Friday, March 2, 2012

Elephant Entitlements, Two Circles, Priorities and Citizenship

One circle is expanding and the other is contracting.

The expanding circle represents the growing number of beneficiaries receiving government benefits and the growing amount of those benefits for each recipient, while the contracting circle represents the reduced number of people subsidizing or otherwise funding those 'big circle' benefits.

Of course, the trend toward an ever smaller number of citizens who pay income taxes is a great example of the contracting circle. Figuratively, it's the 5% who pay a lot compared to the 50% who pay nothing. It wasn't always thus.

As for the expanding circle, the increase in government spending for oldsters as well as the growing number of people depending on the government for assistance in meeting their financial needs are good examples.

But neither circle deals with the biggie--our discussion topic du jour. The biggie is the elephant in the room who's standing unnoticed outside both circles. Meanwhile, he's wondering if and when governments at all levels will address his needs.

Accordingly, the story of oldsters, unfunded entitlements and demographics is today's discussion topic. In Notable & Quotable, the world's rapidly developing aging problem is addressed:

"The U.S. now has 20 people aged 65 or older for every 100 of working age—only a slight change from 1985, when there were 18 for every 100. By 2030, the U.S. will have 33 seniors per 100 working Americans. But consider the numbers elsewhere. In the world's fourth-largest economy, Germany already has 33 elderly people for every 100 of working age—up from only 21 in 1985. By 2030, this figure will rise to 48, meaning that there will be barely two working Germans per retiree. The numbers are even worse in Japan, which currently has 35 seniors per 100 working-age people, a dramatic change from 1985, when the country had just 15. By 2030, the ratio is expected to rise to 53 per 100. . . .

Between 2000 and 2050, for example, the U.S. workforce is projected to grow by 37 percent, while China's shrinks by 10 percent, the EU's decreases by 21 percent, and, most strikingly, Japan's falls by as much as 40 percent.

In this respect, immigration presents the most important long-term advantage for the Anglosphere, which has excelled at incorporating citizens from other cultures. A remarkable 14 million people immigrated to Anglosphere countries over the last decade. The United States, in particular, remains a powerful magnet: in 2005, it swore in more new citizens—the vast majority from outside the Anglosphere—than the next nine countries put together."

Future immigration in the U.S. will augment our ability to make good on many of our entitlement promises to oldsters. That said, the problem still represents the elephant in the room.

There are credible estimates of existing government promises which have unfunded retirement liabilities of ~$100 trillion attached thereto for workers' future retiree health care and pension liabilities, including Social Security. That's a big elephant.

Even if those $100 trillion estimates are "only" in the "ballpark," why are governments continuing to build football and baseball stadiums with taxpayer money? Why aren't we dealing with the needs of the elephant first?

In other words, why don't we decide either to fund or rescind these overpromised retirement benefit promises instead of just ignoring them? They won't go away on their own.

St. Louis's Dome Dilemma and Sacramento in Deal to Keep Its NBA Team each provides an interesting contrast to California Cities Hit the Wall.

First, St. Louis: "Nearly 20 years after the Rams arrived here from Los Angeles, this shrinking city wants taxpayers to open their wallets for a stadium overhaul designed to keep the professional football team from fleeing for the glitz of its former home. . . .

The fight to save St. Louis's NFL franchise comes at a tough time. The city of St. Louis, St. Louis County and the state of Missouri together still owe $153 million on the downtown dome and face deep budget cuts in other areas. But they are proposing a $124 million plan to build new club seats and a 50,000-square-foot plaza at the dome—with nearly half the cost funded by taxpayers....

Despite evidence that these investments rarely pay off in purely economic terms, smaller-market cities continue to offer sports teams millions of dollars in hopes the investments will pay off by improving the quality of life, aiding in the recruitment of new businesses and burnishing their national reputation. Minneapolis and Minnesota are offering more than $600 million for a new Vikings football stadium. And Indiana still owes $649 million on the Colts' four-year-old stadium. . . .

In larger markets, however, cities have managed to keep taxpayers largely off the hook for stadiums, such as the New York Giants' and Jets' $1.6 billion, two-year-old stadium and the San Francisco 49ers' planned $1.02 billion stadium.

Indeed, taxpayers have shouldered about four-fifths of the funding for NFL stadiums in the eight smallest media markets with new facilities since 1995, according to an analysis of data from the consulting firm Convention Sports & Leisure International. During that period, taxpayers have funded less than a fifth of the cost of NFL stadiums in the eight largest media markets where new facilities have been built or are planned, according to the data. . . .

In St. Louis, taxpayers would fund $59.5 million of the proposed renovations. Meanwhile, St. Louis County announced plans last month to lay off 27 workers to help shrink a $26 million budget gap, while Missouri Gov. Jay Nixon recommended shedding 816 jobs to help plug a $468 million hole. St. Louis is eliminating 50 police positions, and recently began charging residents $11 a month for trash pickup. . . .

