Tuesday, June 30, 2015

The Ticking Time Bomb of the Underfunded Pension Promises of Many U.S. Cities and States ... It's Not Exactly the Same as, but it Clearly 'Rhymes' with, What's Happning in Greece and Puerto Rico ... Similarities Abound

Geographically, Greece is a long way from the U.S. mainland. So is Puerto Rico.

But financially they are encountering problems much like those currently facing lots of big U.S. cities and states. Given enough time, big spending, low taxing and unaccountable governments can do a lot of permanent financial damage as a result of underfunding public sector entitlement programs, including pension promises. And that they've done.

That's because many U.S. cities and states, to make an understatement of epic size, currently have huge unfunded pension obligations which grow with each passing day. It's both exciting and shameful.

Government policies and practices designed to placate public sector unions and their members are mostly, albeit not totally, to blame.

These lurking debts may turn U.S. cities, states into Greece paints a troubling but true picture of the situation:

"When Chicago Public Schools announced on June 24 that it would borrow $1 billion to make a $600 million-plus pension payment due June 30 an eerie feeling spread across bond investors and taxpayers alike.

It was the same feeling that gripped investors when Moody’s Investors Service downgraded Chicago’s credit rating to junk based almost entirely on the city’s pension problems.

The fear was that elevated pension costs, in cities like Chicago, might push these public entities into insolvency, wiping out much of the holdings of municipal-bond investors.

Once a sleepy corner of the municipal bond market — often not even properly reflected on cities’ balance sheets — public pensions have recently turned into the biggest headache for taxpayers and municipal bond investors, threatening to bring down the finances of U.S. cities and states.

In some places, like Puerto Rico, Illinois, New Jersey and Chicago, entire balance sheets of cities or states hang in the balance.

Detroit, as well as three Californian cities — Vallejo, Stockton and San Bernardino — had to declare bankruptcy because of their overwhelming pension costs.

In those cases, the courtroom turned into a brutal battlefield pitting bond investors trying to save the money they invested in those cities’ municipal bonds on one side. And on the other side have been public employees trying to save the dwindling pensions that were promised to them.

Recent cases have shown that bond investors are clearly losing this battle.

In the bankruptcies of Detroit, Vallejo, Stockton and San Bernardino, bondholders have faced losses of up to 99% of their holdings, according to a Moody’s report dated May 18. Meanwhile all three California cities chose to preserve full pensions for their employees, while Detroit only cut pensions by approximately 18%.

As the following chart shows, bond values have taken haircuts that far exceeded those of pension benefits:

Part of the reason bondholders have been taking it on the chin is the process of so-called “Chapter 9 bankruptcies.” A Chapter 9 is the type of bankruptcy in the Federal bankruptcy code regulating the bankruptcy of cities and other municipal governments.
The way Chapter 9 works, a city has to present an outline of its assets and liabilities to a bankruptcy court and propose a plan, known as a “plan of debt adjustment,” essentially saying how much it will pay each creditor, such as bondholders, pensioners and employees.

But unlike other bankruptcies, where creditors can also put forward plans — including the proposal to liquidate assets — in a Chapter 9 bankruptcy, the city council is in control of the process and the judge can only determine whether the plan is “fair and equitable,” explains Ty Schoback, a municipal bond analyst at Columbia Threadneedle Investments.

This practically means that once the bankruptcy begins, creditors find themselves “at the mercy of the city’s proposed treatment,” Schoback added.

Pension supremacy . . .

In many states, public pensions are protected by state constitutions or statutory law, and as a result are afforded many privileges . . . . 

In legal circles, this has come to be known as “pension supremacy” and it is a real headache for bond investors.

In Chicago, the state’s constitution dictates that pension benefits for current workers “shall not be diminished or impaired.” New York carries a similar clause, while Hawaii, Louisiana, and Michigan have constitutional provisions that have been interpreted as protecting all pension benefits earned to date. . . .

Most states have some legal type of pension protection, including the so-called “promissory estoppel” which is the protection of a promise even where there is no contract. . . .

Pensions are underfunded all over the nation

Combine the legal supremacy of pensions with low funding levels all over the nation and you may have a recipe for a national crisis.

A report by the Center for Retirement Research that came out last week and surveyed 150 state and local pension plans showed that their average ratio of assets to liabilities was 74%. In other words, for every dollar those funds owe their pensioners, they only have 74 cents in assets....
Center for Retirement Research
If 74% sounds bad, consider this: Chicago’s six pension plans are 40% funded, New Jersey’s are at 51.5%, while Puerto Rico’s, which was facing its own crisis moment Monday, is woefully underfunded at 3%.

Because their pensions are underfunded, cities are forced to spend more of their payroll on pension contributions:
Center for Retirement Research
The increase in required pension contributions over the past several years began just as the recession eroded state and local government revenues.
Pension obligation bonds

Many cities have turned to a special type of risky bonds called pension obligation bonds or POBs to fund their pensions without taking unpopular measures like raising taxes.

But these bonds only provide “short-term budget relief, a strategy to kick the can down the road and pass difficult choices on to future decision makers,” . . .

Over the last 30 years state and local government issued pension obligation bonds to shore up the unfunded portion of their pension liabilities without raising taxes.

In simple terms, POBs allow a city or state to borrow money to make its pension payments and issue bonds that will be repaid by future city revenues.

But here’s the problem:

“When you buy POBs, you’re exposing yourself to the pension fund and essentially lending money to leverage its portfolio,” said Kenneth Potts, a principal at Samson Capital Advisors who specializes in muni bonds.

In other words, there is neither a real asset backing these bonds, nor a specific revenue stream to guarantee repayment.

As the Moody’s report points out, “in essence, pension obligation bond is a misnomer because the bonds are simply a vehicle to fund pensions.”

So when push comes to shove and there are not enough funds to go around, a bankrupt city can choose to give the little money it has to its pension funds but not to its pension obligation bondholders.

The latest fiasco of this type happened this May, when the city of San Bernardino, Calif., offered to pay only 1% to its POB investors, while committing to pay 100% of its pension liability."

Summing Up

Public sector pension underfunding is both a national tragedy and a shameful scam on taxpayers.

The deal is often struck in public sector labor negotiations to pay higher salaries immediately rather than allocate a portion of the budgeted money to necessary and proper pension funding.

Public sector unions like this approach as it results in both higher salaries for those members currently working as well as greater pension benefits for those same members at retirement.  

The greater retirement benefits paid to retirees are due to the higher salaries received during their working years --- which is due to the lower pension funding.

And future taxpayers will eventually get the bill for the underfunded pensions.

Current taxpayers probably won't even know what happened, but even if they do know, they probably won't care since their taxes aren't being raised in the here and now.

It's a shameful scam and frequently a 'constitutional' thing which is done by various cities and states in agreement with the public sector unions.

But someday soon there won't be money to pay for all this stuff, and then all hell will break loose.

It's only a question of when 'soon' will arrive.

For Greece and Puerto Rico, 'soon' is now.

That's my take.

Thanks. Bob.

Investing Advice for Volatile (As Opposed to Risky) Markets ... Watch but Don't Panic and Sell ... Consider Buying Instead

Greece issues combined with slow growth in China and even some news from Puerto Rico caused nervous market traders to sell, sell, sell yesterday. It was indeed a lousy market as the Dow ended the day ~350 points lower than where it began.

The traders sold, but the investors stood pat. That's what long term investors do. They react to news about the companies in which they invest for the long haul but not to short term noise in the various markets and nations around the world.

As for me, I did a little buying near the close of trading yesterday. As Buffett says, it's best to be 'greedy' when everybody else is fearful -- and vice versa. Yesterday was a 'fearful' day.

Why Bogle and Buffett tell investors to ignore market noise has solid advice for individual savers and investors:

"If a tree falls in the forest and nobody hears it, does it make a sound? You might say, "Of course it does" — and you'd be right. But what if five trees fall at once? Fifty? . . .

