Vote Yes for Communism on May 3rd!

Does anyone else find it odd the The Rapid bus system is using a communist-inspired logo to advertise the free concert they are holding on April 16th? This concert, called the “Rapid Revolution,” is allegedly aimed at inspiring people to vote yes on the May 3rd millage increase for the Rapid Fail Line, oops, I mean the Rapid Silver Line. It’s a rather strange tactic to get out the vote. Frankly, it’s a little jarring and I can’t imagine that this type of imagery would inspire confidence or excitement in the average voter.

What I really can’t understand is why they would use a logo that has been used by communist and socialist groups for so long. Some examples are below. Do they really want to associate a bus system with governments which have murdered tens of millions of people through forced labor, starvation, war, and mass murder?

Well, if you’re inspired, I’m sure they’d love to have you at Rosa Parks Circle in downtown Grand Rapids on April 16th, between 2:00pm and 7:00pm. If you’re not inspired, maybe you’d want to contact The Rapid and ask why they’re associating with a communist symbol.

Please note that the chart is quarterly before 2009 as this is the time period in which the city has published its pension balances. After that date, they have been publishing them on a monthly basis. They haven’t posted May or June of this year yet, but based on historic correlation, we’re in for a big drop. The S&P 500 has dropped about 13% in the last two months (reflected in the chart above). (Please also note that these numbers are as of the last day of each month)

While the city raised income taxes solely to fulfill their fiscal year 2011 pension contribution of $15 million, I estimate that in the last two months the pension plans have lost about $81.9 million in value. Oops!

Kent county is number 170 in the nation, in the top 21%.

More data is available here.

]]> http://www.grpundit.com/2010/06/24/michigan-among-the-highest-property-tax-states-in-the-nation/feed/ 0 http://www.grpundit.com/2010/05/21/austerity-from-greece-to-grand-rapids/ http://www.grpundit.com/2010/05/21/austerity-from-greece-to-grand-rapids/#comments Fri, 21 May 2010 13:45:14 +0000 GRPundit http://www.grpundit.com/?p=488 Most Americans probably haven’t heard of the term austerity until recently. If you lived in Europe, it would be a daily topic of discussion. Austerity essentially means being forced to live with less, particularly as it relates to government benefits. As Greece has essentially entered a period of national bankruptcy, the government is finally being forced to spend less money. That’s the ultimate end game of governments who cannot stop themselves. They are eventually forced to stop by external economic forces.

Greece, as well as many other European countries, has lived for a long time on soft socialism. As time went by, more and more “worker protections” were passed making it hard to fire people, giving away bigger and bigger government pensions, more and more civil servants on the payroll, more “bonuses” to those civil servants, and even lying to the rest of the world about how much money was actually being spent by governments. But, as anyone who can do a little math would conclude, this can’t go on forever. You can’t go on forever spending more money than you take in. I know, I know, many politicians and other apologist buffoons will tell you that we can indeed go on spending forever, but they are either stupid or lying.

I’d like to re-post some items from a blog I regularly visit, Mish’s Global Economic Trend Analysis:

- Begin quote -

Social unrest continues to brew in Europe. This time in Romania and Greece. France is on deck as French President Nicolas Sarkozy battles unions who refuse any cuts in pension benefits. French unions have called for a general strike starting May 27.

Let’s kick of the discussion with a look at Romania. The BBC reports Thousands protest over Romania austerity measures.

Tens of thousands of public sector workers have gathered in the Romanian capital Bucharest to protest against plans to cut wages and pensions. The gathering was one of the biggest on the streets of Bucharest was one of the biggest since the Romanian Revolution.

“We will not leave until the government quits,” said Bogdan Hossu, leader of the Cartel Alfa trade union. Marian Gruia, head of the policemen’s union, called on Romanians to unite, “as we did in 1989, when we overthrew the dictatorship” of communist leader Nicolae Ceausescu.

Romania’s economy shrunk more than 7% last year and it needed an IMF bail-out in order to meet its wage bill. It says it needs to implement new austerity measures to qualify for the next installment of the 20m-euro ($25bn; £17bn) IMF loan.

The government has proposed wage cuts of 25% and pension cuts of 15% in order to reduce the country’s budget deficit.

New Wave of Strikes in Greece Over Painful Austerity Measures

Please consider Greek unions hold new general strike against cuts

Unions plan to protest the painful austerity measures of Greece’s cash-strapped government by holding a general strike Thursday that will close much of the country’s public sector and shut down the country’s ferries, trains and public transport.

