 and that is unacceptable.
    — Pat Quinn

    via Des Plaines, IL Patch.

    If you think that taxpayers are going to fund your pensions, forget-about it.

    If you think you can tax the rich to fund your pensions, forget-about it.

    If you think that people are going to move into a community where their property taxes increase by 7% every year in order to fund failing schools, forget-about it.

    If you think you’re going to get your COLA every year, forget-about it.

    You have two options:  Save every nickel and dime you can, or plan to work until you’re in your 70’s.

    Consider:

    Illinois has an unfunded pension liability of at least $83 billion, according to state figures. It had 45 percent of what it needed to pay future retiree obligations as of 2010, the lowest among U.S. states, data compiled by Bloomberg show.  …

    Illinois had about $28 billion of general-obligation debt as of May 8, according to bond documents. The state of about 13 million people plans to sell $50 million of debt next month for technology projects, John Sinsheimer, the state’s director of capital markets, said in an interview.

    via Businessweek.

    Further:

    Illinois’s backlog of unpaid bills has risen to more than $9 billion because of pension costs and falling federal aid, leaving the state “essentially treading water,” Comptroller Judy Baar Topinka said.

    via Bloomberg.

    $83B + $28B + $9B = $120,000,000,000 in debt.  The extra $50 million at 0.42% of the total is a rounding error.  It should also be noted that this does not include the City of Chicago (or any other municipality or county debt) which is another $12-16 billion in debt depending on who you ask.

    12,869,257 people in the state of Illinois.  Every man, woman, and child owed owes $9,324.54 to the state.  If you live in Chicago you owe another 5,910.34 locally for total of $15,234.89.  (Are you feeling good about your new contract yet?)

    I was just looking over the FY2013 Illinois State Budget as prepared by Gov. Quinn.  On Pg 37 we’re told that Debt Service is 5.42% of all outlays.  That’s over $3.3B per year paying principle and interest on money we borrowed.  That’s $3.3B per year we could use to hire police officers, or teachers, or fully fund the pension funds but will instead go to pay for our bad fiscal decisions of the past.

    More importantly, total expenditures are $61.0B.  That means that if we (a/k/a the State of Illinois) completely stopped operating, fired all the employees, shuttered all the buildings, and spend 100% of the budget on paying off debt we’d be debt free in 2 years.

    Oh, I know what you’re going to say… You’re going to tell me all about how the Chicago Teachers’ Pension Fund is not as underwater as the general state fund.  True, but it’s still broke and broken.  And there’s no money to fix it.

    Then you’re going to say that this is a right guaranteed by the Illinois Constitution.  Oh ya?  Well where’s the money going to come from?  The rich?  You wish:

    When New Jersey governor Chris Christie heard British Prime Minister David Cameron invite France’s wealthy to decamp to England to escape a proposed 75% tax rate, he felt something akin to déjà vu. Every day top executives of Johnson & Johnson (JNJ), Merck (MRK), and other companies commute from their homes in Pennsylvania to offices in Christie’s state, saving roughly two-thirds on their state income tax bill — and costing New Jersey’s treasury $50 million, by one estimate.

    via Fortune (a/k/a CNN).

    You don’t understand the Laffer Curve.

    The study, by the anti-tax group Change Maryland, says that a net 31,000 residents left the state between 2007 and 2010, the tenure of a “millionaire’s tax” pushed through by Gov. Martin O’Malley. The tax, which expired in 2010, in imposed a rate of 6.25 percent on incomes of more than $1 million a year.

    The Change Maryland study found that the tax cost Maryland $1.7 billion in lost tax revenues. A county-by-county analysis by Change Maryland also found that the state’s wealthiest counties also had some of the largest population outflows.

    via CNBC.

    You’re confused how a state and raise taxes and lose revenue.  It happens all the time.  I wrote a piece about cigarette taxes in Cook County; raised taxes, lost revenue.

    The more you tax something the less of it you get.

