Wednesday, April 04, 2007

Politicians Doing More Harm than Good

Sometimes in the annals of things-that-strike-us-as-mind-boggling, an example comes along that is so clearly mind-boggling—no matter what an observer’s age, politics or religious beliefs might be—that it requires no commentary on our part to highlight how very mind-boggling it is.

Today’s example comes about three-fifths of the way through a front page New York Times story titled “New Jersey Diverts Billions, Endangering Pension Fund,” and if you ever thought your tax dollars were spent wisely, or, at the very least, not incompetently, you ought to read the entire hair-raising piece—not just the following excerpt.

And, no, I am not making this up.

…Mr. Beaver and Mr. Megariotis recounted a bit of history. In 2001, the Legislature voted to increase teachers’ pensions by 9 percent, raising the plan’s total cost by an estimated $3.1 billion. Because New Jersey’s Constitution forbids creating debts without creating a funding source, the lawmakers needed to pay for it. They looked back to June 30, 1999, the height of the bull market.

Records showed that the pension investments were worth $5.3 billion more on that day than the plan’s actuary showed, because actuaries phase in gains and losses slowly to avoid sudden swings in market value. The lawmakers seized on this paper gain of $5.3 billion, and voted to channel it as an actual windfall into a new reserve in the pension fund, to pay for the new benefits.

I.R.S. officials said that a company would not be permitted to do this with a pension fund.

By the time the Legislature did this in 2001, of course, the stock market had tumbled and much of the $5.3 billion had melted away. That appeared not to have concerned the Legislature. An election was looming, and the teachers’ union was complaining bitterly about past failures to put money into their pension fund.

Too bad the 2005-2006 batch of sub-prime home buyers can't set their home's current value at its peak a year and a half ago...

Jeff Matthews
I Am Not Making This Up

© 2007 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.


tahoe kid said...

Time for corporate hearings on government accounting practices.

gvtucker said...

According to a story on Bloomberg today, the New Jersey public pension fund has a shortfall somewhere between $24.8 billion (the state's estimate) and $56 billion.

That's almost $3,000 per person at a minimum.

whydibuy said...

Governments both local, state and national are going down the same road many large corps took 20 yrs ago. Namely dealing with those pension guarantees that grow exponentially in the future. Corp america utilized the bk court, formula changes that stopped the balloning and in some cases simply balked on paying them claiming fringe pension benefits are cancellable. It'll be interesting to see how govs handle it. Most likely since it would include themselves, tax the heck out of the taxpayers. Its totally ridiculous to see cops, firefighters, teachers and gov workers retire after 25 years and get nearly their full salary and health care paid in full by the taxpayers for maybe another 50 years. Especially when the local taxpayer is skimping by on modest savings and ss and having to cover their own health insurance. It is becoming a real have and have not based on being a privileged gov employee or a no benefit private sector peeon. Just like in many other countries such as the ussr.

dkman said...

Could this be considered as the government version of backdating?

The only thing more entertaining than the government trying to appropriate the money from the "past" is when the government tries to appropriate the money from the "future".

This happened not too long ago on the federal level, when, on the heels of the dot-com stock rally in 2000, the budget was in a surplus. Of course, everyone agreed the Dow was going straight to 36000, so the budget surplus was similarly forecast to grow into trillions into infinity.

What happened next? The politicians started fighting over how the "future" surplus should be spent, resulting in the famous SNL Al Gore "lockbox" skit.

Whatever happened to that surplus?

Its_strange said...

Time to cut taxes i guess

ChewYourGrouse said...

I found that article sort of compelling too. My thought: as someone being lured home to my native (and more fiscally rational) North Carolina, I should get the heck out and leave New Jersey to its throngs of multigenerational sinecure-holders.

Anonymous said...

"Too bad the 2005-2006 batch of sub-prime home buyers can't set their home's current value at its peak a year and a half ago..."

I have a political nominee, on the Congressional level who may do more harm than good with his investigations into sub-prime lending.

That man is Senator Christopher Dodd (D - CT).

Why would I say this? Because Senator Dodd's remarks will, in time, have the effect of tightening credit availability for potential home-owners, just as prices for new and existing homes decline from an inventory glut later this year.

I am not making this up.

From late March of this year, Senator Dodd lays blame for the sub prime mortgage mess on both the regulators at the Fed as well as the lenders (i.e., HSBC, New Century, et. al.) for easing their standards for mortgage loan qualifications. Readers can see for themselves by clicking here.

In my opinion, the lenders were only doing what was in their best interest - namely, to encourage homeownership with loans that, at the time, would allow those of modest financial means to obtain a piece of the American Dream.

Regulators, meanwhile, were not equipped with funds from Congress to effectively enforce the very laws that protects consumers from predatory lenders. One must ask, however, whether the lenders were acting in a "predatory" manner when creating new mortgages to increase American home-ownership?

Also, if regulators are not properly funded by those very same Congressmen who criticize them for failure to oversee lending standards and practices, then are regulators really to blame entirely for what happened as well?

I think not.

In short, Senator Dodd's comments will cause credit markets to "seize up" by increasing regulatory practices and tightening credit standards for banks, which will limit the availability of credit to potential homeowners, making an already ugly situation worse.

But then, I'm not a politician, and I could be wrong.