As John Bogle, the founder of Vanguard Group, recently said in an interview, it's the noise of those falling trees that's the real problem.

That's because people see rising and falling prices — the normal, unceasing action of the stock market trying to price thousands of assets in real time — and they feel a need to react, to do something.


The fact is they should do nothing at all. Volatility is normal and should be utterly ignored. "Don't pay a lot of attention to the volatility in the market place," Bogle said. "All these noises and jumping up and down along the way are really just emotions that confuse you."

The question isn't "Will my investments go up or down?" — because of course they will. The question one should ask is, "Will the fact that investments go up and down bother me enough to do something dumb?"

You should know the answer to this question about yourself. Part of what a good investment adviser does for his or her client is to listen, to really hear the hopes and dreams and expectations of that individual.

It isn't data, it's emotions. People want certainty and security, but they understand that risk is part of the retirement investing equation.

The goal, then, is to find a balance that produces a steady, compounding return while minimizing the impact of a poorly timed emotional reaction.

None other than Warren Buffett addressed the issue of risk and volatility in a recent letter to his investors. The incorrect lesson often preached that volatility is a proxy for risk, “is dead wrong: Volatility is far from synonymous with risk," Buffett said, adding that equating the two terms leads the everyday investor astray.

For most investors, "risk" and "volatility" seem to go hand-in-hand. Experienced retirement advisers, however, understand that these aren't synonymous. Rather, they are two sides of a coin, related but never touching.

True risk

Risk is the negative side of the coin. It suggests the chance of loss. We don't like risk but we understand that it is part of life. If risks were completely unacceptable, we couldn't leave the house, cross a street or drive a car.

Naturally, we seek to reduce risk where possible (seat belts and air bags) and we insure ourselves against financial losses some risks could impose. In a portfolio, diversification and rebalancing play these roles by broadening our holdings and enforcing best practices.

Volatility, the confusing noises Bogle points out, is in fact a good thing for our portfolio. If you are a serious long-term investor with many years to go before retirement, a decline in stock prices is a chance to buy more, more cheaply. Buy stocks when they fall in price and go on sale, as Buffett has long advocated.

If you are closer to retirement, your risk-adjusted portfolio is going to be less volatile by design. Risk reduction from your own emotions can be achieved.

The true risk lies is betting on specific investments in hopes of beating the overall market. That's how you set yourself up for the "falling-tree trap" and, eventually, expose yourself to emotions that cannot help but put your retirement in real danger."

Summing Up

Today should be a better day for the market than yesterday.

And ten years from now, yesterday will be forgotten.

By then the market, including dividends, will likely have doubled from its current levels.

At least that's what usually happens over a ten year period.

So that's my take.

Thanks. Bob.

Monday, June 29, 2015

Puerto Rico Follows Greece in the 'Can't Pay What We Owe' Club

Greece can't service its debts.

Neither can Puerto Rico.

Who's next? And what about the future of the Euro currency and countries such as Spain, Italy and Portugal, as examples?

Time will tell, but one thing's for certain. This story will neither end quickly nor happily. And there will be no winners --- anywhere.

Puerto Rico's Governor Says Island's Debts Are 'Not Payable' and thereby joins today's developing Greek drama of deadbeat governments:

"Puerto Rico’s governor, saying he needs to pull the island out of a “death spiral,” has concluded that the commonwealth cannot pay its roughly $72 billion in debts, an admission that will probably have wide-reaching financial repercussions.

The governor, Alejandro García Padilla, . . . said . . . that they would probably seek significant concessions from as many as all of the island’s creditors, which could include deferring some debt payments for as long as five years or extending the timetable for repayment.

“The debt is not payable,” Mr. García Padilla said. “There is no other option. I would love to have an easier option. This is not politics, this is math.”

It is a startling admission from the governor of an island of 3.6 million people, which has piled on more municipal bond debt per capita than any American state.
A broad restructuring by Puerto Rico sets the stage for an unprecedented test of the United States municipal bond market, which cities and states rely on to pay for their most basic needs, like road construction and public hospitals.

That market has already been shaken by municipal bankruptcies in Detroit; Stockton, Calif.; and elsewhere, which undercut assumptions that local governments in the United States would always pay back their debt.

Puerto Rico’s bonds have a face value roughly eight times that of Detroit’s bonds. Its call for debt relief on such a vast scale could raise borrowing costs for other local governments as investors become more wary of lending.

Perhaps more important, much of Puerto Rico’s debt is widely held by individual investors on the United States mainland, in mutual funds or other investment accounts, and they may not be aware of it.

Puerto Rico, as a commonwealth, does not have the option of bankruptcy. A default on its debts would most likely leave the island, its creditors and its residents in a legal and financial limbo that, like the debt crisis in Greece, could take years to sort out.
Still, Mr. García Padilla said that his government could not continue to borrow money to address budget deficits while asking its residents, already struggling with high rates of poverty and crime, to shoulder most of the burden through tax increases and pension cuts.

He said creditors must now “share the sacrifices” that he has imposed on the island’s residents.

“If they don’t come to the table, it will be bad for them,” said Mr. García Padilla, who plans to speak about the fiscal crisis in a televised address to Puerto Rico residents on Monday evening. “What will happen is that our economy will get into a worse situation and we’ll have less money to pay them. They will be shooting themselves in the foot.”. . .

The central government must set aside about $93 million each month to pay its general obligation bonds — a crucial action in Puerto Rico because its constitution requires such bonds to be paid before any other expense. No American state has restructured its general obligation debt in living memory.

The government’s Public Finance Corporation, which has issued bonds to finance budget deficits in the past, owes $94 million on July 15. The Government Development Bank — the commonwealth’s fiscal agent — must repay $140 million of bond principal by Aug. 1.

“My administration is doing everything not to default,” Mr. García Padilla said. “But we have to make the economy grow,” he added. “If not, we will be in a death spiral.”

A proposed debt exchange, where creditors would replace their current debt with new bonds with terms more favorable to Puerto Rico, signals a significant shift for Mr. García Padilla, a member of the Popular Democratic Party, who was elected in 2012. His party is aligned with the Democrats on the mainland and favors maintaining the island’s legal status as a commonwealth.

He said that when he took office, he tried to balance the fiscal situation through austerity measures and fresh borrowing. But he saw that the island was caught in a vicious circle where it borrowed to balance the budget, raised the debt and had an even bigger budget deficit the next year.

Residents began leaving for the mainland in droves, and Puerto Rico’s credit was downgraded to junk, making borrowing extremely expensive. . . .

Some officials and advisers say Congress needs to go further and permit Puerto Rico’s central government to file for bankruptcy — or risk chaos."

Summing Up

As is the case with Greece, the 'can kicking' game which has long been played in Puerto Rico is nearing its end.

So too elsewhere.

Stay tuned.

Thanks. Bob.

Sunday, June 28, 2015

How and Why Democracies Can Fail to Function Effectively --- Lessons from Greece Concerning Government, Citizens, Economic Growth and Debt Management

Greece is the birthplace of democracy. So far, so good.

In democracies voters rule and elected politicians follow the will of the majority of voters. Sometimes that's bad.

Because sometimes following the will of the majority results in unsustainable debt burdens. As voters we like to receive goodies from government, but we don't like to pay for them. And we frequently choose not to see that when someone receives, someone else must pay.

Thus, politicians win votes by giving people what they want --- until they no longer can. That's the situation in Greece today.

Democracies can fail when their debt burdens become unmanageable and economic growth and taxes are insufficient to keep the democracy financially afloat.

Of course, over time the majority of citizens determine what happens through their behaviors and votes, but when the takers outnumber the payers, politicians invariably side with the takers. That's where the votes are, and the majority rules.

