The Kentucky State Pension Disaster: My $0.02

First, some disclaimers:

(1) I am a Kentucky state employee. I am a non-merit employee.

(2) I am NOT part of any of the pension systems. When I hired in, I opted for a defined contribution plan.

(3) I have no gripe with any state employee or retiree who padded their retirements or retired early via any of the controversial practices–double-dipping, padding their overtime, or cashing in on large amounts of unused sick time–as those employees were/are merely playing by the rules of the system.

If there is blame to be assigned, then let it fall on those who created the system. More on them later.

The Kentucky state pension crisis, at $33 billion–which carries both short and long-term solvency challenges–is one of the worst pension crises in the history of the United States. This crisis has been brewing for most of the last 17 years and threatens the retirement checks of not just those workers in the pipeline, but also the retirees.

Those in the pipeline include not just regular state employees but also policemen, firemen, and teachers.

Given that the pension systems were over 100% funded in 2001, how did the system get to this point of insolvency?

(a) For one, in the wake of revenue crunches that began in the early 2000s–from the aftermath of the dot-com crash and the wake of 9/11–the General Assembly began to balance the budget by cutting corners: among those corners was not paying the actuarially required minimum payments into the pension systems.

(b) For another, over the years, the General Assembly created unfunded incentives that sweetened the deal for state employees in the pipeline:

  • Normally allowed to retire at 27 years of service, employees were given a window whereby they could buy 5 years, allowing them to retire in as little as 22 years of service. What that means: employees, who hired in when they were in their late teens or early 20s, are now retiring under age 40, with health insurance discounted in the same group as state employees. I know of employees who are able to retire at under 40 years of age. This means the pension system is on the hook for that person’s retirement for potentially more than 30 years. The general rule–27 years–is already quite generous, but the “window” puts an even greater strain on the system.
  • The sick and vacation leave accrual formulas are extraordinarily generous. Even for those of us not in the pension system, it’s the same: we can bank our overtime (up to 240 hours, although, over the years, this has become more difficult); we can bank our sick time in proportion to our years of service, and some employees have well over a YEAR of sick time accrued, and this is credited to state employees upon retirement; we can bank our vacation time in proportion to our years of service (here is the link). As you can see, these are far more generous than anything you will see in the private sector.

(c) Making matters worse, the managers charged with managing the pensions engaged in a level of malfeasance that, had the pensions been subject to ERISA, the managers would be rotting in prison.

Make no mistake, had the Kentucky pensions been a private entity, the pensions would have been declared insolvent, offloaded to the Pension Benefit Guaranty Corporation, and retirees would take the mother of all paycuts. And the managers would be lucky to get less than ten years in prison.

(d) Worst of all, the General Assembly and three successive Governors–Patton, Fletcher, and Beshear–each ignored the problem.

Patton was too mired in sex scandals to have the gravitas to face the problem when doing so would have been a lot easier. And he allowed the continuation of many of the fat incentives that drained our systems. The failure to provide the actuarially-required minimums began on his watch.

Fletcher, almost immediately after taking office, became mired in a hiring scandal that depleted his ability to address the problem for his 4 years in office. The failure to provide the actuarially-required minimums continued on his watch.

Beshear–for 8 years–gave mere lip service to the problem. He helped implement small changes that amounted to pissing into a forest fire. And the failure to provide the actuarially-required minimums continued on his watch.

The General Assembly, run by Democrats for most of the last 100 years (Republicans won the House for the first time last year), was the principal culprit in both the design of the pension systems, and their failure to fund them.

Now, Governor Matt Bevin has inherited the perfect storm from Hell: a $33 billion albatross that the private sector must fund–as courts hath decreed it–while many state employees are facing the prospect of perhaps not getting the fat retirement that they were “promised”.

Bevin’s most recent proposals to reform the pension system are shockingly mild:

  • existing retirees would see no change in their checks, their Cost of Living Adjustments (COLAs), or their health insurance premiums;
  • those who retire before July would be able to cash in on their unused sick leave,
  • those who retire after July will no longer be able to cash in on that.
  • Those employees with less than 5 years of service will get transferred to a Defined Contribution–401(k)–plan;
  • those with more than 5 years will remain in the pension pipeline.

