Tuesday, July 28, 2015

One Set of Government Employees Promises But Fails to Fund Future Promised Benefit Obligations Which Eventually Must Be Paid to Other Government Employees ... Meanwhile, They Don't Reveal to Taxpayers the Real Long Term Cost

Government officials and their counterparts in public sector unions frequently act shamefully and in secret when it comes to serving the best interests of We the People.

And this shameful behavior is not restricted to national politics. In fact, local communities, school districts and individual states are as much guilty of malfeasance in secret as are our national politicians. Our public servants often engage in one big secret ongoing and expensive scam and sham.

And here's why. They are afraid to explain to taxpayers why their negotiated deals will necessitate a huge increase in taxes. So they don't mention that either current or future taxpayers eventually must pay what one set of government employees in the here and now has promised to pay another set of government employees in the distant future.

The future taxpayer obligations are 'negotiated' by the government employees and union officials in private, and the deal's financial details and true costs aren't ever fully disclosed to those who pay the bills. It's in effect an expensive fraud on taxpayers, albeit perfectly legal.

And what makes it legal is that We the People have previously delegated our power to the government officials purportedly acting on our behalf, which they don't do.

If taxpayers ultimately dare to object, the courts are likely to make the taxpayers shut up and pay, because of the 'bargain' agreed to by the representatives of the taxpayers, the duly elected government officials.

Of course, taxpayers in effect pay for both teams of negotiators. They pay those who represent them at the bargaining table and then again for the union officials appointed to represent the public sector bargaining unit employees. It's a game of 'inside baseball' where only the union leaders and government officials know the rules. Meanwhile, the taxpayers pay.

And the rules of the game are whatever the union leaders and government officials deem them to be from time to time. The taxpayers then will be forced to pick up the final tab regardless of how high the final bill may be, and they will pay whether there are adequate funds set aside or not.

And normal accounting rules that apply to the private sector absolutely don't apply. That's how the complicit government and union leaders 'hide the ball' from the unsuspecting but paying taxpayers.

Now let's look at just one example of how this game of screw the taxpayer is played.

Relief for Cities' Budget-Busting Health-Care Costs is subtitled 'New government accounting rules enable local officials to get unfunded obligations to retirees under control:'

"The budgets of many cities and states will soon be disrupted by new accounting rules for retiree health plans. Local governments pay most of the health-insurance premiums for their retired employees—for example, from age 50 until Medicare at age 65, and sometimes for life. Nationwide, the total unfunded obligations of these plans are close to $1 trillion, according to a comprehensive recent study in the Journal of Health Economics.

The accounting rules, adopted in June by the Government Accounting Standards Board (GASB), require local governments for the first time to report their obligations for retiree health care as liabilities on their balance sheets. Local governments must also use a reasonable and uniform methodology to calculate the present value of these liabilities. These are both steps forward, enhancing transparency and accountability.

The new rules further provide an incentive for local governments to establish a dedicated trust with assets invested today to help pay health-care benefits in the future. But here the GASB takes one step backward, by allowing local governments to make overly optimistic assumptions, including excessive returns for the trust.

Local government health plans for retirees are on average only 6% funded, according to the Pew Charitable Trust. Because most cities pay these health-care costs almost entirely out of current budgets, they increasingly face two unattractive alternatives: raise taxes, or cut spending for such services as schools and police. . . .

Forcing cities to report to the public their long-term retiree health-care liabilities—calculated under a reasonable and uniform method—should provoke taxpayers to pressure officials to negotiate less-expensive benefits with the unions. It might also give unions a better sense of the trade-offs between asking for wage increases and higher benefits.

Nevertheless, a word of warning. If a city establishes a trust, taxpayers have to ensure that the government follows through with the necessary annual contributions—and that the government doesn’t hide true health-care liabilities by unrealistic projections of investment returns. As former New York Mayor Michael Bloomberg once said, while assuming a conservative investment portfolio will earn 8% a year is “absolutely hysterical,” reducing it to 7.5% or 7% is merely “totally indefensible.” "

Summing Up

So finally it seems that we're inching our way along toward truth telling in government about the future real cost to taxpayers of presently promised benefits. But now new problems of how much these future contributed funds invested will earn over time steps forward. And it's a big deal.

Because only later will come the almost certain return on investment shortfall by the government on funds invested. The bureaucrats will likely assume an annualized rate of return of ~8%, but these results won't be realized in a 'conservative' investment portfolio comprised of bonds and stocks. Thus, an already bad funding  problem will in all likelihood become an even worse one for future taxpayers

And since it's likely that a blended portfolio of bonds and stocks may average ~5% annually in the future, there won't be anywhere close to enough money to pay all the bills. In fact, the 'rule of 72' shows that an average annual investment return shortfall of 3% (8% assumed - 5% realized = 3% shortfall) will result in 50% less money in the pot than assumed after 24 years. 

Current and future taxpayers should at least be concerned, if not terrified.

Isn't it great that we have such a group of knowledgeable, hard working and dedicated group of public officials serving We the People?

Or is it in fact a sickening sight to see when we finally open our eyes to reality?

Sadly, that's my take.

Thanks. Bob.

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