And when it gets bad enough, those citizens and companies who still have financial resources stop investing and perhaps choose to take their money and go elsewhere. Then economic growth disappears as a result of this lack of confidence and private sector investment. At this point there's no way to service the outstanding debt, let alone borrow more money. Along with the investors, the 'investing' creditors stop playing the game as well.

{NOTE: Of course, Greece isn't alone. Similar situations are beginning to play out in various cities and states in the U.S. today --- such as the cities of Chicago, Detroit and Fresno, as well as the states of Illinois, Michigan, California and elsewhere. It's also happening with our debt ridden overpromising central government with Social Security, Medicare and ObamaCare, but that's another story for another day. So let's stick with the lessons being taught by Greece herein.}

Financially, Greece has been an unmitigated economic disaster for many years. See European Central Bank Limits Aid to Greek Banks Amid Crisis.

Unemployment in Greece is ~25%, the country is bankrupt and economic growth is virtually absent. Approximately 50% of its workers are employed by the unproductive and corrupt government. It's now very much on life support from its fellow European nations. But those countries aren't exactly thriving either as France, Italy, Spain, Portugal and others make clear.

Government has been accurately described as that great fiction by which everybody attempts to live off everybody else. And governments around the world have promised their citizens benefits for which not enough money has been set aside to pay for them.

In the U.S. we call these set asides entitlements, and that's a pretty good description of what their intention is with respect to the recipients. But what about the future payers? To what are they entitled --- such as future generations of Americans?

That doesn't appear to be part of the entitlement equation or society's collective conscience, either in Greece, here or in much of the rest of the world. The parasitic politicians certainly don't worry about that 'future stuff.' They just make promises for future generations to pay --- not today's unwilling and voting taxpayers and certainly not the immediate recipients of the 'entitlements.'

Now we'll briefly look at the world as it is and not as we'd like it to be.

New Indexes Attempt to Predict Countries' Readiness for Change provides an overview of the state of the world today. While the U.S. is definitely not yet anywhere close to becoming another Greece, neither are we displaying the ability to 'skate to where the puck will be:'

"Hockey star Wayne Gretzky once said, “I skate to where the puck is going to be, not where it has been.” That is great advice for hockey players and economy-watchers alike. Yet most economic data are backward-looking. Numbers on gross domestic product and employment point to where the economic puck has been, not where it’s headed.

Analysts at KPMG International have developed annual country indexes that try to look ahead. The Change Readiness Indexes are designed to focus how well each nation is positioned to adjust to coming change, whether it is a sudden event like a tsunami or a slow-moving structural shift like an aging population.

“We built these [indexes] to be forward-looking,” said Timothy Stiles, global chair for KPMG’s International Development Assistance Services and a co-author of the report. ”We looked at the way people have to behave to make change happen” without big disruptions to the economy or society. . . .

The first is enterprise capability, which covers how the business sector and labor markets are set up for change.  Next is government capability, which includes the rule of law, regulations, fiscal planning and the relationship between the business and government sectors. Last is the people and society capability. This segment covers how engaged people are in their nation’s culture and society. People need to feel they have a stake in their society and economy, said Trevor Davies, executive director for KPMG’s IDAS Center of Excellence and another author of the report. . . .

Top 10 Nations Best Prepared to Handle Change
  1. Singapore
  2. Switzerland
  3. Hong Kong
  4. Norway
  5. United Arab Emirates
  6. New Zealand
  7. Qatar
  8. Denmark
  9. Sweden
  10. Finland
Source: KPMG International

Mr. Stiles said, “Wealthy nations are not necessarily the best able to cope with change.”. . .

What of the U.S.? It ranks No. 20 on the list of 127 nations. While the world’s biggest economy ranks high in enterprise and society inputs, it lags in the government component.

“The demographic challenges hurt the U.S.” Mr. Stiles said. “The U.S. lacks planning for the aging of its population.”

Although the coming pension burden from retiring baby boomers has been known for decades, politicians have done little to cover the liabilities ahead. In fiscal matters it seems, the U.S. is not skating to where the puck will be."

Summing Up

The world is awash in debt.

America is aging rapidly.

In much of the world, including the U.S., individuals are financially unable to take care of themselves as they enter retirement. Instead of saving for a rainy day --- they often have borrowed excessively to enjoy today.

And in similar fashion, the government sector has continued to spend money that it doesn't have. For example, 'free' schools (K-12 and college) are now too expensive, and the same thing has happened with health care and Social Security as well.

Pension and health care promises have been made to citizens by various governments throughout America, including the federal government, but not enough money has been set aside to pay for them.

Does all this sound to you a little or a lot like another Greece may be in the making? Me too.

That's my take.

Thanks. Bob.

Saturday, June 27, 2015

Financial Ignorance is Expensive and Definitely is NOT Bliss ... It's Not Even Close to Bliss ... $1 Million is More than Zero

It's not what we don't know that gets us into the most trouble financially. Instead it's what we don't even know that we don't know.

So in the interest of knowing, let's take a simple example involving two young and intelligent people who are beginning adulthood after having successfully completed their formal educations (which in all likelihood didn't include basic financial principles leading to much needed knowledge) and landing that coveted first job.

Both are smart people (aren't we all?) but only one has acquired a simple understanding of the rewards that will come from the benefits of early saving and investing over a lifetime.

Thus, we have two smart and well educated young adults. However, for illustrative purposes one is intelligent but financially ignorant and the other is intelligent and at least somewhat knowledgeable about basic personal financial matters. We'll call them FI and FK.

Both are 22 years old and entering adulthood with $16,667 resulting from savings, gifts or otherwise. As adults they are each free to do as they please with their newly acquired wealth.

Perhaps FI chooses to make a down payment on a new car, take an extended vacation, or just simply have a enjoyable time while promptly spending his 'windfall.'

FK, on the other hand, chooses to wisely invest his 'pot of gold' for the long haul in a diversified basket of blue chip dividend paying stocks.

Upon retirement 48 years later, they are each 70 years old. The result financially --- FI ends up with zero and FK has ~$1 million. But that's not the end of the story. Because even if FI had decided at age 22 to invest his pot of gold instead of buying that car and seeing the world, he's still likely to have seen his money grow only to ~$70,000 upon retirement. That $70,000 ending balance for FI stands in stark contrast to the $1 million now belonging to FK.  But how can this be, you ask?

Well, Vanguard Founder John Bogle explains hereinbelow why that's the case. {For the sake of simplicity, we've assumed that stocks will earn 9% annually over a long period of time, which is both logical and historically accurate -- in fact somewhat conservative.}

A Bogle insight that triples retirement returns highlights the dramatic difference between those ignorant about the benefits of investing early and for the long haul and those who both know and apply the basics:

"For millions of people, it's the real-world difference between retiring on time or working years longer than they had expected.

J.P. Morgan recently published data that shows a diversified portfolio over two decades returning a solid 8% annually to the investor. Yet the typical small investor in that same time frame actually experienced a dismal 2.5% return.

That's more than triple the difference! So what's going on here?

First off, small investors overpay dramatically for the advice they get. Then, unfortunately, they take that flawed advice and concentrate their investments into a narrow set of "bets" that fail to deliver — over and over. Things end very badly once you pile up two full decades of below-inflation returns. . . .

Vanguard Founder John Bogle's essential insight was that people didn't need or really want "outperformance" that increasingly few financial advisers could deliver. What they need are results. . . .

The two biggest drains on the long-term performance of a retirement portfolio are heavy stockbroker commissions and fees and losses from emotional trades that can result when an investment goes a direction we don't expect.

Low-cost portfolio investing, instead, is about finding the golden mean that results in a predictable, repeatable return. It also happens to produce a much higher sustainable return....

(The) Bogle . . . key insight (is) that (investment success) comes in two flavors: absolute and relative.

People focus a lot on absolute predictability. . . .

Relative predictability is a different beast. What it means . . . is that an investment behaves as expected relative to the wide variety of alternatives you might have chosen.