Even under the proposed changes–assuming that what the legislature passes will be similar–the Kentucky state employee will have pension and leave accrual rules that are light-years more generous than almost any entity in the private sector!

I worked in the private sector for ten years before hiring into the State. For three years, I was an Engineering Systems Engineer at Electronic Data Systems, which–at the time–was a subsidiary of General Motors.

Back then, we received no sick time to accrue, nor were we paid overtime, nor could we bank overtime, as we were “salaried” employees. We received two weeks of vacation time per year, and that time was “use it or lose it”. In fact, in 1992, everyone in my account had to take the vacation at the same time–during the two week changeover during which GM did their model transitions.

We did not complain.

None of us were on a pension plan; EDS did, however, have generous 401(k) matching.

For six years, I worked as a contractor for Seltmann, Cobb, and Bryant (which became SCB Computer Technology). We received no sick time, and any overtime–and they kept strict tabs on it–was paid, as there was no accrual. We received two weeks of vacation leave per year, and we were never allowed to carry over more than one week to the next year. There were no pensions, as all of us were on 401(k)s.

No one complained.

My point in all of this: no business in America could provide such generous benefits and expect to remain solvent.

Imagine if your company

  • allowed employees to retire at age 40;
  • provided full pension benefits to retirees for the duration of their lives;
  • allowed them to pad their salaries with overtime pay to calculate their retirement income, thus allowing some in the $30K-$50K range to enjoy retirement checks in the 6-figure range);
  • provided for COLAs even during recessions, even when employees were getting pay cuts.

How long would your company expect to remain in business?

If the private sector couldn’t even operate that way, and given that the private sector must pay for those benefits enjoyed by the public sector, then why foist them with such an insolvent system?

And before you–the state employee–start waxing eloquent about how the private sector enjoys your services, let me remind you of a few things:

  1. You, the government worker, produce NOTHING for the economy. Fact is, the minimum-wage burger flipper at Hardees does more for the economy than the hardest-working government employee. That is not to say that your work doesn’t matter; at best, however, we are part of the service sector of the economy.
  2. You, the Government worker, serve at the pleasure of the private sector. They pay your salary, your benefits, and even your pension. The taxes you pay wouldn’t be possible but for the contribution of the private sector.
  3. While you, the government worker, have endured hardships–including pay freezes, pay cuts (furloughs), and force comp leave uses–it pales in comparison to the private sector worker who faced job losses in the dot-com crash, the wake of 9/11, an the Great Recession of 2008. While my bottom line has been crimped over the last ten years, I have been able to keep my house and my job. I did not, like many private sector folks, face job loss, foreclosure, and even bankruptcy.

I’m not saying this to beat up the government workers–I am one myself. All I’m saying is that a little humility would go a long way. You have had it rough, just as those in the private sector have. There is plenty of misery to go around.

And while I empathize with the new employees (with less than 5 years of service) who will no longer be in pensions and therefore may not be able to retire at 27 years, I would also remind them that many of us in the real world would be happy to retire at age 70.

As for Governor Bevin, I’ve heard no small number of employees complain of his proposals, and call him every name in the book.

I have yet to hear that same level of angst aimed at Rep. Harry Moberly or Rep. Jody Richards or Sen. Julian Carroll or Rep. Greg Stumbo or Gov. Paul Patton or Gov. Steve Beshear or even Gov. Ernie Fletcher: they are the ones who got you into this mess.

Matt Bevin, whatever his faults, is the adult in the room telling you the truth.

Matt is an adult. Be like Matt.

Health Insurance Getting Dropped: a Real-Life, Small Business Example

KM–a friend of mine and Cubbie’s–is a physician in Central Kentucky.