Thursday’s strike is to shut down schools, tax and local administration offices, ferries, trains and most other public transport options in Athens. State hospitals will have to operate with emergency staff only.

Most flights will be unaffected, as air traffic controllers will stay on the job. However, some regional airports will close, and Greece’s Olympic Air carrier said it was canceling 30 domestic flights.

Austerity Woes in France

Inquiring minds are reading Sarkozy Grapples With ‘Politically Unacceptable’ Deficit Cuts.

French President Nicolas Sarkozy’s popularity fell to its lowest since his 2007 election last month. Worse may lie ahead as he cuts spending and raises taxes in the wake of Europe’s financial crisis.

Sarkozy risks increasing voters’ ire two years ahead of presidential elections as he strives to meet promised deficit- reduction targets and pacify investors. The choices include the politically sensitive areas of lifting the top tax rate and tightening pension requirements.

“Austerity is economically necessary but politically unacceptable,” said Laurent Dubois, a professor at Paris’s Institute of Political Studies. “But he has no choice, the debts are too heavy.”

The dilemma facing the French leader, who took office three years ago this week, underscores the bind facing European Union politicians, whose response to the Greek debt crisis prompted them to pledge reductions in their deficits and public debt.

Sarkozy has said he will cut France’s deficit to 3 percent of economic output in 2013 from 8 percent now. His reliance on a spending freeze, economic growth and a pension overhaul will get him only partway there, according to Samuel-Frederic Serviere, a researcher at Ifrap, a Paris-based group that monitors government spending

“With just the measures that have been announced, at best we’ll get the deficit down to 5 percent by 2013, and that’s in the best of cases,” Serviere said. “What they’ve announced so far just isn’t sufficient given our European engagements.”

Union leaders say they won’t accept any change to France’s legal retirement age of 60 and have called a general strike for May 27. The opposition Socialist Party is also defending retirement at 60 and says higher taxes will plug the deficit.

- End Quote -

What does this have to do with Grand Rapids? We see our own microcosm of looming austerity here. As this blog has pointed out over and over, the city’s pension plans are unsustainable. Rather than do anything about it, the city’s leaders pleaded for, and got, a tax increase that will, at most, kick the problem down the road for 12 months. As I’ve demonstrated, the city’s pension plans are a ticking time bomb that will bankrupt the city. Not might bankrupt the city. The city’s pensions will bankrupt the city. The city’s politicians don’t want to deal with that now, though. They prefer to string the problem out as long as possible. In the mean time, they threaten us with reduced police and fire protection if we don’t approve their pension bailout.

Well, it worked. Now the city’s taxpayers get to pay more. The increased taxes will not restore or increase city services. In fact, the tax increase has guaranteed that city services will continue to be cut. How? Because we extended their pension failure by one year. All this extension does is guarantee that things will be worse next year by not addressing the root of the problem.

And that brings us back to the beginning of this article. Politicians do not stop overspending until they are forced to. Eventually Grand Rapids’ politicians will be forced to fix the issue, but until then, they will do everything in their power to keep the failed pension plans going. This guarantees that more and more money goes to pensions and less and less money goes to doing what a city should actually be doing: police, fire, roads, etc. The citizens will suffer while the politicians cower and fail. The city’s bureaucrats will eventually be forced into austerity.

We have tea parties (which were silent in regards to Grand Rapids’ tax increase) who claim they want cuts in government, but it’s clear people don’t actually want any cuts, because so many people are dependent on the government’s teat. We all want to live off someone else. That works fine for a while, then suddenly it doesn’t.

I’ll end this post with another prescient quote:

“Unlovely as they are, the Greek rioters are the logical end point of the advanced social democratic state: not an oppressed underclass, but a pampered overclass, rioting in defence of its privileges and insisting on more subsidy, more benefits, more featherbedding, more government.”

This is on top of the $7 million pension deficit that was already budgeted for next year. This means that the pension fund contribution deficit (not the total amount due) is now over $10 million, just for next year.

And the city continues to maintain that the income tax increase on the ballot May 4th will “save” or “increase” city services. The income tax increase is expected to raise about $7 million next year. How exactly do they expect to “increase” or “save” city jobs when the new pension deficit alone is over $10 million. Now we’re at a point where more than 100% of the income tax increase will go solely to the pension plans (as I demonstrated, using the city’s own numbers). If the income tax increase passes, it will go straight from the wallets of city residents to the pension fund.