Cash is an investment. Stocks are an investment. Bonds, commodities, real estate, all investments. The really big risk question is, does your particular method of investing in these categories behave as expected? Is it relatively predictable?

There is a fine difference here, one a lot of retail investors miss. I'll give you an example: If you buy 10 stocks you have selected after much thought, there is a chance that your small slice of the equities market will outperform the entire stock market index, say, the Standard & Poor’s 500 Index....

There is also a chance that you will underperform the index. How far above or below your expectations is a matter of events and personalities and economic factors far, far beyond your ability to observe, much less control.

But, you're optimistic. Maybe it will work out great. Now, compare that to just owning the index and holding it over the years.

The events and personalities and outside factors begin to cancel each other out. After fees (and this is important), you are left with the performance of the entire class of investments. Now we're onto something that's relatively predictable.

That kind of predictability is found in portfolio-driven index investing. Speculating is a fine pastime if you have the money to blow, but most people want and need more security in their retirement planning.

It's perfectly understandable, yet seeking security and predictability also is the superior investment approach by far."

Summing Up

Over a long period of time, a basket of diversified dividend paying blue chip stocks has consistently earned an average annual return in excess of ~9%.

As Mr. Bogle points out, however, individuals who pay high commissions and fees while trading emotionally are likely to fall far short of that average annualized rate of return. They are also likely to invest in what they erroneously perceive to be 'safe' cash and bonds. They confuse risk with volatility. Accordingly, for the long haul their account will probably be lucky to generate average annual returns approximating 3%.

On the other hand, FK at age 22 is wise beyond his years. He understands that the compounding 'rule of 72' means that the initial $16,667 investment will double each time the product of the annual rate of return and the number of years invested is equal to 72. That's six doubles in 48 years at an annual rate of return of 9% (a doubling each 8 years) -- and that ends up being more than $1 million at retirement.

Our young and equally intelligent friend FI either doesn't know about the rule of 72 or chooses to ignore it at the tender young age of 22. That means he will have accumulated zilch or near zilch at age 70.

It's that simple. It really is. Choosing knowledge over ignorance is always the smart thing to do.

That's my take.

Thanks. Bob.

Friday, June 26, 2015

A Lifetime as an American 'Privileged Character' ... Income Inequality and Debt ... Private vs. Public Sector 'Goodness' ... Consumption vs. Saving

As an American, I've enjoyed a privileged life filled with countless opportunities.

The privilege has consisted of being able to make my own way --- to be free to choose my own path and be free to determine the speed at which I travel down life's road. Allow me to expand on this true but often ignored simple fact of American life.

Income inequality is much discussed these days. So is whether the statement that 'All lives matter' is less accurate than 'Black lives matter.' And we also hear a great deal about the greedy private sector compared to the self proclaimed 'dedicated and patriotic servant leaders' of our nation's public sector.

In my view, income inequality is an inevitable and positive feature of living in a free society. To make the point, I'll relate a personal example of that 'unique American advantage of inequality.' The 'unique American advantage' stems from our living in a free society which promises and makes available abundant opportunities to one and all (as in all lives matter).

When I was a young boy, another boy lived briefly in our small Midwestern town one summer. He had the advantages of a refrigerator filled with Cokes, a full length pool table, and a basement in which he could entertain his often envious guests.

In comparison, at my house we drank Kool-Aid, had no pool table and our modest home was smaller than his basement.

But I was indeed raised as a child of privilege. My parents taught my brother and me by example that (except for the house and car) if we couldn't pay in full for something we wanted, we really didn't need it. It could wait. They also encouraged us to get a good education, save money and work hard. That we did. We were then and are now 'privileged characters.'

Here's the point --- with respect to the then much envied boy with the refrigerator full of Cokes, the beautiful pool table and big basement, he left town at summer's end and I can't even remember his name. But like me, he was a child of privilege too.

Americans indeed are 'privileged characters,' one and all. And all lives matter, despite what some 'leaders' want us to believe these days.

Hillary Clinton (of whom I'm no fan) was unfairly attacked the other day for saying that all lives matter. But she was right about that. And since all lives do matter, then the subsets of black lives, white lives, Hispanic lives, Asian lives, Gay lives, young lives, old lives and all other lives matter as well. What Hillary says frequently doesn't make sense to me, but it did this time. All means all. Got it?

Hillary undoubtedly grew up in a house of privileged characters, as do all Americans. In wealthy Winnetka, Illinois, my guess is that the Rodham family could afford Cokes, pool tables and nicely furnished basements.

But one thing that Hillary Clinton, Jeb Bush, and Barack Obama don't have are personal experiences in the private sector. They are all born and bred politicians who have lived off the hard work of the American taxpayers, many of whom they often choose to vilify. But as Americans, that's OK with me. That's their right.

In my family, Dad worked in the private sector as an hourly employee and charter member of the union's bargaining unit. He also worked occasionally as a bartender, played drums in a band, umpired and refereed sporting events, and volunteered as a coach of both youth and adult sports teams. Through his example, he taught me a great deal about a life well lived.

During college summer breaks, I was lucky enough to get a job at the distillery where Dad worked. As an adult, my career began as a member of management representing the company in labor negotiations. In fact, I worked my entire career in the private sector and became what Hillary calls a 'greedy fat cat.' Maybe she should take the time to look in the mirror.

Hillary and others of the 'privileged' political class claim that people like me are out of touch and condescending toward those less privileged economically. Of course, she doesn't know that. How could she? But that's part of her perceived 'job' as a Democratic politician. I get that, even though I think it's despicable. But I what I really don't get is why so many of our fellow Americans believe what she says about the evils of competition and the private sector.

Contrary to what Hillary says, I was taught that all Americans are privileged, and that the private sector is the source of our nation's prosperity and our citizens' world leading economic well being.

Now let's switch gears and look briefly at another glaring difference between us old fashioned types and today's big spending politicians as well as too many debt ridden American households.

When a reduction in consumption is a good thing has this to say:

"Articles (like) “U.S. Consumers Remain Cautious,” point out that consumption is two-thirds of our economy. Hence it's good to encourage spending. This is very short-range thinking. When people aren't consuming, they are saving. You can't simultaneously spend and save the same dollar.

National savings are a disgrace. The median savings for 55 years and older is only $33,000, according to the U.S. Government Accountability Office. After World War II, people saved about 10% of their after-tax income. Savings rates are now only 5%. Most of that 5% is from higher income people. We have to cut spending, hence consumption, by at least 5% as does the government or future generations will be unable to pay interest on the government debt, much less the principal. . . .

When I was young, our family had no credit cards and we were encouraged to save 10% of our income. Then, a very large percentage of people also benefited from their employer's defined benefit programs, i.e., pensions. Now, a better savings target is more like 15% due to the reduction of firms offering pensions. Instead of pensions, employers now offer defined contribution plans like a 401(k)— which only about half of the employees use. . . .

Our political system has fallen into the spend-it-while-you-got-it routine. Perhaps, it's even worse and should be stated as promise-it-now-because-we-can-borrow-more. All of this leaves future generations with a terrible burden just to pay the interest without hope of paying the principal. Our national debt is about $18 trillion, but we have over $200 trillion in unfunded promises. . . .

But there is no law that says that people have to be prepared to retire. Retirement planning is a do-it-yourself enterprise. People must look ahead at what retirement income they may need and how it will be offset with Social Security, pensions and withdrawals from savings that must stretch for decades.

So both individuals and politicians have to be thinking more about the long-term. Politicians have to bring their promises in line with future government income at the expense of fewer votes. As individuals we have to learn to be self-sufficient by compromising our consumption with some savings for the future.

Right now, both individuals and the government are way out of whack and are unwilling to make some short-term sacrifices so their future will be better."

Summing Up

When we were young, we often heard the following, "Who do you think you are --- a privileged character?"

Now I know the answer.

