Monday, July 6, 2015

Independence Day

I retired today from a work-a-day world I have inhabited for the 40+ years since I graduated from law school.

It was not an easy decision. I loved the work and the people I associated with every day. I worked for an excellent company that paid me well.

However, I have reached a point in my life that I am valuing time more than money. Independence more than incentive pay. Family more than the FMLA, the FASB or FICA.

The career path I followed led me into jobs that I never would have thought possible as I entered law school in 1972. Public accounting. Practicing as a CPA. Practicing as a tax attorney. Leading a tax revolt in Ohio in 1983 (truly one of the first Tea Party members). Corporate Director-Taxation for a Fortune 500 heavy manufacturing company. Investment Committee member for a multi-billion pension fund. Political consultant. Washington tax lobbyist. A series of Corporate Finance roles overseeing Treasury, Cash Management and Risk Management. A series of Human Resources roles for a Fortune 500 financial services company including management of Benefits, Compensation and HR Systems. Corporate Communications. Media Relations. Marketing and Branding. Advertising. Real Estate Facilities. Administrative Services.

I doubt there have been many who started out their career doing tax returns and ended it developing marketing and brand strategy, writing ad copy and producing tv commercials.

It has been interesting and it has been fun. There have been so many great memories and great people along the way.

The Second Act now begins.

BeeLine will continue. I started writing it several years ago with the idea that it could be something that could continue into retirement.

I plan to finish a book I started a few years ago on financial planning and I would like to develop a gig doing some public speaking as well. I have a well-developed speech for college students on the principles of financial planning and have several other speeches on the emerging field of neuroeconomics and how it influences human decision making in benefits, sales, marketing and branding.

I have also recently developed a motivational speech on "The Science of Success" that has gotten very favorable reviews in the several times I have presented it.

Several people have approached me about consulting projects and I may find myself considering some of these opportunities as well. I am a big believer in the power of keeping both your mind and body active as the best ingredients for a long and happy life.

Of course, golf, grandchildren and travel will also get some of my attention with my greater independence.

This year's goal on the golf course is to get within 10 shots of my age. If I can then hold that score over the next decade I can get to my longer term objective of shooting my age.

The grandchildren are all here this week so I am off to a great start on that score.

No big travel booked yet but travel planning begins in earnest tomorrow.

By the way, if my BeeLine posts slump in number over the next several months, you will know why.

So much to do. Only so many hours in the day.

Each day of my Independence promises to be hard.


Tuesday, June 30, 2015

A Cautionary Tale

The financial situation in Greece is dominating the news and that country looks to be heading over the cliff as it attempts to run from its mountain of debt.

The Greek people have only bad choices left. They can agree to strict Eurozone imposed austerity measures that would cut pensions, government payrolls and further harm their economy in order to stay in the Euro. Or they can tell the Europeans to stuff it and see pensions, payrolls, bank accounts and their economy obliterated in the aftermath of their exit from the Euro.

Pain is the only option. The only question is how much pain do they want and when do they want to take it?

At the same time, closer to home, Puerto Rico's Governor called for the U.S Territory to be able to file bankruptcy in order to restructure its debts. Its outside financial advisor said Puerto Rico is "insolvent" and will soon run out of cash.

How much debt are we talking about in Greece and Puerto Rico?

Greece has $360 billion in external debt. That works out to $47,636 per capita.

Puerto Rico has $167 billion in external debt. That is $47,828 per person.

How much debt does the United States have you might ask?

$18.5 trillion or $58,437 per capita.

All of this data from List of Countries by External Debt in Wikipedia.

How are we better off than Greece and Puerto Rico right now when our debt levels are even higher?

We have a much stronger and productive economy.

The dollar is the world's reserve currency.

And we can print money and they can't.

It makes all the difference in the world.

Until it can't be done any more.

Pay attention to what goes on in Greece and Puerto Rico.

It should be a cautionary tale for all of us.

Sunday, June 28, 2015

Our Lost Constitution

There was a time when the Constitution meant something.  It was respected for what it was.  So were the limitations that were carefully crafted into the document by the Framers.  Even when there was pretty compelling language in the Constitution to bend it to the "current times" it was ruled out of bounds.  Has something been lost?

