A credit bubble is created when the
amount of money borrowed exceeds the capacity of the borrower to pay it back.
This concept is easy to understand, but the financial foundation of borrowing
has been manipulated to an historic extreme by government. Not just through the
national debt but through the agreements to create debt through public sector
union contracts and municipal bond issuance.
The scale of the public pension and
muni bond bubble has not been widely reported. There are 90,000 units of
government in the U.S. A large number of these have public pension
plans. In 2014 there were 19.5 million people enrolled in public pension plans and 9.6 million receiving
pensions. In California alone there were 3.36 million people
receiving public pensions. Since there were 23 million people in California age 21 and over this means that over one in
seven California adults is currently receiving a public pension.
By definition, a public pension plan
must be financed partially or completely by public contributions: taxes. Since
these plans are defined geographically -- by school district, city limits and
state boundaries -- they mandate huge public revenue demands on local incomes.
The question is how big this bubble is today. And unlike the mortgage bubble,
it is not created by tens of millions of homeowners, but by a very small number
of public sector union leaders who control city and state contracts.
Biggs estimated that the entire
amount of unfunded pension liability in the U.S. was $4.6 trillion in 2011, but this figure did not include municipal bond
debt which, when combined, brings the total unfunded pension and muni bond
liability to $8.3 trillion. This amount is far greater than the mortgage
meltdown and is not included in the Treasury Department's balance sheet or
the national debt.
But unlike the mortgage credit
bubble that led to the 2008 crash, public pensions are not debts, since the
money to finance them was not borrowed, it is just allocated to be paid by
future appropriations, i.e., your taxes.
While pensions are not strictly
debts, they are treated as debt for taxpayers since taxpayers are forced upon
threat of financial punishment to pay them. For example, someone who doesn’t
pay their property tax bill will have their house seized and sold to pay the
public pension bill.
The public pensions themselves are
not founded in constitutional authority to tax since they are future
appropriations of tax revenue. So they, in effect, impose taxes upon residents
who are not yet born. This is not consistent with the concept that
appropriations require the consent of the governed.
Because these pension appropriations
exist only in the abstract, they are not based upon borrowing
standards. No risk management standards exist, at any level, to constrain
pension debts to financial borrowing qualifications such as credit, capacity,
and character. If this whole issue is beginning to sound like a con game that’s
because it is. There’s no accountability.
So while the mortgage lending crisis
was caused by a loosening of underwriting standards, the disturbing and ominous fact about the public pension
and muni bond bubble is that it was not created by changes in standards:
no standards ever existed. So the term “subprime” does not apply. There
are no credit ratings for public pension plans.
What’s interesting is that while
social security’s funding numbers are published, there is no reliable national
source of information on pension funds. Social security funds are expected to
run out of money in 2034 but while there are municipal bonds that last until
2030 and 2040, there is no urgency about how they will be
paid. Information is lacking: the IRS does not have an
income-type category for public pensions. The usdebtclock.org website does not tick off the total amount of public
pension liabilities.
So when public pension contracts are
established they are guaranteed to fail. This is because public pensions are
never constrained by the revenues paid by taxpayers. When more money is
needed for pensions, they simply raise taxes.
Think of it this way: when a
homeowner applies for a mortgage, they have to give accurate numbers as to
their income and monthly bills. They have to accurately report their assets and
liabilities. I am not aware of any large public sector pension plan that is
honestly based upon, and limited by, an accurate accounting of the incomes of
the taxpayers who are forced to pay the pensions. And muni bonds are in the same situation: muni bond issuers do not have to
report the future pension liabilities of their city, pension plan, or school
district.
