Wednesday, May 2, 2012

The False Choice Between Security and Opportunity ... Which Road to Take ... Stockton's Example

By signing into law the Social Security Act of 1935, President Franklin Delano Roosevelt introduced the promise of cradle to grave "security" to the American people.

But in a different vein, General Douglas MacArthur later said, "There is no security on this earth, there is only opportunity."

Who was right--FDR or MacArthur? Can't we have both security and opportunity? That said, if we can choose just one, who decides for We the People which road to take?

Perhaps Robert Frost's 1920 poem "The Road Not Taken" can help us choose.

TWO roads diverged in a yellow wood,
And sorry I could not travel both
And be one traveler, long I stood
And looked down one as far as I could
To where it bent in the undergrowth;

Then took the other, as just as fair,
And having perhaps the better claim,
Because it was grassy and wanted wear;
Though as for that the passing there
Had worn them really about the same,

And both that morning equally lay
In leaves no step had trodden black.
Oh, I kept the first for another day!
Yet knowing how way leads on to way,
I doubted if I should ever come back.

I shall be telling this with a sigh
Somewhere ages and ages hence:
Two roads diverged in a wood, and I—
I took the one less traveled by,
And that has made all the difference.

But what if we first choose the road to security, and only later discover that the path to opportunity would have been the better choice? That opportunity precedes security, in other words.

And if we should ever change our mind and opt for opportunity over security, assuming we can choose only one, what's preventing us from then pursuing the other road? Just us, I would argue.

And if we should elect to pursue both security and opportunity, a laudable objective for sure, how do we do that?

By initially depending on others to do what we otherwise could do for ourselves, or by striving to do what we can to be self reliant, knowing that if we should fail for whatever reason, our fellow citizens will be there for us?

And why do we even have to choose? Can't we leave that which-path-to-take decision up to the government?

Well, the city of Stockton, California's current financial dilemma speaks directly to that important question.

Untouchable Pensions May Be Tested in California deals with Stockton's current most precarious financial condition. It also questions the ability of the state to prevent the pensions of public workers from being subject to the governance of federal bankruptcy laws. My guess is that California won't win this one, should it ever be litigated. But that's not the discussion topic for today.

When Stockton ran into financial trouble a few years ago, the city borrowed money to make pension contributions for its city employees. The investment of these borrowed funds went sour, and the move backfired. It made a big problem bigger.

Now the city fathers are contemplating bankruptcy, but they are concerned that state law will prevent them from treating Stockton citizens and taxpayers equitably in relation to the rights of city workers. That is, they fear that the state's laws will not allow Stockton taxpayers to decide not to pay in full the future retirement benefits previously promised to city workers.

Stockton is out of money and is clearly unable to meet its obligations in full. Whether the retirement pay of its city workers can be adjusted in relation to its other obligations of the city is the issue.

In simple terms, Stockton is absolutely between a financial rock and a hard place. So is Calpers, California's state agency which manages pension and health benefits for more than 1.6 million California public employees, retirees and their families. As a result, California is in trouble too, along with many other cities, public employees and taxpayers within California. Conceivably, this could impact U.S. taxpayers as well. What's it all about?

Here's what the article says in pertinent part:

" When the city manager of troubled Stockton, Calif., had to tell city council members why it was on track to become the biggest American city yet to go bankrupt, it took hours to get through the list.There was the free health care for retirees, the unpaid parking tickets, the revenue bonds without enough revenue to pay them. On it went, a grim drumbeat of practically every fiscal malady imaginable, except an obvious one: municipal pensions. Stockton is spending some $30 million a year to pay for them, but it has less than 70 cents set aside for every dollar of benefits its workers expect.
Some public pension experts think they know why pensions were not on the city manager’s list. They see the hidden hand of California’s giant state pension system, known as Calpers, which administers hundreds of billions of dollars in retirement obligations for municipalities across the state.
Calpers does not want cities like Stockton going back on their promises, and it argues that the state Constitution bars any reduction in pensions — and not just for people who have already retired. State law also forbids cuts in the pensions that today’s public workers expect to earn in the future, Calpers says, even in cases of severe fiscal distress. Workers at companies have no comparable protection."
Discussion and Analysis
Here's my take. First, let's dispense with the legal argument about whether California's state law can stop Stockton from adjusting retiree benefits to its current or even future public sector retirees. In my view, no state will be allowed to prevent a city or national government from acting in the best interests of its citizen taxpayers. That's one reason we have federal bankruptcy courts--to sort things out between the various legitimate creditors and the bankrupt debtor.
In simple terms, federal law preempts state law, so the California provision saying that cities can't lessen their obligations to make pension contributions in full won't stand scrutiny if the issue ever lands in federal bankruptcy court. At least that's my opinion. But we're not going to dwell on the legal aspects of Stockton's situation today.
Instead we'll look at the situation in practical terms.
Summing Up
In my view, MacArthur has the better of the security versus opportunity argument, but let's give FDR credit as well.
As a society, in addition to equal opportunity for one and all, we should see to it that the least fortunate among us are secure with respect to their basic needs.
That said, and regardless of what the California government says, there can be no special privileges for any one group of citizens granted over another group of citizens, or the taxpayers as a whole.
Stockton Has Choices
1- Stockton can continue to make its pension contributions as scheduled and choose fewer city services instead.
2- Stockton can make fewer pension contributions, and the Calpers fund will then be unable to pay to retirees as scheduled.
3- If fewer contributions are made to Calpers by Stockton, other cities will then be affected as fewer funds are available for retiree benefits.
4- Stockton can make fewer or no contributions at all, declare bankruptcy and let the courts sort out the various competing claims of creditors.
5- In any case, some creditors are going to receive less than they've been promised unless, of course, taxpayers agree to make additional payments.
What's fair? Depends on where you sit, as always.
What's true? Promises have been made that can't be kept.
What's likely to happen? There is going to be a huge change in the obligations accepted by taxpayers with respect to paying public employees.
When We the People come to internalize that we're in charge, things will change for the better.

Finally ...
The pursuit of opportunity precedes basic security in a self governing and free society.
If we keep that simple order of opportunity and then security in mind, we'll know which road to take.
And we'll understand that our fellow citizens have our back as well.
And that will make us secure.
Thanks. Bob.