Most definitely based on the 5-4 Supreme Court decision on Friday where it was miraculously concluded that the 14th Amendment to the United States Constitution provides "that the right to marry is a fundamental right inherent in the liberty of the person, and under the Due Process and Equal Protection Clauses of the Fourteenth Amendment couples of the same-sex may not be deprived of that right and that liberty."

It is all a little hard to understand in that the 14th Amendment was adopted in 1868.  How is it that this fundamental right in the Constitution was not discovered for 147 years?

Justice Scalia asks the same question in his dissenting opinion and he also provides a most troubling answer.

“The five Justices who compose today’s majority are entirely comfortable concluding that every State violated the Constitution for all of the 135 years between the Fourteenth Amendment’s ratification and Massachusetts’ permitting of same-sex marriages in 2003. 
They have discovered in the Fourteenth Amendment a ‘fundamental right’ overlooked by every person alive at the time of ratification, and almost everyone else in the time since. They see what lesser legal minds—minds like Thomas Cooley, John Marshall Harlan, Oliver Wendell Holmes, Jr., Learned Hand, Louis Brandeis, William Howard Taft, Benjamin Cardozo, Hugo Black, Felix Frankfurter, Robert Jackson, and Henry Friendly—could not.
They are certain that the People ratified the Fourteenth Amendment to bestow on them the power to remove questions from the democratic process when that is called for by their ‘reasoned judgment.’
These Justices know that limiting marriage to one man and one woman is contrary to reason; they know that an institution as old as government itself, and accepted by every nation in history until 15 years ago, cannot possibly be supported by anything other than ignorance or bigotry. And they are willing to say that any citizen who does not agree with that, who adheres to what was, until 15 years ago, the unanimous judgment of all generations and all societies, stands against the Constitution.”

What is most amazing to me is that five unelected Supreme Court Justices could effectively overrule state constitutional provisions and laws against same sex marriage. And almost all of the constitutional provisions were ratified by the voters of each state within the last 15 years. By and large these were not even close votes either.

What is even more remarkable about this is that these Constitutional votes were taken by the people exactly because they were concerned about this exact result---that judges would somehow find a "right" in their Constitution that did not exist there before.

Below is a chart of the states that voted on the question of same sex marriage by a vote of the people with the vote outcome.

Notice that in only two cases did a ban on gay marriage fail to gain a majority of voters. In Arizona in 2006 (which also attempted to ban civil unions) and in Minnesota in 2012.  Arizona voters went on to ban same sex marriages in 2008 while allowing civil unions for same sex couples.

StateDateYes Yes voteNo No voteVote outcome
Alabama200681% (734,746)19% (170,399)Yes Yes
Alaska199868% (152,965)32% (71,631)Yes Yes
Arizona200648% (574,332)52% (607,769)No No
Arizona200856% (1,258,355)44% (980,753)Yes Yes
Arkansas200475% (753,770)25% (251,914)Yes Yes
California200852% (7,001,084)48% (6,401,482)Yes Yes
Colorado200656% (865,126)44% (674,030)Yes Yes
Florida200862% (4,890,883)38% (3,008,026)Yes Yes
Georgia200476% (2,454,912)24% (768,703)Yes Yes
Hawaii199871% (285,384)29% (117,827)Yes Yes
Idaho200663% (282,301)37% (163,408)Yes Yes
Kansas200570% (414,106)30% (178,018)Yes Yes
Kentucky200475% (1,222,125)25% (417,097)Yes Yes
Louisiana200478% (618,928)22% (177,103)Yes Yes
Michigan200459% (2,698,077)41% (1,904,319)Yes Yes
Midwest:
Minnesota201247% (1,399,938)53% (1,550,844)No No
Mississippi200486% (957,104)14% (155,648)Yes Yes
Missouri200471% (1,055,771)29% (439,529)Yes Yes
Montana200467% (295,070)33% (148,263)Yes Yes
Nebraska200070% (450,073)30% (189,555)Yes Yes
Nevada200267% (337,183)33% (164,555)Yes Yes
North Carolina201261% (1,317,976)39% (840,802)Yes Yes
North Dakota200473% (223,572)27% (81,716)Yes Yes
Ohio200462% (3,329,335)38% (2,065,462)Yes Yes
Oklahoma200476% (1,075,216)24% (347,303)Yes Yes
Oregon200457% (1,028,546)43% (787,556)Yes Yes
South Carolina200678% (825,766)22% (232,978)Yes Yes
South Dakota200652% (172,242)48% (160,173)Yes Yes
South:
Tennessee200681% (1,419,434)19% (327,536)Yes Yes
Texas200576% (1,718,513)24% (536,052)Yes Yes
Utah200466% (593,297)34% (307,488)Yes Yes
Virginia200657% (1,328,134)43% (998,483)Yes Yes
West:
Wisconsin200659% (1,260,554)41% (861,554)Yes Yes
Credit: Wikipediahttps://en.wikipedia.org/wiki/U.S._state_constitutional_amendments_banning_same-sex_unions

