Friday, April 24, 2015

California Pension Crisis 5.0

We found this news story from a couple of weeks back quite startling.  Organized and supported by public employee labor unions, protestors picked up signs and marched out front the Sterling Hotel in Sacramento, while chanting anti-Wall Street themes.  This activity was all part of an effort to express their opposition to a forum being held inside the hotel by the Reason Foundation to explore possible solutions to the public employee pension crisis in California Now, we support first amendment rights in all instances, including this one, but the themes of the protest are quite curious.  

It has us thinking about a much broader issue that has crept its way into American politics and business, as well, for that matter.  I like to refer to it as "a thumb on the scale".  The ideom refers to the practice of unethical butchers in days (hopefully) long gone, of slipping a thumb onto a scale used to weigh a customer's purchase to inflate the price.  Scales for weighing meat and other products are now more commonly in plain view, and we'd like to believe used by a new breed for whom such open customer display is not even necessary.

But the practice has more general application to those in the worlds of business and politics who, in an all consuming desire to succeed, might be willing to cheat ever so slightly to out-maneuver an unsuspecting customer, opponent or audience.  We're not implying anything outrageous, illegal or even overtly unethical, after all, influencing outcomes is in part what political campaigns and marketing efforts are designed to do.

The practice of "spinning" news for political gain crept into the common vernacular in the 1990s. The idea was to reinterpret the news for the viewer to bias the viewer's perception.  Before long newscasters on the nightly news were referring to political aids as "spin doctors" (not to be confused with the highly talented musical act of the same name).  In short span, America had managed to legitimize an activity of highly suspect intent.

So what does all of this have to do with a union organized protest in Sacramento?  Perhaps this photo is a good place to start.  These protestors are voicing their opposition to efforts under discussion in California that could, in their estimation, limit pension benefits to which they are entitled by virtue of their employment by public agencies.

But it's the sign being held up that caught our attention.  The sign reads "Good for Wall Street...Bad for the Rest of Us" and in so doing characterizes efforts to limit public employee benefits as being initiated by or inuring to the betterment of Wall Street.  On the face of it, you might be wondering what in the heck Wall Street has to do with any efforts to limit public employee pension benefits. And in this instance at least, closer inspection will not cause the argument to make any more sense.

The argument, awkwardly put forward by the labor unions - and to which this poor soul holding up the sign may actually be convinced - is that Californians are somehow faced with a choice.  Either favor the interests of hard working school teachers, police officers and firefighters, or do something that would benefit those evil, greedy demons on Wall Street.  But now the reasonable person might ask, how are these two unlikely groups even remotely connected?

If I'm following their argument correctly, and I admit it's a bit of twisted logic, I'm guessing it has to do with the bankruptcy case of the City of Stockton.  You see the city, faced with insurmountable debts to the CalPERS pension system, bondholders and other creditors, was forced to file for bankruptcy in 2012.  Despite the Judge in the case opining that the obligations to all creditors, including CalPERS could be amended by the bankruptcy process, the city, in its reorganization plan chose not to do so.  That is, the city chose to fulfill its obligations to its pension system in full, but renege on its promises to repay bondholders who had lent the city money for a variety of public purposes.  Now call me old fashioned if you like, but my Dad taught me that if someone lends you money, you have an obligation to repay it.  In full.

One of the purposes for which the city borrowed money, was for building a new fire station.  One of the investors in those bonds was Franklin Advisors, who purchased $35 million of the city's bonds back in 2009, long before any talk of bankruptcy.  It deposited those bonds into two of its municipal bond funds.  Per the bankruptcy plan, now approved by the courts, however, Franklin will be paid 12 cents on the dollar that it invested, leaving its fund with a $30 million loss on its investment.

Now, I guess this is where Wall Street must come in.  Apparently, Franklin and other investors who lent the city money for vital public projects must be considered by the unions "Wall Street" firms, even though Franklin is located in San Mateo, California and runs mutual funds that invest in municipal bonds, and whose shareholders are retirees and other ordinary citizens.  But, then again, public sentiment is decidedly against Wall Street.  

Now here's where the thumb gets slipped on the scale.  The union organizers or public sector employees who printed this sign must clearly know that.  To not, would be ignorant.  Let's assume, as is likely the case, that it's the former.  So, knowing quite well that private individuals like you and me might be investors in these Franklin funds, and would suffer losses from Stockton's failure to repay its promised obligations, why in the world would the unions represent otherwise?  Could it be that if the interests of public pensioners were pitted against those of ordinary citizens, it might be more of a fair and reasonable fight?  And who wants that anymore.  I mean, when it's just so tempting to tip the scales.