The city has been having a series of “town hall” meeting to explain and drum up support for the income tax increase. By the sounds of it, they aren’t going so well:

Bill Kudlack showed up at Monday’s town hall meeting on the fence about whether to support a city income tax increase over the next five years. He left still on his perch.

“There is a lot of government waste, and I always think you can cut somewhere else,” said Kudlack, emphasizing he needs to be convinced officials have done everything possible to reduce costs before coming to taxpayers for a hike.

But Mike Farage said he left the meeting even more convinced he can’t support a higher income tax.

“Clearly, their best is not good enough,” Farage said of using taxpayer dollars efficiently. “They are also using the typical scare tactic when it comes to police and fire services.”

Only about 40 people showed up at Union High School for the first of six scheduled town hall meetings, and many of those were city employees. The meetings are designed to examine city finances and inform voters about the two May 4 ballot requests.

The word is getting out there: the income tax increase will do nothing to save or improve city services.

The city bureaucrats and politicians are desperate to prop up the failing pension systems at all cost, no matter how much it costs taxpayers. They want to continue to make sure the problem is put off as long as possible. But math is a simple thing – it always works. Not even the Grand Rapids city commission can repeal the laws of compounding numbers. The pension plans will fail. The question is how long will we, as residents, tolerate cutting our family budgets just to fund Cadillac pension plans for city workers?

I will quote extensively from his comments and bold the comments that I believe are important to note. This financial report is extremely relevant to the upcoming income tax increase on the ballot May 4th. For more information on that subject, see my posts on the income tax increase (Grand Rapids Tax Increase: It’s the Pensions Stupid, and Grand Rapids Fires Police, Firefighters, Keeps Parking Lot Sweepers).

By approving this tax increase, the taxpayers of the city will simply be kicking the can down the road one more year. As I’ve already demonstrated, if the tax increase passes, the city will be forced to come back again next year for even more money because the pension plans are killing the city’s budget.

Here are CFO Scott Buhrer’s comments. I know it’s long, but reading it is a must for all city residents:

Today it is obvious that the U.S. economy has far more capacity to produce goods and services than the demand for those goods and service. So any increase in demand will result in little price change. This will be the case until our underemployment rate of over 17% (the U6 measure) drops by a considerable amount and we begin to use our factories well above our current 72% utilization rate. In his book The Return of Depression Economics and the Crisis of 2008, Paul Krugman, winner of the Nobel Prize in Economics, correctly predicted that monetary policy (i.e. zero interest rates) would not lead us out of this financial crisis, and subsequently, as a columnist for the New York Times, Krugman has written of his belief that much more federal stimulus funding is required. But, at the end of the day, can you solve a problem that at its very heart emanates from excessive debt by continuing to fuel demand underwritten by government debt?

Over the last year I have provided assessments of National, State, and local economies. On September 15th I reported that the federal government had spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the United States last year (i.e. Gross Domestic Product, or GDP).

Which brings us to today. Irrespective of whether the economic recovery has begun or not, the United States (and much of the rest of the industrialized world for that matter), will face a long and difficult stretch of time as we deal with the excessive debt levels that have been accumulated over the past two decades.

The 19th-century British journalist Walter Bagehot claimed that during each speculative upturn merchants and bankers “believe that the prosperity they see will last always, that it is only the beginning of greater prosperity.” A boom in U.S. stocks in the early 1900’s was remembered by Alexander Dana Noyes, the financial editor of the New York Times in the 1920’s, as “the first of such speculative demonstrations in history which based its ideas and conduct on the assumption that we were living in a New Era; that old rules and principles and precedents of finance were obsolete; that things could be done safely today which had been dangerous and impossible in the past.” This mode of wishful thinking has continued up to the present day.

Instead of providing beneficial warning, economists have more often played the role of enablers during each successive New Era. The noted and early neoclassical economist whose work is perhaps more respected now than when he was alive, Irving Fisher of Yale, notoriously opined in September 1929 that stocks had reached a “permanently high plateau,” justifying this view with the claim that Prohibition had enhanced worker productivity and that businesses were employing new “scientific” management practices.