Indeed I was then a privileged character, I am now a privileged character, and as an American, I always will be a privileged character.

And it's always in the best interests of each privileged American character not to become an overly indebted one.

That's my take.

Thanks. Bob.

Thursday, June 25, 2015

Spending Other People's Money, aka OPM ...The Taxing of Future Generations for Government Mandated 'Entitlement' Promises Has Become a 'Great' American Political Tradition ... To Future Generations, These Entitlements Represent Frauds, Ponzi Schemes, Scams, or Can Kicking

Perhaps the greatest fraud perpetrated by politicians on Americans is allowing us to believe that while working we are paying fully for the benefits we ultimately receive from the government in the form of Social Security and Medicare.

{For a timely and current analysis of this freebie tendency enjoyed throughout America as a result of legislation, please see ObamaCare Beyond the Handouts. It's subtitled 'We've already proved we can subsidize health care. But which subsidies make sense?'}

The fact is that we pay only for a portion of the benefits to which government programs 'entitle' us. The 'pay-go- approach and 'can kicking' methodology in fact passes the vast majority of those costs on to future generations. It's called 'pay-go' but the total 'pay' doesn't happen until after the worker-beneficiary has 'gone' from the workforce.

The Medicare example is instructive, but it's not unlike Social Security, public sector pensions and many other underfunded entitlement programs sponsored by government officials. It may not be a fraud or a Ponzi scheme, and it may not be a scam, but it certainly is both unfair to, and unsustainable by. future generations of working Americans as our society ages.

Our Entitlement Problem for the Next Generation, in One CBO Chart tells the story succinctly and revealingly:

The Congressional Budget Office’s 2015 Long-Term Budget Outlook analyzes the mean lifetime Medicare payroll taxes and benefits relative to lifetime earnings, by decade of birth.
Congressional Budget Office
"The Congressional Budget Office released its annual update last week regarding the long-term budget outlook. In that document, one chart in particular demonstrated the financial difficulties caused by an entitlement system that has promised Americans more in benefits than it can deliver.

Figure 2-5, on Page 47 of the CBO report, analyzes the average lifetime Medicare benefits and taxes for cohorts of the population based on their decades of birth. Individuals born in the 1940s will receive, on average, Medicare benefits equal to about 7% of their lifetime earnings. Those born in the 1960s will receive lifetime Medicare benefits equal to about 11% of their average lifetime earnings, and those born in the 1950s get benefits equal to about 9% of their earnings. In all three cases, the lifetime benefits received from Medicare will vastly exceed the lifetime taxes paid in. Most cohorts, CBO said, will pay about 2% of taxes relative to their lifetime earnings.

These findings echo reports by Eugene Steuerle and colleagues at the Urban Institute analyzing Social Security and Medicare benefits over a lifetime. Their most recent series of estimates, released in November 2013, found that a two-earner couple in which both make average wages and turn 65 in 2015 will receive more than three times as much in lifetime Medicare benefits ($427,000) as they paid over their career in Medicare taxes ($141,000)."

Summing Up

Facts are facts.

Politicians enact legislation which provides current voters future benefits and purportedly pays for them by the taxation of current workers.

But if the tax is insufficient to fund the promised benefits, which invariably is the case, future taxpayers necessarily get the bill.

Spending other people's money (OPM) is a well established American political tradition and practice. It's a vote getter, pure and simple.

The OPM that relates to entitlements spending, however, is going to be an unaffordable burden for future Americans, our kids  and grandkids.

And as more workers leave the workforce and exceed the  number of youngsters entering the workforce in future years, the 'problem' will become a genuine national crisis.

Do you think this will receive serious discussion in the upcoming 2016 presidential campaign?  Neither do I.

That's my take.

Thanks. Bob.

Wednesday, June 24, 2015

The Lingering Housing Crisis ... How Easy Credit, Education, A Lack of Financial Knowledge and Government Policies Have Harmed Poor and Middle Class Americans

The U.S. and world have experienced a financial collapse of our own making.

As individuals we've accumulated too much debt driven by too easy credit resulting from too little knowledge about personal financial decisions.

And let's not leave out the huge role played by government. Wrongheaded government policies which were aimed to help achieve greater home ownership by poor and middle class Americans have created a catastrophe whose lingering effects are still reverberating throughout our nation and much of the rest of the world today. It's an ugly picture, and it's not a problem that will disappear anytime soon.

So today we'll take a brief look at the lingering troubles with 'underwater' housing in Lithonia, Georgia and then Ewing, New Jersey.

Why The U.S. Housing Recovery Is Leaving Poorer Neighborhoods Behind is subtitled 'Home prices in wealthier areas are rising, but many poor communities are stuck with a housing crisis that drags on:'

"The housing rebound may have lifted home prices across much of the nation. But cities like Lithonia, Ga., are still waiting for the bounce.

Along with other communities in the Atlanta area, the small working-class suburb saw prices run up during the housing boom a decade ago, followed by an epic bust. While nearby wealthier areas are now rising, or even fully recovered, poorer towns such as Lithonia are stuck with a housing crisis that drags on.

Roughly 10,000 homeowners in Lithonia—or 54% of all families with a mortgage—owe more than their homes are worth, according to the online real-estate tracker Zillow. That is a stark difference from wealthy Atlanta neighborhoods like Buckhead, where about 12% of homes are underwater. House values in Lithonia at the end of the first quarter were still almost 35% off their peak, while in Buckhead they were off by only 12%.

Signs of a disproportionate housing recovery appear across the U.S. Nationwide, about 15% of homes worth less than $200,000 were underwater as of the end of March, according to CoreLogic, a real-estate information firm. Meanwhile, just 6% of homes worth more than $200,000 were underwater during the same period.

To be sure, homes across the price spectrum are still below their boom-time peaks. Between January 2006 and May of 2015, the median value of homes in the bottom third of the market has dropped 13% to $101,900, according to Zillow. The median in the middle third is down 6% to $172,600, while in the top third it is off 4.5% to $325,800.

And yet many middle-class and high-income communities are now seeing home values that are close to those before the crash. Robust activity in some markets has spurred the return of bidding wars for hot properties.

Lithonia illustrates the growing divide in the recovery in the U.S., where large swaths of the housing market—from Trenton, New Jersey to Memphis, Tenn.— remain bleak.

Places like Lithonia “were hit with foreclosure first, the longest and the hardest,” says John O’Callaghan, chief executive of Atlanta Neighborhood Development Partnership Inc., a nonprofit that buys and rehabilitates foreclosed homes. Residents there “don’t have good access to mortgage credit,” he says. “They don’t have wage growth. Everything is going wrong.”

Today in Lithonia, boarded-up homes with overgrown yards dot the streets surrounding Shirley Jones, who bought her early-1900s home in 1996 for about $80,000. Ms. Jones cashed out some of her home’s equity to do repairs in 2005, when her lender said her house was worth $325,000. Now, she owes about $172,000.

Needing to make more repairs, Ms. Jones a few years ago asked a real-estate agent to assess what the home might be worth. The agent, who is also her friend, said the home wouldn’t sell for more than $50,000. . . .

Economists say lower-income communities have been hit by a confluence of events and factors that have left their communities stuck in a vicious cycle. It starts with falling home values, which trigger foreclosures as homeowners can’t sell their property for a price that would cover the outstanding mortgage debt.

Banks are reluctant to lend to the lower-wealth borrowers with shakier credit histories who would normally buy homes in those neighborhoods. That reduces demand, leading to more foreclosures and a higher supply of vacant and decaying homes—leading to further price drops.

The cycle has been hard to break in large part because low-wage workers have seen little, if any, income growth during the recovery—putting them in weak position to qualify for mortgages. . . .

“Negative equity preys on the less affluent,” says Zillow chief economist Stan Humphries. He said that even underwater homeowners still current on their mortgages suffer, because they often face trouble refinancing to capture a lower interest rate. “It’s a double-whammy for them, because they’re paying higher than they should on their mortgage costs and they owe more than they would if they could re-buy their home now,” he says. . . .