What is really important to remember here is that there is a U.S. Constitution and that document has a mechanism that allows it to be amended if it is necessary. 

There is absolutely no way that the U.S. Supreme Court should be overturning a constitutional provision that a majority of the various states have adopted.

What is so wrong with following the Constitution? I wrote about all of this in 2011 in "Making Amends With The Constitution". There is a process in place in our Constitution if we want to change the rules. It is not easy but it was not supposed to be easy if we were to carefully protect the rights of the majority and also assure that minority rights are also respected. 

Compare the same sex ruling of the Court to other significant constitutional issues in our history.

For example,

Abolition of Slavery
President Lincoln had effectively abolished slavery through his Emancipation Proclamation in 1863 but he still believed in the necessity of following Constitutional standards and proposing the 13th Amendment which reads "Neither slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction."

Lincoln's effort in this regard is the subject of the 2012 movie "Lincoln".  Why did he see the need to go though all of that effort when it could have been done by the Courts or by letting his Emancipation Proclamation do the job? He did it because he wanted the legitimacy of the process. 


Income Tax
Article I, Section 8 of the Constitution provides that Congress has the power to lay and collect taxes. Nevertheless, the income tax law of 1892 was ruled unconstitutional because it was considered outside the power of Congress.  The 16th Amendment was ratified in 1913 to allow the establishment of an income tax.


Women's Right to Vote
There was nothing in the Constitution signed by the framers that precluded women from voting.  All references in the document were to people, not men.  However, the culture and custom was generally for only males to vote.  Nevertheless, it took the 19th Amendment in 1920 before it became the law of the land.  

Interestingly, 15 states (beginning with Wyoming in 1870) granted women the right to vote before adoption of the 19th Amendment.  Since voter eligibility was an issue left to the states (in that it was not specifically enumerated in the Constitution by the Framers) women in these states voted in both state and federal elections before 1920.

Equal Rights Amendment
Similarly, a substantial effort was made in the 1970's to pass an Equal Rights Amendment to the U.S. Constitution to state that "Equality of rights under the law shall not be denied or abridged by the United States or by any State on account of sex."  Why go through the effort if a court could just make a ruling? The amendment ultimately failed as only 35 of the 38 states needed to ratify the amendment signed on. 

Was the U.S.Constitution designed to change with time? Of course. That is what the amendment process is for (Article V).  The Framers in their wisdom also considered this carefully.  They did not want it amended for some passing fancy. 

Nor did they want a small majority to change the key foundations of the governing document to the detriment of a significant minority.  Therefore, 2/3 of both the House and Senate can come together and propose any amendment. They do not even need the President to concur.  Alternatively, 2/3 of the states can come together and call a convention to propose their own amendments and bypass Congress completely.  If the amendment is ratified by 3/4 of the states it is adopted as part of the Constitution.

If the American people want a federal government with expansive power they can have it. They can allow gay marriage. Or ban it in all 50 states. They can require everyone to buy health insurance or anything else.  They can ban assault weapons or ban abortions from coast to coast.  There is a way to do it.