More recently, just a few short years ago, Federal Reserve Chairman Ben Bernanke and a number of other academic economists hailed the “Great Moderation,” arguing that rising institutional debt levels were tolerable, thanks to better monetary policy and better risk reducing financial innovations. During the boom years, Mr. Bernanke pronounced that rising house prices were a sign of improved economic fundamentals rather than speculative excess. It turns out that the Great Moderation was, in fact, a trap – a time of overindulgence of borrowing and risk-taking that would eventually destroy wealth rather than create it. Financial catastrophe is invariably preceded by periods of prosperity and New Era rationalizations.

The same Irving Fisher first highlighted the fact that an economy’s debt level could have harmful impacts on the economic growth, if it is excessive. In 1933 Fisher published his debt deflation theory that pointed out that the contraction of debt levels (which is currently occurring) usually results in prolonged economic distress. Borrowing binges invariably unwind, often quite precipitously, with sharp declines in asset prices, consumption, and high unemployment.

Housing prices are a remarkably accurate predictor of banking crises. Banking crises often follow periods of financial liberalization or deregulation. For all its “this-time-is-different hubris”, the United States has proved no exception. Rapidly rising housing prices should have set off alarm bells. Especially when the cumulative real price (i.e. inflation adjusted) increase in the United States between 1995 and 2006 rose 92%, more than three times the 27% gain for the preceding 100 or so years – and the total value of mortgages reached 90% of GDP. In 2005 alone, at the height of the bubble, real housing prices rose more than 12%, which was six times the rate of GDP growth.

International institutions (e.g. the International Monetary Fund) might help avert crises by promoting greater transparency in reporting financial data. Although it’s better than most, the United States government “runs an extraordinarily opaque accounting system.” In the past two years, the federal government (including the Federal Reserve) added huge off-balance-sheet guarantees and trillions of dollars of difficult-to-price assets to its books – and to date the Federal Reserve has refused to disclose details about these assets to the U.S. Congress. Bloomberg (a media company providing business and financial news and information) has sued in an attempt to compel disclosure.

What we do know is that Congress authorized up to $300 billion to bail out Fannie Mae and Freddie Mac. Quietly, on Christmas Eve, Treasury pledged unlimited support for the two agencies, without any additional Congressional approval.

Financial over-indulgence knows no boundaries and has no expiration date. Human nature is at the heart of the financial disasters. A recurring theme: investors, lenders and policymakers repeatedly delude themselves during economic booms into thinking that business cycles have been repealed and that the good times will go on and on. Indeed, after the recent financial collapse, 140 banks failed in 2009. If you think banking failures are declining and the financial crisis is over, consider this: the Federal Deposit Insurance Corporation’s (FDIC) board recently voted to approve the 2010 budget, which includes $2.5 billion for staffing to resolve failed banks taken over by the agency. That does not include the cost of winding up the affairs of these failed banks, which is almost impossible to estimate. That FDIC budget for staffing to resolve the affairs of the failed institutions is up 92% from $1.3 billion in 2009. The hiring plans will bring the number of FDIC employees to 8,653. Sheila Bair, Chairman of the FDIC, said the budget approved for 2010 “will ensure that we are prepared to handle an even larger number of bank failures next year, if that becomes necessary and to provide regulatory oversight for an even larger number of troubled institutions.” The number of problem banks on the FDIC’s confidential list as of September 30th more than doubled to 552 – the highest level in 16 years – up from 250 at the start of the year.

Three important factors pertain to the present situation in the United States and the world.

First, when debt becomes excessive, regardless of whether the government or the private sector is accumulating the debt, countries lose the ability to grow their way out of the problem; they must go through the time consuming and often painful processes of debt repayment and increased savings.

Second, whether the debt is owed externally or internally is not as critical as the excessiveness of the debt. Economic damage occurs as a result of extreme over-leverage, whether the barometer of performance is economic output, the labor markets, or asset prices.

Third, government actions, even involving sizable sums of money, are far less helpful than they appear. Further increasing government debt to solve the problem of over-indebtedness in the private sector only leads to greater systemic risk and general economic underperformance.

The question that is currently being debated is “are we headed for massive inflation or deflation”? As is widely feared here in the U.S., many countries have had the right
circumstances and mechanisms to inflate away their debt overhang, and, in fact, have done so by debasing their currency. This approach poses the most risk to those individuals who are on fixed incomes. Those particular circumstances, however, are not currently present in the United States, not with underemployment in excess of 17% and industrial capacity utilization at 72%.