Even in relatively wealthy counties, the lowest-priced communities are suffering. In the town of Ewing, N.J. in Mercer County, the median home value is $176,000 and about 29% of homes are underwater, according to Zillow. In tony Princeton, which is about a 20-minute drive away, the median value is $788,000 and roughly 5% of homes are underwater.

For residents of Ewing, the problems are taking a toll. High-school teacher Adrienne Stanley and her husband moved into a $279,000 Ewing townhouse in 2007, making a 20% down payment, with the idea of starting a family. Soon after buying, prices started to drop but the couple assumed that prices would soon recover as the economy picked up strength.

Now, eight years later, prices still aren’t even close to prerecession levels. Some nearby townhomes recently sold for between $150,000 and $190,000. Ms. Stanley would like to move to Princeton to get stronger schools for her daughter, but her family is stuck.

“I lose sleep every night thinking that my lack of foresight is the reason that she will not get the education I so desperately want for her,” says Ms. Stanley.

But few places have the difficulties of Lithonia."

Summing Up

While we can't rewind the clock and turn back time, we can go forward knowing that a basic understanding of financial matters is an essential ingredient of a life well lived.

Our debt ridden society didn't get that way without the active involvement of We the People.

However, that failure to do our duty financially was in large part attributable to a lack of personal knowledge and understanding related to basic financial decisions involving taking on excessive levels of debt.

The government gurus and 'sellers' (general retailers, credit card companies, admissions' offices of colleges, car dealerships, realtors and builders, stock brokers, banks and other lenders, insurance agencies, and government sponsored entities offering student loans) aren't there to help us lead financially responsible lives. That's very much our self assigned job to do.

It's very much a caveat emptor world, and it's left to each and all of us to be guided accordingly.

And while the necessary knowledge to guide ourselves properly is all too often lacking, filling that knowledge gap is our individual job as well.

The sellers won't do it, the lenders won't do it, and neither will the government. It's absolutely up to us. So let's help each other.

That's my take.

Thanks. Bob.

Tuesday, June 23, 2015

When It Comes to Personal Financial Management, Don't Join the Crowd

Most Americans of all ages are doing a lousy job of planning and preparing for our financial needs in our retirement years.

Pension plans, especially in the private sector, are becoming a rarity and home equity values aren't exactly growing in leaps and bounds either. Pay increases are tough to come by, the economy is slow going, global competition is real, we're heavily indebted, and to top it all off, we're growing much older as a nation.

Yet we're ignoring these realities, saving less, acting financially irresponsibly and becoming less capable of caring for ourselves in old age. For most of us, those are just the cold hard facts.

70 million Americans teetering on edge of financial ruin delivers the sobering news:

"In the past few years, the job market has vastly improved and home prices have rebounded — yet Americans are becoming even more irresponsible when it comes to saving for emergencies.

According to a survey of 1,000 adults released by on Tuesday, nearly one in three (29%) American adults (that’s roughly 70 million) have no emergency savings at all — the highest percentage since Bankrate began doing this survey five years ago. What’s more, only 22% of Americans have at least six months of emergency savings (that’s what advisers recommend) — the lowest level since Bankrate began doing the survey.

These findings mirror others — all of which paint an abysmal picture of Americans’ ability to withstand an emergency. For example, a survey released in March by national nonprofit NeighborWorks America also found that roughly one third (34%) of Americans don’t have emergency savings. . . .

The problem with this lack of savings is that emergencies can and do happen, and when they do, you may be forced into an expensive solution like credit cards or personal loans — and in extreme cases having to declare bankruptcy.

Indeed, half of Americans had experienced an unforeseen expense in the past year, according to a 2014 survey by American Express; of those, 44% had a health care-related unforeseen expense and 46% had one related to their car — both of which tend to be things you can’t avoid paying.

Thus, advisers recommend that most Americans have at least six months worth of income in their emergency fund — and more if they have children or other dependents."

Summing Up 

We desperately need an attitude adjustment in America about the importance of providing for our old age.

To continue to rely unwisely on the Social Security promises of the political class while in essence hoping to pass along the unfunded liability for greater absolute numbers of retirees in relation to fewer future workers simply isn't fair. Nor is it a viable option.

The underfunded Social Security and Medicare/ObamaCare/Medicaid elephants in the
room are looking at all Americans. It's time for We the People to wake up and face the facts.

That's my take.

Thanks. Bob.

High Cost Traditional Brick-and-Mortar Retailing Takes Another Hit --- Small Banks and Online Lenders Join to Get More Customers

Traditional brick-and-mortar retailers remain under heavy attack by Amazon and other online sellers.

It's all happening quickly, and it's absolutely a very big deal. One of the latest businesses to feel the pinch is Gillette. See Razor Sales Move Online, Away From Gillette.

Whether it be book stores like Barnes and Noble, conventional retail stores such as Target, local hometown merchants, stock brokerage offices, insurance agencies, academic institutions or local community banks, online selling is gaining each and every day in winning customers. We'll look briefly at the trends in consumer lending herein.

In business it's all about satisfying customers at a cost which renders a profit to the business.

The key word is customers. Without customers no business can survive. And without covering its costs of staying in business, no business can get and keep investors interested in that business. So without profits, cost control and volume growth, there's no reason to be in business.

There is a developing partnership between Lending Club's online banking business model and small community banks. Branch banking is becoming an obsolete business model, and local community banks are threatened as a result.

Lending Club and Smaller Banks in Unlikely Partnership is subtitled 'More than 200 community banks have signed on to deals with Lending Club despite some inherent risks:'

"For a glimpse of how financial technology is bringing together some unlikely bedfellows, look no further than the partnership between online upstart Lending Club Corp and Rhode Island’s 200-year-old BankNewport.

A traditional community bank with 15 branches around the state, BankNewport turned to Lending Club for help in getting back into unsecured consumer loans, a business it lost to bigger competitors years ago.

The odd couple in February announced a co-branded partnership under which the online lender will send direct mailings to BankNewport customers, and share some revenue from any loans it makes to them.

BankNewport is one of more than 200 community banks that have signed onto a deal with Lending Club on pitching consumer loans. . . .

Whatever hesitation the banks may have about sharing customers, BankNewport feels it has little choice.

“We have to make sure we remain relevant,” Sandra Pattie, BankNewport’s CEO, said in an interview at a cafe overlooking the sailboat-dotted Newport harbor. “We’ve been trying for years, six years or so, to get away from our strong reliance on the residential mortgage market. This seemed like it does that for us.”. . .

The move isn’t without risk: Some observers wonder if the community banks are handing a competitor information on customers and making them more likely to go to an online firm rather than a bank branch for mortgages or other financial needs. . . .

Community banks—those with less than $10 billion in assets—made slightly more than 75% of all consumer loans in 1990 . . . but that amount has plummeted to less than 9% of the market last year, with larger banks seizing that business. . . .

If the partnership works as planned, the customers will get loans through Lending Club’s online process but remain loyal to BankNewport for products such as mortgages or small-business loans. The bank will get a small share of the roughly 4% upfront fee that Lending Club collects, or about 0.5%. That is expected to provide a very modest revenue stream, but to BankNewport, that isn’t the main point.

“We do practically no auto loans, no student loans, no unsecured personal loans. We can’t compete” on price, said Leland Merrill Jr., the bank’s chief lending officer. He said while the bank is on a first-name basis with many of its customers, that doesn’t help it sell loans that aren’t competitively priced. . . .

Mr. Merrill acknowledged that the risk of sharing customers with a competitor is real. The BancAlliance arrangement prevents Lending Club from soliciting the bank’s customers to sell them mortgages or other products, but if they get used to banking from their laptops rather than bank branches, a natural process of attrition could take place, he said.