These pensions are created behind
closed doors, have no limits and are out of control. In 2014 Robyn Gordon
Peterson of the Long Beach Public Transportation Co. had a pension of $1.2
million dollars and this did not include benefits. The Los Angeles Police and
Fire Depts. and San Diego City; have one retired Assistant Fire Chief whose
pension is $871,605; three others with pensions in the $800,000s; (from 800K to
899K) seven in the $700,000s; twenty-three in the $600,000s; seventy-four who
receive in the $500,000s; and seventy-nine who receive pensions in the $400,000
range. This means just 194 people collect over $80 million a year. And this
doesn’t include tens of thousands who collect pensions in the $300,000 range,
the $200,000 range, etc.
Michael Moore is nowhere to be
found.
This disconnect is why all state
public sector pension plans are underfunded. The average public pension is only 41% funded. This is the quintessential definition of a bubble.
And when they crash, they will crash
under different circumstances than the mortgage meltdown. It’s important to
realize that this crash will not occur all at once, as when the MBSs crashed.
It will be a spreading financial crisis that moves from one pension-bankrupted
city to another. This is already happening.
The only sudden crash will be felt
by muni bond investors, who will have their investments seized. Both bankruptcy
court judges in Stockton, CA and Detroit, MI ruled to shortchange the muni bond
investors. In Detroit, Syncora, who insured pensions, lost 86% of what it was
owed. In Stockton, CA Franklin Templeton investors lost 88%. Muni bonds are guaranteed to fail since they are issued
based only on the voluntary reports of the issuing municipalities, not sound
financial rules, as corporate bonds must. And 75% of muni bonds are held by private individuals. The public sector unions
which created these bubbles did not suffer financial losses. The Federal
Judges only kicked the pension bubble down the road.
Public pensions give unequal
treatment both under the constitution and in accounting rules, establish a
shadow ruling oligarchy without the consent of voters and bankrupt government
at all levels.
There is another important
constitutional issue. The Supreme Court has already ruled that campaign
donations are a form of speech. FEC records show that the SEIU, AFSCME, the
American Federation of Teachers and National Education Association give 99% of their
campaign money to Democrats. This is unconstitutional, since citizens are
forced to subsidize without their consent, through extortive property taxes,
the political speech of these public unions.
A credit bubble is created when the
amount of money borrowed exceeds the capacity of the borrower to pay it back.
This concept is easy to understand, but the financial foundation of borrowing
has been manipulated to an historic extreme by government. Not just through the
national debt but through the agreements to create debt through public sector
union contracts and municipal bond issuance.
The scale of the public pension and
muni bond bubble has not been widely reported. There are 90,000 units of
government in the U.S. A large number of these have public pension
plans. In 2014 there were 19.5 million people enrolled in public pension plans and 9.6 million receiving
pensions. In California alone there were 3.36 million people
receiving public pensions. Since there were 23 million people in California age 21 and over this means that over one in
seven California adults is currently receiving a public pension.
By definition, a public pension plan
must be financed partially or completely by public contributions: taxes. Since
these plans are defined geographically -- by school district, city limits and
state boundaries -- they mandate huge public revenue demands on local incomes.
The question is how big this bubble is today. And unlike the mortgage bubble, it
is not created by tens of millions of homeowners, but by a very small number of
public sector union leaders who control city and state contracts.
Biggs estimated that the entire
amount of unfunded pension liability in the U.S. was $4.6 trillion in 2011, but this figure did not include municipal bond
debt which, when combined, brings the total unfunded pension and muni bond
liability to $8.3 trillion. This amount is far greater than the mortgage
meltdown and is not included in the Treasury Department's balance sheet or
the national debt.
But unlike the mortgage credit
bubble that led to the 2008 crash, public pensions are not debts, since the
money to finance them was not borrowed, it is just allocated to be paid by
future appropriations, i.e., your taxes.
While pensions are not strictly
debts, they are treated as debt for taxpayers since taxpayers are forced upon
threat of financial punishment to pay them. For example, someone who doesn’t
pay their property tax bill will have their house seized and sold to pay the
public pension bill.
The public pensions themselves are
not founded in constitutional authority to tax since they are future
appropriations of tax revenue. So they, in effect, impose taxes upon residents
who are not yet born. This is not consistent with the concept that
appropriations require the consent of the governed.
