Pensions: a suggestion made that Illinois borrow $107B and California short-term decisions with long-term consequences

The news making the rounds is a suggestion that was made for Illinois to borrow $107 billion to cover their underfunded pension. The St. Louis Post-Dispatch has a column on the matter. Essentially, the argument is that if you can borrow at 5 percent and earn 7 percent, the pension problems would disappear. This could work in a perfect world -- if there is never a market crash ever and if you ignore the fact that the CAPE ratio is rather high.

Also, it might work if politicians didn't like to raid funds. Here's a fun quote from the article:

Illinois issued $10 billion of pension bonds in 2003 and earned positive arbitrage on the money, but the pensions’ funding status continued to deteriorate. The Legislature used the new money as an excuse to cut its pension contributions.

Let's be honest, the time to make a bet like this is after a massive bear market, but at that point there would likely be other concerns that would prevent one from making such a large debt issuance.

And California makes short-term decisions to cut costs that later cause long-term pension problems. Per the OC Register:

First: In 2015, Gov. Jerry Brown got employees to contribute to their retiree health benefits fund.

Second: Then this cost to the employees was largely reversed in 2017. The LAO [Legislative Analyst's Office] said the pay increases offered in 2017 likely were “larger than they would be if the administration had not insisted on employee contributions to retiree health benefits.” And worse, the pay increases drive up pension costs.

Third: Note the quote about driving up pension costs.

Fourth: Labor contracts are usually two years, but Brown signed contracts that are five years in length.

So Gov. Jerry Brown spent much of his term trying to work through California's budget deficit. And now that he's nearly out the door, he signs an usually long labor contract that could tie the hands of the next governor. Not a nice thing to do when you're heading out the door.

The Sacramento Bee has an interesting article up on pension problems in the cities.

First: over the next 7 years, many California cities expect to see a 50% increase in pension spending.

Second: CalPERS now expects to average 7 percent earnings on its investments each year, down from its previous projection of 7.5 percent. 

So in a way, by lowering the average rate of return, CalPERS is forcing funding issues down to the city level. It is a nice conservative approach to things, but it causes issues at the city level. With the stock market gyrations, it'll be interesting to see what happens to the pension funding if 2018 doesn't see significant gains. If we see the stock market flat line for two years, I suspect those 50% increases in pension spending will be accelerated.

Sweden: Part 2 -- Mother Jones vs The Times (UK) vs Reuters (Malmö)

There's been a lot of talk -- from conservatives -- about immigration violence in Sweden. I paid passing attention to it, but wasn't necessarily convinced as it really was just from conservative sites.

In Part 1, I look at recent events that got me curious enough to do a Google search on the topic. Basic summary is that the far right in Sweden has been calling for the military to go out and crack down on gangs. In a recent Riksdag debate, the current Prime Minister (not from the far right party) appeared to leave that option open.

I did a Google search and came upon three articles that provided opinion and further insight into what is going on in Sweden.

First up is Mother Jones (21 Feb 2017). Now let's just state that this article is a year old and doesn't take into account the recent Riksdag debate. What's discussed:

First: Much of this debate is in regards to the city of Malmö.

Second: Kevin Drum -- the writer of the piece -- goes through crime statistics in Sweden.

Third: Crime is trending down in the city over the last decade.

Fourth: Murder rates have increased from 7 in 2014 to 12 in 2016. (My bias: In a way, you might consider that a statistical blip.)

Fifth: Kevin Drum puts much of the blame on increased gang violence, which doesn't necessarily mean it is driven by immigrants as there is a long history of immigration.

Next up we have Reuters (12 July 2017). What does Reuters have to say?

First: Police are checking papers at worksites, looking for undocumented workers (My bias: I wonder how this would fly with the left in the US?)

Second: The police increased these checks after a terrorist attack in April 2017 when Rakhmat Akilov drove a truck into Stockholm shoppers.

Third: The Migration Agency estimated 10,000 asylum-seekers a year will choose to disappear rather than be deported. Up to 50,000 undocumented immigrants already work in hotels, transport, construction and restaurants, the agency said last year.