Lending Club, which is nine years old, first offered its shares to the public in December, at $15; the stock closed Monday at $16.86. It originated $4.38 billion in consumer loans last year, a 112% increase from the previous year, and it added $1.64 billion in the first quarter of this year, a 107% increase from the year earlier. It is gearing up its lending for residential mortgages and small businesses, the company says.

Renaud Laplanche, chief executive officer of LendingClub, said in an interview that the deal is a two-way street: His company gets access to lists of customers considered likely loan candidates outside of the urban areas where it is better known, a valuable benefit. The customers who want loans benefit from Lending Club’s efficient online infrastructure, and usually get lower interest rates."

Summing Up

And so it goes with the creative destruction and ever changing ways of businesses continuously needing to get and keep satisfied customers by offering competitive values. {NOTE: It's so unlike government, but that's another story for another time.}

Brick-and-mortar physical structures add needlessly to additional costs, and added costs lead to higher prices. Smart consumers avoid high prices which don't represent added value to the purchase decision. It's just that simple.

Who's next for local bank hook-ups?

Will it be payday lenders, auto title lenders, credit unions, pawn shops or others?

And doesn't the 4% upfront charge by Lending Club seem too high to you? It does to me.

But then there's the 7%+ real estate commission, the hidden multi-percentage points stock broker commissions on mutual fund purchases and individual stock buys, as well as other high transaction fees paid by unsuspecting buyers for services not rendered on auto loans, credit cards and the like.

Smart buyers deserve better. They will get better too.

That's my take.

Thanks. Bob.

Monday, June 22, 2015

Government Against Itself ... The Illinois Example

The importance and ramifications of collective bargaining, aka unions, in the public sector have replaced that of the private sector in many areas of America. It's a case of government being against itself.

{The new book "Government Against Itself" by Daniel DiSalvo is worthwhile reading for those interested in achieving a better reality about the fiasco.}

The public taxpayer paid employees of schools, fire stations and police departments are often represented by unions. In fact, close to 40% of public employees are now so represented by unions compared to less than 10% in the private sector. {It used to be just the opposite. Accordingly,The situation has completely reversed over the past few decades.}

As you know, private sector companies can go broke and out of business if the costs, prices and values associated with operating those businesses aren't supported by free-to-choose customers. In other words, customers rule in the private marketplace. Government doesn't have a market or free-to-choose customers which it has to satisfy in the public arena.

There are two pieces of government being represented in the uncompetitive unionized government sector --- the employees and the taxpayers. But which government is the one that is in charge? Is it the one that represents and bargains on behalf of the taxpayers or the one that represents the unionized employees?

Sadly, the taxpayers are left unrepresented in most cases and government employees bargain with one another. In other words, government bargains with itself. For a current example, let's look at Illinois today.

Rigging Contract Rules in Illinois is subtitled 'Democrats pass a bill that applies only to the current reform Governor:

"The state reform story of the year is in Illinois, where new Governor Bruce Rauner is trying to fix the broken fisc. To appreciate what he’s up against, consider how the American Federation of State, County and Municipal Employees (Afscme) is rigging contract negotiations.

The union’s contract with the state expires June 30. Democrats in the state legislature have passed a bill stipulating that if Mr. Rauner and the union can’t agree on a new contract after 60 days, the negotiations would go to binding arbitration. In what is the definition of political cynicism, the bill would change the rules for four years only, expiring along with Mr. Rauner’s term. The assumption is that a Democratic successor would give the union whatever it wants.

Unions and employers are expected to bargain in good faith. . . . But according to Afscme Illinois, the elected Governor must be boxed in with the threat of an arbitrator making the final contract decision. The union can’t abide that Mr. Rauner has proposed such shocking ideas as creating a 40-hour work week (overtime currently begins after 37.5 hours), freezing wages and raising health-insurance premiums for state workers.

Since 2000, Illinois public employees have seen their compensation grow handsomely. According to the Illinois Policy Institute, state workers won 27 pay raises in the decade before 2014. Between 2000 and 2013 average public employee compensation (adjusted for inflation) grew 32% to $82,314 from $62,423. Inflation-adjusted private compensation for the same period grew 14% to $65,064 from $57,086.

Afscme knows that binding arbitration can tip the scales in its favor. The arrangement encourages unions to inflate their demands because if arbitration gives them half of their ask, they still come out ahead. The system also forces government to accept terms dictated by arbitrators who aren’t accountable to taxpayers.

New York police and fire unions have used binding arbitration for decades. In 2013 the Empire Center reviewed 136 arbitration awards filed with the New York state Public Employment Relations Board from 2003 through 2012. The center found that only four had included a pay freeze in any given year. Changes in health insurance were rare.

The union bill was pushed by Democratic House Speaker Mike Madigan, whose daughter is gearing up to run for Governor against Mr. Rauner in 2018. Mr. Rauner has 60 days to veto the bill.

Meantime, Illinois voters can see again the Democrat-public union connection that has laid their state low."

Summing Up

The taxpayers are taking it on the chin again in Illinois.

And the new Governor is being sidelined by his political opponents in the state legislature.

Arbitration sounds good, but the reality is that taxpayers didn't elect the arbitrators. They elected a Governor to change things and give Illinois a future.

Unfortunately, they also elected a set of politicians who depend on union support for their jobs and political future. 

The unions are winning. The taxpayers are losing.

That's my take.

Thanks. Bob.

Sunday, June 21, 2015

KISS Type Budgets are for Everyone

Budgets are necessary tools for responsible personal financial management. Employing the KISS (Keep it simple, Stupid!) method of personal budgeting is both highly useful and absolutely appropriate.

That's because unlike government, We the People as individuals don't have the power to tax nor do we have the power to print money --- at least not real money.

And contrary to government officials, we certainly don't have unlimited borrowing ability. In fact, it's the inattention to routine and habitual borrowing that often ends up putting us over the edge. By then it's too late, and we've become unable to service the debt obligations we've undertaken one at a time and over a lengthy period of time.

Here's the key --- how much of our income is required to service our debt obligations (both principal and interest) in relation to after tax income --- that's the crux of the matter. And if we accumulate high and unaffordable credit card balances in addition to the other debt obligations we've acquired along the way, our ability to tap into unused credit capability becomes tapped out. As a result, our ability to borrow is gone --- just when it's needed most.

Accordingly, we should take the utmost care to make sure that any credit card balances are paid in full each month. Setting aside the high and unconscionable interest rates related to outstanding credit card balances, large outstanding balances also mean that we're perhaps only one unforeseen large bill away from financial catastrophe. Such things as medical bills, home or car repairs, and other similar 'recurring non-recurring' expense items can then become the catastrophic game changer

You're Never too Rich for a Budget contains worthwhile personal financial advice for one and all:

"You may be earning $1 million a year, but if you’re also spending $1 million a year you’re still broke. Establishing and maintaining a household budget to ensure that spending remains under control and money is being set aside for savings is critical to accumulating wealth. Astonishingly, according to a 2013 Gallup poll, only 32% of Americans maintain a budget.

Below are some basic guidelines to creating and sticking to a budget. 

Getting Started: When sitting down to write a budget, keep it simple. Try to only list a handful of spending categories. Things like rent or mortgage, utilities, savings, food and commuting expenses. Anything left over falls into the “other” category, which you can spend as you please. Focusing on only a handful of categories isn’t as onerous as drilling down into each expenditure and you’ll be more likely to stick with it.

How much should you be setting aside into savings? A good rule of thumb is 20% to 30% of your pretax income. Naturally, it may take time to build up to this, especially if student loans or credit-card debt are still in the picture. If this is the case, earmark those funds for long-term savings once those debts are paid. After all, you’re already accustomed to living without that money.

Maintenance: Once you’ve created a budget, make it effortless by putting some basic tools in place. First, automate as much as possible, especially your monthly contributions to savings. . . .