Here is her response to my recent post:

Here is an example for you…

I am a small business owner (8 employees plus myself) who has provided group health insurance since opening my business. Six of those employees were covered by health insurance and my group plan, this past year, cost 70k yearly (it went up about 30% per year). This is a huge expense for a small business. I received a notice that our plan did not meet compliance with Obamacare’s new regulations. Therefore, I dropped our health insurance and, instead, opted to give a stipend for employee directed coverage. While the stipend will still cover their expenses, most of them are discouraged by the huge hassle. I am a bit relieved, however, to be stepping OUT of the insurance business.
As any reader can attest here: KM is being quite generous with her workers.

If You Lose Your Health Insurance

The way ObamaCare is working, it’s quite possible that a third of Americans who currently HAVE health insurance may lose it. This includes people who had employer-funded coverage who stand to get dropped, as well as those who have private plans that are no-longer in compliance and who now must sign up for one of the “better” plans.

Whatever you do, if you lose coverage, think long and hard before signing up for one of the other plans. If, after reviewing those plans, you decide that you can afford a plan that will prevent you from going broke if you have a medical disaster, then by all means do what you must do to hedge yourself against that eventuality.

But let’s say that you fall into one of the following categories:

(a) You cannot afford any of the new plans;

(b) You can afford the premium for one of the new plans, but the plan you can afford will not be sufficient to provide the financial hedging that you need if you have a medical event.

In such a case, you’re damned if you do and damned if you don’t. In that event, the rational decision is to take the path that allows you the most control over your own money.

That means:

(1) Don’t bother purchasing insurance.

(2) Take the amount you would otherwise spend on premiums and save it. You can still put up to $2,500 into a Health Savings Account (HSA), pre-tax. If your employer has Flexible Spending Accounts (FSAs), you can sock pre-tax money away into those. And with some new rules coming down, you may be able to carry $500 in FSA money over to the next year. Beyond that, stick as much money as you can into an envelope.

(3) Be proactive in seeking physicians with whom you can arrange private payment in the event you will end up needing to do this. Many will work with you. Try to cover as many bases as you think you will need–a primary care doc, a dentist, a pediatrician, a general practitioner, a cardiologist, an orthopedic surgeon, a neurologist, a dermatologist–and get ahead of the curve.

While ObamaCare is a disaster, it can also be a great opportunity for Americans to seize the initiative and become a free country again. Breaking the chains of the financial-medical complex–while not the only step necessary–is an integral step toward that end.

The Real Question: Does it Even Matter?

CBS News is reporting record lows for President Obama’s approval rating as well as overwhelming lack of support for ObamaCare by the American public.

Those approval numbers are well-deserved, as ObamaCare has been a complete and utter disaster. While the failures of the website have been nothing short of catastrophic, they pale in comparison to the shock of ObamaCare, which has millions of Americans losing their jobs, getting their hours cut, losing their health insurance and being forced to purchase plans that have fewer benefits and higher costs, and run the risk of losing their physicians, who may not be “in network”.

Much has been made of states like Kentucky, which apparently had a smoother rollout for the online health exchanges. Except that most of the Kentucky enrollees are for MEDICAID. This is a budget bubble waiting to burst.

Still, in assessing these disasters, the most important question here is this: does it even matter?

Keep in mind that Obama is the President for whom Americans voted, twice.

Granted, the Republicans faced the perfect storm in 2008. Bush was largely unpopular due to the war efforts and his deficit spending. During his eight years in office, he lost both houses of Congress. While Presidential nominee Sen. John McCain (R-AZ) had initial momentum with his selection of Gov. Sarah Palin (R-AK), the financial collapse of 2008 all but guaranteed Obama’s victory. Especially when McCain erased any material difference he had with his opponent by supporting TARP.

But Obama had been a weak President. While he was able to get a Democrat-controlled House and Senate to pass ObamaCare, he was so abysmal that he lost control of the House in 2010 and saw his influence in the Senate greatly-impaired.

And yet, in Mitt Romney, Republicans managed to nominate a weak candidate whose own health care reform was the model for ObamaCare.

While Obama’s campaign performance was lackluster, Romney catastrophically uninspiring. Obama carried every swing state. In order to win, Romney was needing a victory in three of four–Ohio, Florida, Virginia, and Pennsylvania. He lost all four.