    You tax income, you get less income.  You tax babies, you get less babies.

    Even the left-loving Bono (of U2 fame) moves his wealth around to avoid taxes.

    In Illinois, if we quadrupled the state income tax on those with adjusted gross income over $500k it would take over 13 years just to get current state pension liabilities square.  This would not cover the additional debt of Chicago Teachers, Chicago Police & Fire, or any of the billions and billions of general debt.

    So take your 16% raise and start saving.  Save like your life depends on it.  Because it does.

  • 400 Richest Americans’ Worth $1.7 Trillion

    The net worth of the richest Americans grew by 13 percent in the past year to $1.7 trillion, Forbes magazine said on Wednesday, and a familiar cast of characters once again populated the top of the magazine’s annual list of the U.S. uber-elite, including Bill Gates, Warren Buffett, Larry Ellison and the Koch brothers.

    The average net worth of the 400 wealthiest Americans rose to a record $4.2 billion, the magazine said.

    via Chicago Tribune.

    I love stories like this.  The Left will go on and on about how its unfair that these people earn this money; it’s terrible that anyone should be allowed to have this much money, and what-have-you.

    So let’s just take.  Let’s just take all of it.  Let’s take these thieving bastards money and redistribute it so everyone benefits.

    $1.7 T / 314,409,835 people = $5,406.96 per person.

    That would be a one time payment by the way.  No one would ever get another nickel from these people ever again.  Hardly seems worth it to me.

    Maybe we should use it to pay off our national debt.  After all every citizen owes the government over $51,000.  Surely we’d all be better off if we just paid down the debt.

    $16T – 1.7T = $14,300,000,000,000

    After that we all now owe about $46,000 to the government, each. … Huh?!   Still seems like we all owe a lot of money.

    And this is the folly — we can Eat the Rich — but it would never be enough to save us from what we’ve already done to ourselves.

    Inflation and austerity are coming.  Plan for it.

  • Treasury Won’t Sell Take a Loss on GM Shares

    General Motors Co. executives want the Treasury Department to sell its almost 27 percent stake in the company because, they say, the feds are hurting their image and government pay restrictions are chasing away top talent.  …

    Government officials weren’t interested in the deal.“At GM’s Friday share price of $24.14, the U.S. would lose about $15 billion on the GM bailout if it sold its entire stake,” the Journal notes. “While GM stock would need to reach $53 a share for the U.S. to break even, Treasury officials would consider selling at a price in the $30s.”

    via TheBlaze.com.

    This is the Treasury department playing politics.  Treasury is supposed to be “above” politics.  It’s supposed to control the U.S.’s monetary policy such that our economy grows at a steady pace.

    The question now is did Tim Geithner make this decision or did it come from Obama himself?

  • Jobless Claims Jump

    In a separate report, a sharp rise in gasoline costs drove up wholesale prices last month by the most in more than three years. But outside energy and food, price gains were mild.

    Initial claims for state unemployment benefits rose 15,000 to a seasonally adjusted 382,000, the highest in two months, the Labor Department said on Thursday. The prior week’s figure was revised up to show 2,000 more applications than previously reported.

    via CNBC.

    We all expect this right?

    Is this the new normal?

  • More Americans Can’t Afford Banks

    In the aftermath of one of the worst recessions in history, more Americans have limited or no interaction with banks, instead relying on check cashers and payday lenders to manage their finances, according to a new federal report.

    Not only are these Americans more vulnerable to high fees and interest rates, but they are also cut off from credit to buy a car or a home or pay for college, the report from the Federal Deposit Insurance Corp. said.

    Roughly 17 million adults are without a checking or savings account. Another 51 million adults have a bank account, but use pawnshops, payday lenders or rent-to-own services.  …

    The study also found that one in four households, or 28.3 percent, either had one or no bank account. A third of these households said they do not have enough money to open and fund an account. Minorities, the unemployed, young people and lower-income households are least likely to have accounts.via The Washington Post.

    Not a good sign.