I view the present inflationary environment as benign because: 1) the U.S. economic system is overleveraged and academic research confirms that this circumstance leads to deflation; 2) monetary policy is, and will continue to be, ineffectual as efforts to spur growth are thwarted by declining asset prices, loan destruction, and adverse regulatory influences; and 3) the federal government’s stimulus spending will ultimately lead to increased taxes and governmental borrowings must inevitably rise, further stunting any economic growth. These factors ensure that inflation will remain contained. Interest rates easily can and do rise for short periods, but remaining elevated in a disinflationary environment is contrary to the historical experience. If we do see higher interest rates it could be coupled with stagflation.

Fisher’s 1933 “Debt-Deflation Theory of Great Depressions” and modern “quantitative” methods have now essentially confirmed this conclusion: over-indebtedness and major contractions, particularly those that involve geographical regions (or in the present situation, extend worldwide) lead to deflation, not inflation.

The U.S. response and the world-wide response to the financial crisis have been remarkable.

But, we may find that at the end of the road, the cure could be as deadly as the illness. In 2009 the book This Time is Different – Eight Centuries of Financial Folly by Carmen M. Reinhart and Kenneth S. Rogoff compiled a database by looking at over 250 financial crises in 66 countries over a period of 800 years. The common theme in explaining the crises is that debt was excessive relative to national income (GDP). They make the compelling case that this old rule still applies and this time is not different. After studying data spanning 800 years, Reinhart and Rogoff characterize the current financial crisis as the “ Second Great Contraction.”

Broadly speaking, financial crises are protracted affairs. More often than not, the aftermath of severe financial crises such as the one that we are currently experiencing, share three characteristics:

First, asset market collapses are deep and prolonged. Declines in real housing prices average 35% stretched out over six years, whereas equity price collapses average 56% over a downturn of about three and a half years.

Second, the aftermath of banking crises is associated with profound declines in output and employment. The unemployment rate rises an average of seven percentage points during the down phase of the cycle, which lasts on an average more than four years. Output falls (from peak to trough) more than 9% on average, although the duration of the downturn, averaging roughly two years, is considerably shorter than that of unemployment.

Third, the amount of government debt tends to explode; it rose an average of 86% (in real terms, relative to pre-crisis debt) in the major post-World War II episodes. The main cause of debt explosions is not the widely cited costs of bailing out and recapitalizing the banking system. The upper-bound estimates of the banking bailout costs pale next to actual measured increases in public debt. The biggest driver of the governmental debt increase is the inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged output contractions.

The Reinhart and Rogoff book is very sobering. It provides extensive empirical data that supports my belief that we have a lot of pain left to experience because of the bad choices our nation has made. We, in this case, is the entire developed industrialized world, and the emerging world will suffer, too, as we go through it. It is not a matter of pain or no pain. There is now no way to avoid it. It is simply a matter of when and over how long a period. The lesson of history, then, is that even as the economy and financial institutions improve, there will always be a temptation to stretch the limits. Just as an individual can go bankrupt no matter how rich she starts out, a financial system can collapse under the pressure of greed, politics, and profits no matter how well regulated it seems to be.

Yet the ability of governments and investors to delude themselves, giving rise to periodic bouts of euphoria that usually end in tears, seems to have remained a constant. No careful reader of Friedman and Schwartz will be surprised by this lesson about the ability of governments to mismanage financial markets, a key theme of their analysis. As for financial markets, we have come full circle to the concept of financial fragility in economies with massive indebtedness.

All too often, periods of heavy borrowing can take place in a bubble and last for a surprisingly long time. This time may seem different, but all too often a deeper look shows it is not. Deficit spending only provides a transitory boost to the economy. It initially raises GDP, as it did in the second half of 2009, but then the effect dissipates and later is reversed, as financial resources available to the private sector are reduced.

Conclusion

The enormous amount of federal borrowing and stimulus programs are likely to serve to restrict long-term economic growth. The slow U.S. economic growth environment will obviously lead to continuing budget challenges for the City and the State. If we continue to push expenses into future years it will assure that our future will be challenging even if the economy improves.

“When automated ticketing machines took over her job, Grand Rapids Parking Facility Attendant Leah Leonhardt feared being laid off.

On Thursday, parking leaders agreed to a plan that would save her job and five other full-time positions, as well as scrap plans to privatize about 20 seasonal employees.

Now, Leonhardt spends her days shoveling snow, cleaning ramp decks, and collecting and counting cash, but that’s fine with her.

