Tuesday, August 27, 2013

Pensions, Psychology and Leadership


  Among the many things I have learned in my career this fact truly stands out. Psychology matters. It is the swing in psychology that gets people into the biggest trouble. This is true whether referring  to investors whose behavior I have witnessed for nearly 40 years, or the politics and politicians of the 4 States I have observed in my adult life. The professionals, the public and the media focus on  hot topics and are caught up in emotions en masse and invariably swing in the wrong direction at the wrong time. When things are going well people become greedy and overly enthusiastic, and when times are troubled, people become fearful and reticent. They stick their heads in the sand. That’s just the wrong thing to do. It’s important to control fear and greed.
Another mistake that people often make is that they compare themselves with others who are making more money than they are and either conclude that they should emulate the others’ actions by taking risk or seek to “even” the playing field through envious actions. This is the source of the herd behaviour that so often gets them into trouble. We're all human and so we’re subject to these influences, but we mustn't succumb. In my world .This is why the best investors are quite cold-blooded in their professional activities. I believe similarly that  the best politicians solve problems through courageous action not from polling and running ideas of a flag pole.. Rhode Island and the United States have some very obvious problems currently being uniformly ignored by the elected leaders of today.
     In Rhode Island so many towns and cities are on the verge of insolvency, that its truly frightening. But it seems this is  just too hard for our leaders to tackle. No one seems willing to do the right thing. Kicking the can is no longer working and the idea “du Jour” is to adjust way too little, far  too late. Just 10 years ago town finances seemed  ok and the crash of 2000 happened. This should have been a wake up call, but towns just kept on making promises oblivious to the fact that health care obligations were and are unfunded and rapidly exploding. Their greed was in full bloom until 2008 when towns were exposed. Some by town criers and some by the toothless Auditor Generals reports. Willful ignorance on the part of elected leaders and voters, as well as beneficiaries continued unabated and have lead to the toxic mix that now stands before us. Recently our best real effort for reform , such as it is, was the Towns and Cities Pension Crisis Commission. Their task, as set out by legislation and by the leadership from Gina Raimondo and Rosemary Beth Galoogly has been to identify those cities that are in “crisis” or near death.(under 60% funded) This modest task only addresses liabilities arising from pensions, not health care. The result of this effort has been revealing and somewhat helpful. Yet nothing “real” is being accomplished and even the modest goals they have set out, now appear to be completely unattainable. The last two meetings of this group have been cancelled without explanation. Have we now as a State shifted the moral burden from where it should be? On the voters and the taxpayers ? Have we now  let elected leaders off the hook for lying about finances? I fear this commission is yet another delay tactic. The time has come to face facts.
 In the investment world we can infer psychology from investor behaviour, and that allows us to get an understanding of how risky the market is, even though the direction in which it will head can never be known for certain. Yet Rhode Islanders have deluded themselves into believing that they can guarantee salaries many years in the future as well as health care costs.   I know we can not and by now you should also know they can not. But more importantly ,why do we do this for 12% of our population, guarantee millions? and let the rest figure it out on their own? The reason lies in the psychology of uninformed town leaders and politicians for the last 50 years. In the early 1970”s they were influenced by union advances in the Northeast and within the first  20 years of the programs ,  no problems existed. The dual tailwinds of favorable demographics and inflation made promises appear easy to achieve.   Soon retirees of all stripes realized inflation was a killer. So within the construct of politics politicians handed out promises for votes .They handed out our promise to 12% of the elite government workers.  And so on. But now, the game is over. Inequities exist of laughable proportions. It makes little sense for a middle school librarian to receive a million dollar annuity when masters and PHD librarians that are not publicly financed  have retirements of roughly $50,000 total. Should Janitors have retirements guaranteed by you in the hundreds of thousands? While the hard working private sector worker has no such guarantee? Why are we doing this and why isn’t anyone addressing this?

     I believe the answer to such lack of leadership  is obvious. Voters do not reward politicians for telling the truth. (witness the results of Doherty vs Cicilline). A real leader would be courageous and  would suggest immediate  action.

                                  MY Plan for real results

·          Eliminate town run Defined Benefit Plans for new hires.
·         Create Defined Contribution plans or hybrid plans fair to the active employees.
·         Do not haircut anyone who is more than 10 years retired or earns less than 35000 a year.
·         We should haircut all those who earn more than 35,000 but not by much maybe 10 % per year.
·          Freeze all colas for 10 years.
·          Then tax residents ( 15% to 20% of current UAAL) in a  big chunk in  2014 for allowing this tragedy to continue and for continually voting in incompetent or cheating politicians.
·         Fire every town manager who was in charge for the whole period during the explosion in liabilities over the last 15 years.
·          Mandate every Town Council pay Annual Required Contributions going forward  before any raises are allowed or they are subject to recall.

            Remember the following  advice so that we can make this mess less likely for our children and grandchildren. Mass emotion is very predictable and there are those individuals  who are unscrupulous enough to take regularly advantage of it. Too little skepticism by voters  and too much eagerness by leaders  in an up-economy – just like too much resistance and pessimism in a down-economy – can lead to  very bad investment results.
            Warren Buffett once said, "The less prudence with which others (government) conduct their affairs, the greater the prudence with which we must conduct our own affairs." Let all of us handle our own retirements and don’t obligate us to guarantee others.

 Do the right thing fix this…now ..

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