It just does not seem that these types of powers exist with the President or Congress with any reasonable reading of the Constitution.  At least, this has been the interpretation for most of our history. Nor does it seem to be within the power of five justices to suddenly discover fundamental rights that have somehow been hidden in the Constitution for over 200 years and start applying them to over 300 million citizens by fiat.

It is indeed ironic that Justice Kennedy in the majority opinion based much of his rationale on the rights and liberty of the same sex couple who wants to marry.

However, what of the rights and liberty of the voters of the various states cited above?

And most importantly, what about the rights and liberty of those who might have a different view of gay marriage based on their religion?

Who prevails in a conflict between someone who has the right and liberty to marry under the 14th Amendment and a Pastor, Rabbi or Iman who also believes that the 1st Amendment is supposed to protect their rights as well? How will the government balance those rights?

Will we see churches threatened, sued and denied tax-exempt status for not performing same sex marriages?

In my view, that is a certainty. They have already come after butchers, bakers and candlestick makers who did not want to participate in gay marriage ceremonies based on their religious beliefs. The clergy is next as are the churches, synagogues and mosques.

Look no further than Kennedy's opinion where he states only that religious believers may continue to "advocate" and "teach" their beliefs. Nothing more. There seems to be no allowance for religious believers to actually "exercise" their religion.

Who would think that when it came to rights and liberty that #14 would trump #1?

And that the politics would trump policy at the Supreme Court of the United States.

This is not the Constitution of our Founders. Are they even looking at the Constitution?  

If they can do this what can't they do?


Thursday, June 25, 2015

Roberts' Rules of Order

Robert's Rules of Order is a book "containing rules of order intended to be adopted as a parliamentary authority for use by a deliberative assembly."




It was written in 1876 by U.S. Army Colonel Henry Martyn Robert (1837–1923).

Apparently Chief Justice John Roberts and a majority of the U.S. Supreme Court have decided to develop their own legislative rules of order so that it can save the U.S. Congress from itself and the Affordable Care Act from oblivion.

Roberts has taken up the pen writing for a majority of the Supreme Court twice by concocting and contorting opinions that try to affirm a law that deserves no affirmation. He first turned a penalty into a tax to save the law in the original ACA case and he now has turned the federal government into a state in King v. Burwell.

It is all quite remarkable.

Especially for a body that is supposed to interpret the law rather than legislate from the bench.

The Supreme Court, and Chief Justice Roberts in particular, seems to believe its role to be more concerned with political and social order than its constitutional role to provide checks and balances between the three branches of government and assaults on constitutional order.

I found this portion of the majority opinion written by Justice Roberts to be especially remarkable where he defends the decision to allow credit subsidies on the federal exchange even though the statute clearly states that subsidies can only be provided by "exchanges established by the state".

"Those credits are necessary for the federal exchanges to function like their state exchange counterparts, and to avoid the type of calamitous result that Congress plainly meant to avoid," Roberts wrote.

I almost laughed out loud when I read this rationale.

I also would like to ask Justice Roberts this question.

If Congress plainly meant to avoid a calamitous result why did they not plainly make that clear when they wrote the statute and passed it into law?

This seems to me to be an open and shut case if the Court was doing its job and not that of Congress.

Justice Antonin Scalia blasted the majority ruling in his dissent, in one part suggesting the healthcare law should now be called "SCOTUScare."

"Rather than rewriting the law under the pretense of interpreting it, the court should have left it to Congress to decide what to do about the act's limitation of tax credits to state exchange," Scalia wrote, joined by conservative justices Clarence Thomas and Samuel Alito.

Exactly.

Leave Robert's Rules of Order to maintain order in the deliberative process.

Do not use Justice Roberts' Rules of Order to save bad legislation.

Thursday, June 18, 2015

Interest About Interest

It has now been almost seven years since the effective federal funds rate established by the Federal Reserve was over 1%. I am not aware of any other period in economic history that interest rates have been so low for so long.

Here is the FRED graph showing the federal funds rate from the beginning of the data set in 1954.



If that period is not long enough for you, here are a few graphs using a longer time perspective that I came across in a paper on The Equilibrium Real Funds Rate by James D. Hamilton, Ethan S. Harris, Jan Hatzius and Kenneth D. West.