Rams fan Michael Phillips, a 34-year-old St. Louis native, said the city should let the team go if the cost is too high. "We can barely afford our schools . . . .

Smith College economics professor Andrew Zimbalist, who studies the impact of sports teams on cities, said the renovation cost is "not an economic investment."

David Peacock, head of a board that attracts sporting events to the city, said there is more to the issue than the renovation costs. "It's civic pride and it's economics," he said. "There are benefits beyond just the 10-plus [home] games. It's creates economic opportunities.""

Dream on, Mr. Peacock.

Next up is Sacramento: "Sacramento Mayor Kevin Johnson said the city would keep its National Basketball Association franchise and build a new arena for the Sacramento Kings, skirting the threat of rival bids for the team. . . .

The mayor, a former NBA player, gave few details of the deal to keep the Kings in Sacramento, but officials in his office confirmed that a new facility, valued at just under $400 million, would be in place in time for the 2015-2016 season. The Kings' owners, the Maloof family, will be expected to contribute more than $70 million to finance the construction and operation of a new arena. . . .

Sacramento has been fending off challenges from other cities aiming to woo the Kings since last year when reports surfaced Anaheim, Calif., might be willing to build a home for the team."

Finally, we have Stockton's sobering example of the much larger issue facing municipalities throughout America:

"Confronted by declining tax revenue and rising employee costs, Stockton, Calif., is considering bankruptcy—while several other struggling California cities warn they could eventually face the same predicament.

Stockton officials voted Tuesday night to take the initial step toward a bankruptcy filing by the city of 290,000 . . . .

As in Stockton, two other Northern California cities, Hercules and Lincoln, are attempting to restructure their debt and cut employee costs to forestall insolvency. Late last year, Hercules retained bankruptcy attorneys in part to explore options with its creditors.

The problems facing these cities follow the Chapter 9 bankruptcy of Vallejo, Calif., in 2008. Vallejo exited from bankruptcy last year after cutting costs, but its finances remain precarious, officials said.

Since then, there have been municipal bankruptcies elsewhere, including by Central Falls, R.I., Harrisburg, Pa., and Jefferson County, Ala.

While a number of communities nationwide are in financial straits, troubled ones in California are under unusual pressure. State law makes it hard for cities to quickly raise taxes to cover shortfalls because they typically have to gain voter approval for increases. California also was hit harder than many states by the mortgage crisis and housing bust, leaving it with one of the country's highest foreclosure rates. That reduces tax revenue. . . .

Stockton, meantime, faces a budget deficit of $20 million to $38 million for the fiscal year ending June 2013. . . .

Bankruptcy is painful for municipalities . . . since it entails restructuring long-standing contracts, including retiree health-care benefits.

"Right now we're a city that, frankly, has hit the wall," said Stockton Mayor Ann Johnson. "We're looking at a financial situation that is so bad that we see no way out of it . . . .

The troubles are weighing on Stockton employees. Rhonda Lobosco, who has worked for the city for 20 years, doesn't recall ever seeing her hometown in such bad shape. Ms. Lobosco, a 51-year-old secretary in the city's public works department, worries she could lose the health benefits she had been promised in retirement due to the city's troubles. . . ."

Summing Up

We owe ~$100 trillion in unfunded entitlement promises. Yet the national politicians don't want to talk about it. It's the 2012 election season, so who would want to discuss anything so trivial as $100 trillion during such an important voting year? Stockton municipal employee Ms. Lobosco, for one. And countless others, including taxpayers. But the national politicians say they can wait.

Meanwhile, what are the cities, counties and states doing? Too many of them, including union leaders, have decided to copy the national politicians and pretend that the elephant doesn't exist.

So local governments talk to their taxpayers about building ballparks instead of funding or changing entitlements. And their employees are the vulnerable ones, along with the local taxpayers, of course.

In addition to the feds, St Louis, Sacramento, Stockton and a whole lot of other communities and states need to establish some real priorities and not worry about such trivial matters as where the Rams and Kings play. The elephant is simply too big to ignore any longer.

But I'm still optimistic.

Someday soon we'll take the time to discuss exactly how troubling this underfunded entitlement elephant really is, as well as how we can remedy the governments' current ridiculous approach to investing, funding and designing properly the financial way forward for all concerned. And we all should be concerned.

As with most things, doing the right things precedes doing those things right. Today we're not doing the right things. We're not even looking at the elephant.

So We the People should not lose hope. There are realistic and straightforward solutions to all this.

Stay tuned and we'll see how this develops, especially after November's election. But no matter who wins, the elephant will be heard from sooner rather than later.

And we'll deal with him then, whenever "then" occurs.

Thanks. Bob.

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