America spoke, and they decided to keep Obama.

Republicans had two alternatives against that backdrop: (a) do nothing to stop ObamaCare and let it crash on its own weight, or (b) refuse to raise the debt ceiling and force a balanced budget. The latter would have forced spending issues to the surface, the former would have passively allowed a bad law to fail, at which point Obama would own it.

Instead, Republicans chose the worst possible route at the worst possible time: (c) try to defund ObamaCare while failing to address fundamental spending issues. This made it look like a political vendetta rather than a principled stand.

Now, ObamaCare is failing catastrophically. The house of cards that is postsecondary education is getting wobbly. Unemployment is still terrible in spite of five years of unprecedented economic and monetary stimulus. The national debt–not including unfunded liabilities–is double what it was when Bush left office.

And yet, Hillary Clinton has a better-than-average chance of winning in 2016. This is because there is no credible opposition in the GOP.

Yes, Sen. Rand Paul (R-KY) looks promising, as does Sen. Ted Cruz (R-TX). But they have no future in a party that is run by an establishment that is closer to Rockefeller than to the Tea Party. That is the other 9,000-pound elephant in the room besides Gov. Chris Christie (R-NJ).

End-result: until the money runs out and the defecation truly slams into the circulation, don’t expect the situation to materially improve anytime soon.

The Education Bubble…Is She About to Go Pop?

At first glance, the cracks seem to be forming.

In the fall of 2012, published tuition and fees for in-state students at four-year U.S. public schools rose just 2.9 percent from a year earlier, the smallest increase in 33 years, the College Board reported. At private schools, published prices rose 3.8 percent, lower than the increases in recent years.

At the same time, the number of students enrolled in colleges and universities fell by nearly half a million after two decades of substantial growth, according to the U.S. Census Bureau.

Moody’s rating service has warned that enrollment declines threaten the finances of many colleges.

The academic world is in for quite the shakeup. The issue is not IF, it is WHEN.

If this latest report is any indicator, that shakeup is going to come down sooner rather than later.

Obama is Unhinged

Either President Obama has absolutely no clue how the real world works–and this is possible, as he went from academia to community organizer to politician–or he is trying deliberately to destroy the American health care system.

Fact is, businesses have spent the last three years preparing for the implementation of ObamaCare. That was passed by both houses of Congress, signed into law by the President, and upheld by the Supreme Court.

As a result, businesses have made capital planning decisions around their expected costs due to this law. They have laid off workers. They have cut workers from full-time to part-time. They have dropped coverage for certain workers because the coverage did not satisfy the requirements of ObamaCare. That dropped coverage was part of a business decision that was part of a capital plan that was negotiated with investors.

In addition, insurance companies have already made capital decisions regarding the plans that were dropped, and the addition of new, “compliant” plans. Because each state has its own rules for capital requirements, insurance companies must go to great lengths to ensure that they have the necessary reserves to cover the plans that they provide. They dropped the old plans–and added the new plans–with particular capital structures in mind.

As the old plans were dropped–and new plans added–companies made key changes in business rules, some of which are very complex. Those business rules were carried over into their respective IT systems. Developers for those systems have modified their code, made database changes, and have gone through several layers of testing to make sure the new rules are working.

Therefore, to pass a law–or, setting aside the legalities here, issue an executive order–allowing people to keep their old policies, with less than two months remaining in the year and with businesses having already made decisions with respect to capital and operations, does nothing to materially improve the situation, and in fact will only make things worse.

Fact is, even if we repealed ObamaCare today–permanently, effective immediately–a mother lode of damage has already been done. It will take years to recover from this disaster.

I am not defending the Republicans on this, however, as the Establishment has utterly failed to make a coherent case for free markets, and in fact is arguably in bed with the Democrats in their desire for fascism.

Vox and Captain Capitalism: It’s Both/And, not Either/Or

Yesterday, Vox Day provided an assessment of the gender gap in college degrees. Captain Capitalism, in turn, pointed out that the numbers don’t tell the whole story: (a) when you factor in engineering and hard science degrees, men are outperforming the women by a wide margin, and (b) women are getting the bulk of the meaningless degrees that are largely available due to a bubble economy in higher-ed, and therefore will not be advancing in the world.

