Friday, July 10, 2009

Conor Friedersdorf is a Liar or a Hack...

Maybe both...
As the Matt Welch piece mentions, "the state's annual pension fund contribution vaulted from $321 million in 2000-01 to $7.3 billion last year." That is a rather alarming rate of growth, and an astonishing figure, don't you think? Given that the state is bankrupt and issuing IOUs to its creditors, it doesn't seem unreasonable to complain that public employee unions have extracted benefits that are both obviously unaffordable and far in excess of what is enjoyed by the taxpayers who finance them.
The State of California has what is known as a "Defined Benefit" plan which, like all defined benefit plans, have the following characteristics with regard to payments and funding that any accounting student would have learned in his, or her, Intermediate Accounting I or II class. Simplified for discussion, yet with enough detail by which to form a competent opinion:
1. An employer commits to paying its employee a specific benefit for life beginning at his or her retirement. The amount of the benefit is known in advance and is usually based on factors such as age, earnings, and years of service. There are compensation plan limits, but they are not relevant to the discussion.

2. The employer is responsible for making the decisions about how much money to contribute to the plan and how to invest the contributions to fulfil the plan obligations. Employer contributions to the defined benefit plan are based on a benefit formula that calculates the investments needed to meet the defined benefit. These contributions are actuarially determined.
So, in 2001, the market just came off a long bull-run where the (simplified) annual return was 43% for a twenty-one-year run. That is, the market went from about 1,000 (1980) to about 10,500 (2001). That was great. But since 2001 the market has, at best, been flat and has fallen to, basically, it's 1996 levels, wiping out over a decade worth of returns. Now the ROI has fallen to just under 19% for the 1980-through-2009 (06/30/09) period. Even worse, is the current negative 4.5% ROI we suffered during, and because of, the Republican laissez-faire/Libertarian Bush-years where the market was allowed to run wild without supervision.

All of which California has to make up.

This was not the fault of the union. It was not the fault of the State. It was the fault of the system that Friedersdorf, and the rest of the "Lords of Capitalism" tout at every instance.

If Friedersdorf doesn't understand the why California has to make the payment, he's not qualified to opine. If Friedersdorf DOES understand, then he's a liar. In either case, he's just flat, stupidly wrong.

ADDENDUM: One more note -- ALL Defined Benefit Plans, public or private, have this issue. It has NOTHING to do with the Unions and everything to do with the decline in the value of the assets used to pay the retirees. It's especially dishonest to pretend it's the California Civil Service unions.

1 comment:

Conor said...

Dear Moses the Penguin,

I have responded to your post here: http://theamericanscene.com/2009/07/10/when-penguins-attack