Fourth: Opinion polls indicate a shift in attitude towards immigration. In 2017, 52% favored letting in fewer refugees into the country. In 2015, this was 40%.

Fifth: the Sweden Democrats (a party that started out as Neo-Nazis) poll at 20%.

Finally, we have The Times - UK (21 January 2017). What do they have to say?

First: Rapes are up 10% versus 2016 and 36% of young Swedish women feel unsafe at night.

Second:  In Malmö, where a fifth of the 340,000 inhabitants are under 18, children as young as 14 roam the streets with Kalashnikov assault rifles and bulletproof vests. The average age of gang members is 22, the vast majority of them hailing from migrant families.

Third: Paramedics and firefighters refuse to go into Rinkeby (outside of Stockholm's old centre) without police escort.

The one important fact that Mother Jones leaves out is the gangs hail from migrant families, which is stated in The Times article. Kevin Drum does state that these gangs have been around for awhile, but he never goes into any detail about the ethnic make-up of these gangs. From reading the article, one could just assume they're Swedish Europeans. He also states that immigrants have been moving to Sweden for years and that the uptick has just happened recently. But he doesn't discuss the recent uptick in immigration. Kevin Drum does state that Sweden loves statistics so I took a look and found this government website with immigration data:

2016: 163K
2015: 134K
2014: 127K
2013: 116K
2012: 103K
2011: 96K
2010: 99K
2009: 102K
2008:  101K
2007: 99K

There is a large uptick in immigration from 2007 - 2016, but that doesn't tell the full story. Per the website, between 2010 - 2015, only 20% of immigration was related to asylum seekers. In 2016, that number was 47%. So this is another fact that Kevin Drum is leaving out -- that there is a large increase in asylum seekers. With that, one might actually argue there could be a correlation between an increase in gang violence and immigration.

What is interesting about the Reuters article is the quote that 10,000 asylum seekers a year who are denied their papers may simply disappear versus getting deported. My question: if you disappear, you have to depend on help from someone, right? Could a portion of these individuals be finding their way into gangs? Also, is shouldn't be ignored that Swedes are turning against immigration and that the shift in opinion polls is probably one reason why the Prime Minister stated in an interview that he wouldn't rule out using the military to combat the gangs. Sometimes if you want to stay in power, you've got to consider options that goes against your beliefs.

On the other hand, how accurate is The Times article? Are massive numbers of children walking the streets with Kalashnikov assault rifles and bulletproof vests? Or did someone just see a small handful of children walking around a gang infested area? It just seems possible that The Times article is trying to be sensationalist.

Essentially, I think Mother Jones is purposely ignoring certain facts. On the other hand, The Times might be prone to exaggeration. The truth is probably in the middle somewhere, which means that it is something to keep an eye on. Due to that, I'll add this to my list of issues that I blog on.

Sweden: Part 1 -- Immigration Violence? What's going on?

There's been a lot of talk -- from conservatives -- about immigration violence in Sweden. I paid passing attention to it, but wasn't necessarily convinced as it really was just from conservative sites.

Oil: Long Term Outlook (as in 20 - 30 years)

BP chief economist Spencer Dale and Bassam Fattouh, director of The Oxford Institute for Energy Studies, have a research paper up on BP.com that discusses peak oil and long-run oil prices.

I am of the opinion that oil prices are likely to spike around 2020 due to a lack of exploration capital spend. I am also of the opinion that we're likely to hit peak oil demand around 2040.

Turkey attacks the Kurds in Syria (Part 2: Russia sticks with the Kurds?)

Turkey recently launched attacks into Syria. Specifically, those attacks were in Afrin, which is controlled by Kurds. The YPG (People's Protection Units) are the Kurdish forces in that area. Turkey has issues with the YPG as they believe them to be an offshoot of the Kurdistan Workers Party (PKK). The PKK is responsible for the Kurdish independence movement in Turkey.