Because these pension appropriations
exist only in the abstract, they are not based upon borrowing
standards. No risk management standards exist, at any level, to constrain
pension debts to financial borrowing qualifications such as credit, capacity,
and character. If this whole issue is beginning to sound like a con game that’s
because it is. There’s no accountability.
So while the mortgage lending crisis
was caused by a loosening of underwriting standards, the disturbing and ominous fact about the public pension
and muni bond bubble is that it was not created by changes in standards:
no standards ever existed. So the term “subprime” does not apply. There
are no credit ratings for public pension plans.
What’s interesting is that while social
security’s funding numbers are published, there is no reliable national source
of information on pension funds. Social security funds are expected to run out
of money in 2034 but while there are municipal bonds that last until 2030 and
2040, there is no urgency about how they will be paid. Information is
lacking: the IRS does not have an income-type category for public pensions. The usdebtclock
So when public pension contracts are
established they are guaranteed to fail. This is because public pensions are
never constrained by the revenues paid by taxpayers. When more money is
needed for pensions, they simply raise taxes. Think of it this way: when a homeowner
applies for a mortgage, they have to give accurate numbers as to their income
and monthly bills. They have to accurately report their assets and liabilities.
I am not aware of any large public sector pension plan that is honestly based
upon, and limited by, an accurate accounting of the incomes of the taxpayers
who are forced to pay the pensions. And muni bonds are in the same situation: muni bond issuers do not have to
report the future pension liabilities of their city, pension plan, or school
district.
These pensions are created behind
closed doors, have no limits and are out of control. In 2014 Robyn Gordon
Peterson of the Long Beach Public Transportation Co. had a pension of $1.2
million dollars and this did not include benefits. The Los Angeles Police and
Fire Depts. and San Diego City; have one retired Assistant Fire Chief whose
pension is $871,605; three others with pensions in the $800,000s; (from 800K to
899K) seven in the $700,000s; twenty-three in the $600,000s; seventy-four who
receive in the $500,000s; and seventy-nine who receive pensions in the $400,000
range. This means just 194 people collect over $80 million a year. And this
doesn’t include tens of thousands who collect pensions in the $300,000 range,
the $200,000 range, etc.
Michael Moore is nowhere to be
found.
This disconnect is why all state
public sector pension plans are underfunded. The average public pension is only 41% funded. This is the quintessential definition of a bubble.
And when they crash, they will crash
under different circumstances than the mortgage meltdown. It’s important to
realize that this crash will not occur all at once, as when the MBSs crashed.
It will be a spreading financial crisis that moves from one pension-bankrupted
city to another. This is already happening.
The only sudden crash will be felt
by muni bond investors, who will have their investments seized. Both bankruptcy
court judges in Stockton, CA and Detroit, MI ruled to shortchange the muni bond
investors. In Detroit, Syncora, who insured pensions, lost 86% of what it was
owed. In Stockton, CA Franklin Templeton investors lost 88%. Muni bonds are guaranteed to fail since they are issued
based only on the voluntary reports of the issuing municipalities, not sound
financial rules, as corporate bonds must. And 75% of muni bonds are held by private individuals. The public sector unions
which created these bubbles did not suffer financial losses. The Federal
Judges only kicked the pension bubble down the road.
Public pensions give unequal
treatment both under the constitution and in accounting rules, establish a
shadow ruling oligarchy without the consent of voters and bankrupt government
at all levels.
There is another important constitutional
issue. The Supreme Court has already ruled that campaign donations are a form
of speech. FEC records show that the SEIU, AFSCME, the American Federation of
Teachers and National Education Association give 99% of their
campaign money to Democrats. This is unconstitutional, since citizens are
forced to subsidize without their consent, through extortive property taxes,
the political speech of these public unions.
http://www.americanthinker.com/articles/2016/02/the_growing_public_pension_and_muni_bond_bubble.html
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