While my sentiments are with Captain Capitalism, I think both of them are hitting some important points:

(1) Women are getting the bulk of the college degrees, even if they are not dominating in engineering and hard sciences. This is the result of an education system that has been waging war on men and boys for almost a century. That the corporate culture outside academia, sadly, has embraced a large part of that politically-correct agenda, does lend credence to the premise that Vox is correct.

(2) At the same time, women are going to bear the brunt of the pain when things majorly go south. Because they are getting the bulk of the degrees, and because those degrees are more likely to be worth a roll of used toilet paper, and because those degrees will carry a mother lode of student loan debt, the women are going to be impacted when the economy ultimately collapses. Their degrees will not land them substantive jobs, they will not be able to service their student loans, and the men will run from them because they will choose not to be yoked to that baggage.

I have some female friends–recent college graduates–who have five figures of student loan debt, degrees in non-specialty fields, and very few substantive job leads.  And no, they don’t have any remote marital prospects, either.

Oh, and Vox provides an excellent piece showing a mother-daughter fight over a college route. Kudos to the mom.

Had enough of feminism yet?

Economic Recovery…FEEL THE RECOVERY!!!

A FB friend of mine says,

I feel so stuck right now. I have a useless college degree & very little work experience. I can’t seem to find a job because I’m almost 25 with no experience. I can’t afford a car because I can’t find a job. I’m automatically disqualified from a lot of jobs because I don’t have a car. Bills just keep piling up & I can’t seem to see the light at the end of the tunnel.

She’s got a degree from a state university, majoring in General Studies. She’s got student loan debt of about $35K. She lives in the Midwest.

A Bleak Picture

I cannot answer as to whether this is the exception or the rule for black youth.

(I realize that anecdote is not statistic, but–having been to inner-city schools and one integrated school–I never saw a situation that was this bad. Then again, it’s been a while since I was in school.)

Still, if this is indicative of the situation, I’d say the black community is disintegrating even worse than I thought.

Academia, Government, and Malinvestment

In the real world, preschools and day care centers are plenteous. The market is one of near-perfect competition, where rates are competitive, competitors are always coming and going, and there isn’t a lot of quality variance: most preschools fundamentally suck, and the “better” ones are often lesser evils. Preschool workers–as a group–do not make a lot of money. If they pull above $10 per hour, it’s a bonanza.

And yet, there are colleges with entire education tracks–early childhood education–designed to prepare students for jobs with such economic limitations.

Making matters worse, we have a government that encourages this. Here’s a real-life example of how this has played out. Names have been changed to protect the guilty.

Let’s say that our federal government has $1 million in grant money available for initiatives in “early childhood education”.

Let’s say we have a university: BSU. The initials “BS” can mean whatever the reader wishes.

BSU decides to compete for the grant, proposing the development of an early childhood education center–i.e. a state licensed “preschool”–that will be staffed with faculty, highly-experienced teachers, and students. This will allow students to gain work experience as they work toward teacher certification, and will allow for a high-quality competitor to traditional day care and preschool centers.

BSU receives the grant, and spends the $1 million to build the complex, hire the director, train staff, and ensure that the facilities comply with state licensing requirements. The workers are supposedly the best of the best: they have a minimum of 5 years of experience, and they are paid $12 per hour.

The center at BSU opens on April 1. Their rates average about $50 per week more than the average preschool in the area.

After a month of being open, the number of children enrolled: ZERO!

So let’s get this straight, folks: We, the taxpayers, have provided $1 million in funding to a college, so they can hire overpaid workers and staff, price their services out of the market, and encourage students to accrue a mountain of debt as they enter a profession that–after 5 years of experience–they will pull down $12 per hour if they get a really good break. Making matters worse, they have NO CHILDREN ENROLLED after being open for a month.

When you consider that this is what college education–with few exceptions (such as the STEM fields)–has devolved into, the reality becomes all the more sobering.