Nominal interest rates in the United States since 1855.




Interest rates in the United Kingdom since 1800.




Nominal interest rates in Germany since 1858.





In Japan .



In Italy.



In Switzerland.



To say that the monetary and interest rate policy by the world's central bankers is in uncharted waters is an understatement.

How long can this be sustained?

What happens when the air is let out of the balloon?

What happens upon a Greek default?

Have the central bankers boxed themselves in so there is no graceful exit?

These are just a few questions circulating right now.

At some point there will be a lot more interest about interest. That usually comes when people also start being more concerned about the return of their money than on the return on their money. Or when the pernicious effects of inflation start to be better understood when things start heating up.

There is inherent risk in extending credit to someone else.  The record of interest rates shows that the compensation for that risk is not 0.12% or anything close to what we have today based on any historical standards.

Has the world changed that much? Have the laws of economics been displaced?

I don't think so.

When it turns, who will get burned?


Saturday, June 13, 2015

Chickens Coming Home To Roost

This is the headline of an article in Pensions and Investments magazine this week.

Chicago Public Schools faces $634 million pension fund contribution by June 30


Wow! That's a lot of money.
As the deadline looms, the Chicago Public School Teachers’ Pension & Retirement Fund expects the Chicago Public Schools Board of Education to contribute the full $634 million due before the close of its fiscal year on June 30, said Frances Radencic, director of communications of the $10.2 billion pension fund. 
The pension fund “currently liquidates $60 million to $80 million per month to make pension payments to members,” said a statement on its website. “The fund cannot afford another pension ‘holiday’ or budget relief.”
I would say not. When you are a pension fund manager and you are required to have the liquidity to pay out $1.3 billion in benefits payments each year, a $634 million cash contribution is rather important in order to avoid having to liquidate your investment portfolio.

And those benefits paid to retired Chicago school workers are increasing at a rapid rate.


Credit: Chicago Teacher's Pension Fund-2014 Annual Report

This article caused me to look for a little context on the inner workings of the budget of the Chicago Public Schools.

It is a rather large enterprise.

Its 2015 FY budget is $5.7 billion. Those revenues are enough to put the Chicago Public Schools on the Fortune 500 if it was a corporation.

This is the breakdown of the budget. $3.9 billion is paid for salaries and benefits for 39,206 employees. That works out to almost exactly $100,000 per employee.

The CPS serves approximately 397,000 students which puts its per student costs at $14,500 per year.


Credit: Chicago Public Schools 2015 FY Budget


About half of the total staff are teachers.

Credit: Chicago Public Schools 2015 FY Budget


Why is the CPS in such a position on its pension contribution?

It has not been making the contributions it should have in recent years due to legislation passed by the Illinois legislature. The total shortfall in contributions from an actuarial perspective is over $1.2 billion for just the last few years. This chart shows the past contributions and the projected contributions that will be required over the next several years.


Credit: Chicago Public Schools 2015 FY Budget


This chart shows the consistent underfunding of the pension fund between the actuarially required employer contributions and what was actually contributed since 2006.


Credit: Chicago Teacher's Pension Fund-2014 Annual Report


This has led to a funded status on the pension fund of just 51.5% as of the most recent report.


Credit: Chicago Teacher's Pension Fund-2014 Annual Report


Of course, this calculation is assuming a discount rate on the future liabilities of 7.75% which many would argue is much too high considering the low interest rate environment we are in. Using this rate, the CPS pension fund has $20 billion in liabilities and just over $10 billion in total assets. A more realistic view would probably place the future liabilities in the range of $30-$40 billion at today's rates.

Underlying all of this is a significant demographic shift as the number of active employees has fallen in the CPS while the number of retired employees has increased putting even more pressure on the pension fund, the CPS budget and the taxpayers of city of Chicago and the state of Illinois.


Credit: Chicago Teacher's Pension Fund-2014 Annual Report 

It is not a pretty picture.

However, it is a picture that will be painted again and again in other public sector pension plans, Social Security and Medicare if our elected leaders continue to ignore demographic and actuarial realities.

A famous Chicago pastor once said that "America's chickens are coming home to roost."

They certainly have in his home city.