Statistics show that those who monitor their budget on a regular basis are significantly more likely to stick with it than those who don’t. . . .

If you are targeting a particular goal (say, getting out of consumer credit-card debt), let your friends and family know your progress. Money has a bad reputation as a taboo topic, but everyone faces many of the same challenges with money. You may be surprised by just how supportive your friends and family are of your goals, and you may even inspire them in the process.

Beware of lifestyle inflation. Finally, don’t let celebrities, glossy magazines, and television fool you; most self-made millionaires don’t look like millionaires. Their secret: Living below their means. Take advantage of job promotions and raises to increase your rate of savings. Each time you receive a raise, allocate at least half to savings. You’ll still see a bump in your checking account, and you’ll ensure that increases in lifestyle don’t outpace your nest egg.

One of the tenets of building wealth is living below your means, and the most painless way to do this is by keeping your lifestyle in check."

Summing Up

Budgets need not be formal to be effective, but they do need to exist.

The simple reason for recommending budgets for everyone is that if we don't know where we're going, any road will get us 'there' --- wherever 'there' may be.

And 'there' isn't always a pleasant place to go, especially for out-of-control debtors who could and instead should have been in-control debtors.

It's always best to decide for ourselves where we want to go and then head 'there' directly.

Budgeting amounts to nothing more than charting a course of where we want to go, then keeping score with respect to where we are, and continuously making small adjustments to stay on track and take us to our desired destination.

That's my take.

Thanks. Bob.

Saturday, June 20, 2015

Happy Father's Day ... Financial Advice for All Ages, but Especially for New Graduates Entering Adulthood and the Workforce

Happy Father's Day to my fellow Dads out there.

As for me, I had a great Dad, and my knowledge and appreciation of him grows with each day and year since his death in 1974. There seems to be something about getting older that makes us appreciate more and more what we once took for granted. Maybe that's maturity.

In any event, this year's graduation season has ended, and now the real world beckons our new crop of graduates and young adults to tackle the world's problems and make the planet a better place for one and all. Their time has come.

But if today's graduates are in any way similar to us now over-the-hill people, they'll soon learn that they aren't knowledgeable enough about the tendencies and behaviors of people, including themselves. They will soon come to know that they don't even know what they are now sure that they do know. As one of my favorite sayings puts it, 'The greatest enemy of knowledge is not ignorance. It's the illusion of knowledge.'

I know that 'not knowing what I didn't know' was true for me. I now know that I really never did and still don't know much at all, but knowledge of that 'widespread ignorance' is somehow comforting and makes me more capable of handling life's many obstacles along the way. And so it is always about learning and 'growing up.' Ignorance can be bliss if coupled with an open mind and a thirst for knowledge.

This continuous learning and 'growing up' process is equally applicable to acquiring a better understanding of the critical factors ahead during adulthood with respect to financial literacy and related life lessons, including a solid and lifelong pursuit of knowledge about basic financial understanding, planning, saving and investing.

For instance, how many of our youngsters, or even oldsters, have internalized the simple fact that it's not the down payment or the monthly payments that matter most? The lower the down payment and longer the term of the loan, the greater the debt obligation. It's really that simple. So low monthly payments and no money down sales gimmicks are just that --- gimmicks. We the People need to know that, and the earlier we learn it, the better life will be.

But learning the life lesson won't be easy. In fact, government policies often enable and encourage irresponsible individual behavior in indebtedness related to large purchases. And the big ticket sellers and lenders out there are aligned with government and very much in favor of people borrowing excessively for long periods of time.

As an example of what happens when unaffordable demand is created and satisfied, at least temporarily, Low-Down Mortgages Picking Up --- to Chagrin of Some provides a timely analysis. The article predicts a possible replay of the recent housing debacle and describes what happens to prices when homes become more 'affordable' and demand grows due to low-money down government backed loans. Haven't we seen this movie before?

And low-money down home loans are similar to auto loans in one important respect --- the buyer is 'underwater' immediately after taking transaction costs into consideration. With immediately 'underwater' homes, there are the ~6% selling commission costs along with the out-of-pocket transaction and moving costs to acknowledge. With cars it's the immediacy of the decreased value of the 'day old used car' and insurance. Thus, when our new grads buy both homes and cars, they immediately owe more than they own. Done deal.

And then for our new graduates there are the repayment obligations related to student loans, credit cards and such to consider. In other words, there are lots of ways for the financially illiterate grads to get in over their financial heads without even realizing it at the time. And neither government nor the smiling 'helpful' sales people are there to help the buyers -- they are there to help themselves.

Knowledge is power, so let's encourage our youngsters and oldsters alike to acquire more knowledge about the way things really work in the 'real world.'  By so doing the world will become a better place, and we'll feel better for having made our small personal contribution to that happy outcome.

The Financial Advice I Wish I Had Gotten at Graduation is full of common sense guidance for today's unknowing young adults about to enter the world of work and adulthood:

"For everyone, the memories of life after college are a mix of excitement and trepidation about what is coming next. . . . Realizing now how important a time that was to think about finances, my first wish would have been for some advice!

As a major in economics, I knew . . . not much about how to manage my (little) money. . . .

The advice I wish I had received after graduating from college and graduate school is about the importance of planning for the future—for retirement, for buying a house and so on. I have always been a saver, even during the grueling low-income period in graduate school, but saving equated to what was left over each year without any specific target to achieve. It took me a while to figure out that my savings were either too little or not allocated properly.

Had I planned to buy a home, I would have been able to buy it sooner and a more suitable house as well. But an early start in saving for retirement is where I could have benefited the most. My retirement is likely to be as long as my working career. I sincerely hope that is true and a lot of savings will be necessary to support those post-employment years—and that cannot be achieved by leaving things to chance.

In my case, three things were needed.

First, I had to figure out how much to save in order to retire at a target date. That required calculations, not just relying on the gut feeling about saving I had used after college and graduate school.

Second, I needed a proper allocation of those savings. It was inefficient to save without taking advantage of tax-favored vehicles, such as Supplementary Retirement Accounts and IRAs, or to invest in managed funds that generated dividends and charged high fees.

Third, I needed a system to keep myself on track and to evaluate how well I was doing. Even though I came late to understanding these future-planning requirements, the changes are paying off. Empirically, it turns out that those who plan for retirement end up with about three times the wealth of those who do not plan.

One of the keynote speakers at our financial-literacy seminar series said that it is very hard to support a 30-year retirement with a 40-year working career. It will be even worse if retirement is extended (longevity keeps increasing) while the working years when one can contribute to retirement savings get shorter. The latter can happen because of graduate school, repaying student loans and the failure to think about contributing to a retirement account. . . .

Annamaria Lusardi is the Denit Trust Chair of Economics and Accountancy at the George Washington University School of Business, where she focuses on financial literacy, personal finance and macroeconomics."

Summing Up

If you know any young graduates, or even any young people, it would be a good idea to pass along the foregoing advice.

{And since this is Father's Day weekend, let's be sexist and point out that males generally are more familiar with financial matters than are females. That said, however, the Dads really don't know much about this stuff either. They just aren't as lacking in financial knowledge, aka ignorant, as are the Moms. For proof of this relative male supremacy with respect to financial knowledge and literacy, please see Women, Especially, Are Failing Financial Literacy. And since women live longer, that knowledge discrepancy in the end just makes a bad situation even worse.}

The sad truth is that individuals of all ages and both sexes are ill prepared to take good care of their financial lives. This is especially true when it matters most --- when they leave school and enter the workforce.

Accordingly, everybody would be well advised to make a concerted effort to become knowledgeable financially --- and to start that effort as early as possible.

It isn't that hard, and in time it will prove to have been more than worth the time and effort. It will be a great investment.

In other words, achieving financial literacy will make a tremendous difference to our individual and family's financial health and well being.

That's my take.


Thanks. Bob.