So let me get this straight: The city fired 44 police officers and 25 firefighters, but has decided to keep 26 parking lot sweepers and other seasonal employees?

Oh, and of course the city is claiming that they need a $7 million tax hike in May, 100% of which will go straight to the city’s underfunded pension plan.

What you’re witnessing is the breakdown of government’s ability to make rational decisions. Look for a lot more bad decisions as revenue continues to decline and unions press harder on their city government puppets to curry more favors, at our expense.

However, the bottom line is this: 100% of the tax increase will go directly into the city’s retirement pension system. This system is rapidly becoming unsustainable for a couple of reasons, which I’ll outline below. The city manager is trying to make the case that this tax increase will somehow increase fire department coverage downtown, but that’s a smokescreen to distract voters from the real fiscal disaster waiting in the wings.

The first, and most obvious reason for the sudden pension crisis is, of course, the current Great Recession. We’re lucky in that the city publishes lots of information on their pension plans. You can peruse the information here: City of Grand Rapids – Retirement Systems. We can glean several things from the monthly pension reports. The graph below summarizes the balances of the pension funds.

The city maintains two pension funds. One is for the police and fire employees, the other (general) for all other employees. As of December 31, 2007, the combined balance of both funds was $753 million. As of December 31, 2008, the combined balance was $493 million, a stunning loss of $260 million, or -35%. This tells us important information. Much of the city’s pension funds are clearly invested in risky assets, probably equities (stocks). For comparison, the S&P 500 stock index dropped 38% during the same period. This is an example of how the city’s bureaucrats can promise bigger and bigger pension benefits during the good times. Since the pension fund obviously is sensitive to the market’s ups and downs, the good times inflate the value of the pension funds, making it look like it’s easier to offer better and better benefits without having to increase the city’s costs.

But, then comes reality, crashing things down. When the market began to tank in 2007, it took the city’s pension fund with it. This sort of drop slaughters the pension fund’s solvency, and this is why the city must now contribute much more money just to keep the fund afloat. Of course, you’ll notice that the fund has recovered, as of December 31, 2009, to the level of $590 million. This is an increase of approximately 20%, while the S&P 500 increased by 27% during the same period. The problem is that the current market rise has run out of steam. Over the last three months, the market is essentially flat and appears to have entered a new down trend.

If the city had simply invested in safer and more stable securities, such as US government bonds, the funds would be in far better shape. For instance, if the pension fund were invested in 30 year treasury bonds, the annual return would have been about 4.5%. Compounded annually, the city’s pension funds would stand at about $836 million today, instead of $590 million (or a loss of around $246 million). But, a safe and secure growth rate like this would have constrained the city’s ability to offer greater and greater levels of benefits. A conservative and thoughtful path of sustainable benefits was possible, but the city’s leaders chose not to got that way.

So, what are the real consequences and costs of this problem? The graph below shows us the increase in the city’s pension system contribution costs.

As you can see, the pension contribution cost is estimated to be $5.009 million this fiscal year (2010). This will increase to an estimated $26.66 million cost in 2015. That’s a whopping 532% increase in just five years. Again, that’s assuming a 7.5% stock market growth rate, so the reality may be much worse. But the important point of data is the difference in pension contribution costs between the current year and next year (2011). As stated, the current year’s pension cost is about $5 million. Next year’s is estimated to be $12.019 million. An increased cost of $7.01 million. Wait a minute. Where have I heard that number before? Ah, yes. Here:

News Headline: “Grand Rapids income tax increase could raise $7 million”

What’s the logical conclusion? The entire tax increase will be spent on pensions. Oh, and that’s just the first year. In 2012 the increased pension cost will be another $4 million. The year after that, an additional $3.5 million, and so on. By 2015, the city will have to raise taxes by $21 million a year, or three times more than the proposed tax increase, just to pay for pensions.

Are you ready to pony up?

But wait, there’s more. Before readers try to make the argument that things would be fine without the current stock market conditions, please look deeper into the pension funds’ built-in collapse. That’s right – built-in collapse. This is the second reason for the current pension crisis.

It’s been in front of our city leaders, but they have chosen not to deal with it. What am I talking about? The city receives an annual report on the pension system’s health. You can read these reports here. The chart below is taken from this report (click on the chart to view it full size).