Turkey attacks the Kurds in Syria (Part 1: US parts with NATO ally Turkey?)

Turkey recently launched attacks into Syria. Specifically, those attacks were in Afrin, which is controlled by Kurds. The YPG (People's Protection Units) are the Kurdish forces in that area. Turkey has issues with the YPG as they believe them to be an offshoot of the Kurdistan Workers Party (PKK). The PKK is responsible for the Kurdish independence movement in Turkey.

Corporate and Public Pension Issues: GE and California

The biggest non-secret out there is that we have a pension problem in this country. There are two perfect examples: GE and California.

Let's take a look at GE first. CNN Money (18 January) has an article that goes into the GE situation. Here are some major points:

1. When Jack Welch retired, there was a pension surplus of $14.6 billion (2001).

2. With Jeff Immelt, it all went down hill. The pension currently has a $31 billion problem (2016).

3. This was largely driven by money poorly spent on share buy backs and M&A.

4. Share buybacks equaled $40 billion. So if GE hadn't wasted money on buybacks (though additional cash would have been applied to higher dividend payouts), their liabilities could have been much smaller.

5. One example of an M&A purchase that went wrong was the acquisition of Alstom's power business, which is focused on coal-fueled turbines.

6. Though on the M&A front, if oil supply/demand disconnects arise as I suspect, Baker Hughes might work out as a solid M&A deal. But from what I've read, GE wants to sell off Baker Hughes. They should probably hold on for a few more years to see if the IEA forecasted crisis happens come 2020-ish.

7. GE isn't the only corporation with large pension deficits. GM is $18 billion short and Boeing is $20 billion short.

8. One thing that has been mentioned via CNBC (16 January) is that GE could break up as soon as Spring. Yet CNN Money has this quote: But analysts warned that GE's pension liabilities are so large that it could make dismantling the company very messy, if not impossible. Yeah, how do you split up the pension liabilities?

In summary, one could say that GE focused on pleasing Wall Street via share buy backs and attempted to please Wall Street via M&A versus properly taking care of their retirees. It appears based the CNN Money article that GE could have easily averted their current pension crisis by just maybe doing half of the buy backs that they did. Perhaps in GE's defense, few probably thought that interest rates would stay as low as they have for as long as they have. And as the article states: Yet GE also said that its pension liabilities could go down significantly if rates rise.

Now for California. George Skelton of the LA Times (18 January) suggests that it is now time for politicians to address a looming pension crisis.

Here are some juicy quotes:

1. It was revealed last year that the cost of retiree benefits in Los Angeles amounts to roughly 20% of the city’s general fund, which pays for basic services such as police and parks. In 2002, the cost was less than 5%.

The article doesn't do any forecasting, but this is not a good picture to have this percentage increase that much in 15 years.

2. The unfunded liabilities at the state and local level ranges from $333 billion to $1 trillion.

3. Just using the official numbers, [Joe Nation, Stanford public policy professor] says, the unfunded liability amounts to an average of $26,000 per household — fourth worst in the country. No. 1 is Connecticut at $38,000, followed by Alaska and Hawaii.

Now, of course, we don't know what the unofficial numbers are for Alaska, Connecticut and Hawaii, but if we just go with the $1 trillion level and assume that the other states are being more truthful, we obviously surge to number 1.

4. The article goes into how there are various conflicts in terms of pensions. Unions give money to politicians. Judges and Sacramental staffers who might need to do the reform (or propose the reforms) would also be hitting their pocketbooks.

Essentially, what happens when we finally go into a Wall Street bear market? Does the unfunded pension liability explode to $1 trillion?

Kurdish Government Protests in Iraq

In November, I wrote a blog post about power plays between two Kurdish political parties: Patriotic Union of Kurdistan (PUK) and the Kurdistan Democratic Party (KDP). I mentioned that it looked like an issue surrounding oil profits.

In December, protests erupted that impacted both the PUK and KDP. Based on current reading, the situation is a bit more complicated than just PUK vs KDP as we now have mention of another political party called Gorran.