This chart shows us the number of active employees at the city who are participating in the pension plan versus the number of retired employees who are drawing benefits. This is generally referred to an active/retired employee ratio. In 1975 there were approximately 2.6 active employees for each retired employee. This means that the contributions made on behalf of the active employees were likely higher than the benefits being drawn by retired employees. Contrast this with the current ratio of close to one active employee for each retired employee. This means that active employees’ and the city’s pension contributions are likely just going straight out the door to pay for currently-retired employees. This trend will result in failure. It’s the same principal as a Ponzi Scheme. Current “investments” just go right out to the door to pay benefits to others.

The following chart (from the same report) shows us the cost of pension benefits as a percentage of current employees’ payroll (click to view full size):

This is the cost of unsustainable defined-benefit pension plans. As you can see, in 1975, the city contributed $5 for every $100 in payroll. This cost has ballooned to nearly $45 per $100 of payroll cost. You are now seeing exactly why the city budget has been squeezed. Even with fewer employees and a relatively flat budget, the city continually runs out of money and is forced to cut services.

We, as citizens, are seeing a degradation of basic city services so that pensions can be fully funded.

To put a cherry on top, the below is an excerpt from the pension report (Page B-1):

Voluntary Retirement. A member may retire after 30 years of service regardless of age, or after attaining age 62 and completing 8 years of service. Effective January 1, 2001, members covered by the Emergency Communications Operators Bargaining Unit, after attaining age 55 and completing 8 years of service. [emphasis added]

This means that if you’re 62 and have worked for the city for only eight years, you get a lifetime pension. If you’re part of the Emergency Communications Operators union, you can retire at 55 after only eight years of service. And you’ll notice that this was approved as recently as 2001 by our city’s leaders. The problem was compounded that recently. Now they think that citizens should pay for this through higher taxes.

The end result is that, due to our city leaders’ absolute failure to manage finances well, they are trying to push the cost off onto taxpayers without doing anything to address the underlying problem. The politicians find it easier to raise taxes than deal with angry unions – and that’s exactly what they are doing again. The city commission is afraid to tackle the real problem, so the easier path is to “kick the can down the road” and try and deal with it later. The problem is that eventually you are forced to deal with it. Instead of dealing with the issue when it was easy to manage, the city has gone beyond the point of being able to fix it without disruption. The current path of the city’s pension fund is bankruptcy.

It’s easy to spend and make promises when the times are good. But now the residents (and taxed non-residents) of Grand Rapids are being asked to pay for the politicians’ and bureaucrats’ inability to think ahead and act in their fiduciary capacity as representatives of the citizenry. Who do they work for? The city’s unions or the city’s citizens?

• UPDATE: See also Grand Rapids Fired Police, Firefighters; Keeps Parking Lot Sweepers.
• UPDATE 2: The Grand Rapids Income Tax Increase Scam is Getting Worse

Grand Rapids Pensions: Thanks Taxpayers!

Why is this issue important? Because the state will eventually have to repay this borrowed money. We’re talking about billions of dollars.

According to the web site Pro Publica, Michigan is the number two borrower of federal funds to pay unemployment benefits (behind California). The negative balance of the state’s unemployment fund now stands at $3.429 billion. This negative balance is rising almost exponentially. In December alone, the state paid out $243 million more than it collected in unemployment taxes from employers.

2009′s “stimulus” law contained a provision that allowed states to avoid interest payments through 2011, but the bill will eventually come due. The kicker is that higher unemployment taxes on employers will be imposed to attempt to pay this shortage back, but that will just serve to kill more jobs as businesses are saddled with even more costs of doing business.

As the private sector has collapsed under the weight of debt saturation, government has begun to take on the debt load.This won’t end well.

The problem is that so many people are now dependent on government handouts, the political will to fix the situation will be almost impossible to come by. The entitlement  culture will only be curtailed where there is no other choice. And that may be sooner than we think.

We see our own microcosm of this with the crushing pension costs in Grand Rapids. The city’s commission is asking for an income tax increase, 100% of which will go to pay pension costs. And that’s just for the first year. They will have to come back to taxpayers to cover the tens of millions more they will need to pay just to keep the pension fund solvent. Let me repeat, just so it’s clear. This income tax increase will do nothing to improve or prop up city services. It will go only to pay for pensions.

Multiply this by all the cities in Michigan by all the states in the nation by all the people on federal benefits.

Just to illustrate, please observe the national debt’s growth rate:

National Debt Doom

That’s called a parabola. It will fail. Nature doesn’t tolerate exponential growth rates.

We’re hearing bleats from the likes of the National Association of Realtors that housing may be turning around and that prices are up. Prices may have ticked up slightly in some areas. This is due to a few government and bank policies that are distorting the market – temporarily.

First, The Federal Reserve has printed nearly $1.25 trillion of counterfeit money to buy Mortgage Backed Securities from Freddie Mac and Fannie May. This has had the affect of creating a market for mortgages that wouldn’t have been there otherwise. This has kept rates low and loans easier to get. This program ends in March.

Second, we all know about the $8,000 first time homebuyer tax credit that was set to expire last year and was extended to April of this year. This also bumped up demand and prices, but at the expense of future demand and prices.

Third, banks and the government mortgage entities tried foreclosure moratoria to give borrowers time to catch up and work out loan modifications. This has been a failure and foreclosures are picking up again.

Some suggested reading material to learn more about these market-distorting policies:

• The Housing Double Dip Began In December
• Foreclosures down in January, but surge on way?
• Rising FHA default rate foreshadows a crush of foreclosures

According to Trulia, if you bought a house in Grand Rapids in 2005, the value of your house has dropped 25% or more. Anecdotal looks at housing in my personal experience shows a 30-40% decline.

The point is that the decline is not ending and more pain is to come. Foreclosures are increasing and more and more people are realizing that paying on a mortgage for a house that will take decades to regain its value is a waste of time, money, and worry. As I previously posted, the option of walking away from your mortgage is rapidly becoming more and more attractive. This is a good thing. Why? Because it clears the market more quickly and gets us to where we need to be (and will eventually end up anyways) in order to begin rebuilding the economy. The government has wasted, literally, trillions of dollars to prevent the inevitable.

Banks are trying very hard to make people believe that walking away from your mortgage is somehow immoral or shirking your responsibility. Yet banks and businesses walk away from mortgages all the time, because it’s simply an economic decision.

See the article Double standard in mortgage walkaway:

NEW YORK — Tishman Speyer Properties walks away from 11,232 Manhattan apartments because it can’t pay its mortgage. That’s good business.

Rick Gilson, a college custodial supervisor in South Dakota, wants to walk away from the mortgage on his mobile home. If he does, he’ll be a deadbeat.

Those two borrowers face the same financial dilemma: Their mortgages far exceed the values of their properties. Yet one gets to walk away without guilt, while the other can’t.

Gilson is too scared to dump the mortgage on his mobile home. He owes $31,973, but the home is only worth about $14,000.

“I have 12 years of money put into this property that I will never get out,” said the 50-year-old Gilson, from Rapid City, S.D. “But I am still paying because this is what I have been told to do. That’s what I think is right.”

Until now, the focus of the real estate crisis has been on individuals. One in four U.S. homeowners, or nearly 11 million Americans, are underwater on their mortgages. In some parts of the country — Florida, Nevada, Michigan, California and Arizona — the share tops 40 percent.

Some experts say it makes sense for some people to walk away if they’re deeply underwater, even if doing so could wreck their credit score for seven years. It may not be worth it to keep paying a mortgage when they can find comparable rental housing for considerably less money.

The argument against walkaways is that they will wreak economic havoc if a lot of people do it. Banks will have more bad loans on their books. They’ll make fewer loans. Home prices will plunge more.

The rules are different, though, for the walkaway of all walkaways.

That title is reserved for what happened to one of New York’s trophy properties, the 56-building Stuyvesant Town and Peter Cooper Village complex. Spanning 80 acres on Manhattan’s east side, it’s the largest single-owned residential area in the city. Its red brick buildings, built by Metropolitan Life in the 1940s for World War II veterans, are still a haven for the city’s middle class.

Commercial real-estate firm Tishman and its partner, investment firm BlackRock, paid $5.4 billion to buy the property from MetLife in late 2006 — right at the market’s peak. They hoped to make money by converting rent-regulated apartments into luxury condos and raising rents.

Then the housing crash hit. The value now: $1.8 billion.

And you thought you overpaid for your house.

I suggest you read the entire article.

Just look at it this way – if it’s significantly cheaper than your mortgage payment to rent a property similar to your current home, you’re underwater and losing money each month.

Of course, if you decide that fixing your family’s balance sheet is more important than propping up a bank, you should consult an attorney who specializes in foreclosure and short sales. Every state is different in terms of its real estate law, so you must get good advice before making the decision.

More on the local impact, and reaction, coming soon…