The Law School Biz

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One of the necessary requirements for fundamental reform of a dysfunctional institution is self-reflection among the individuals within that institution. It is now quite obvious to knowledgeable spectators that the American system of higher education is desperately in need of fundamental reform. But this realization has yet to sink into the heads of most of the key players in that institution, the faculty and the administrators. This, I think, is mainly because they are not yet generally self-reflective.

One of the main impediments to self-reflection in the academic world is the tendency among its inhabitants to view higher education — indeed, all education — not as a business but as a kind of quasi-religious institution. Under this view, the key players (especially the faculty) are not agents delivering a service and subject to the same motivations as agents in any other business (chief among which is self-interest), but are instead disinterested and selfless individuals educating young minds as a noble calling.

That is why it is always useful to report data that demonstrate that in fact college is a business like any other, and the agents in it (the faculty, staff, and administrators) as well as the customers — the students — behave as agents and customers do in other businesses, i.e., as rational maximizers of their personal preferences. Recent data on the changing reality of law schools are very illustrative in this regard

Consider first the data on the market for law school graduates, as reported by Deborah Jones Merritt. If you look at the percentage of recent law school grads who land a full-time job requiring bar admission (as opposed to those who get any sort of full-time job, say, as a waiter or bus driver), you see a declining market. In 2001, only 75.9% found such jobs within the nine months after they graduated. In 2002, the figure dropped to 75.3%. In 2003, it was 73.7%; in 2004, it was 73.1%. In 2005, it ticked back up to 74.2%, in 2006, to 75.3%; in 2007, back down to 74.2%. But in 2008, it dropped to 71.2%; in 2009, to 65.2%; and in 2010 it slid to 62.3%. Now; in the 2011 figures, it has sunk to 59.8%. That is, over 40% of law school grads last year could not find full-time work for which their costly education was appropriate within nine months of graduation.

This means that during the past four years, nearly 74,000 law school grads could not find appropriate full-time work (again, requiring bar admission). This represents huge direct costs in terms of money spent to educate these students (and the wages they have forgone in law school) and in even greater opportunity costs. (Most people bright enough to get through law school could have gone instead into medical, business, or technical trades.)

Students have apparently heard about the declining chances of employment in the field. Law school applications are way down over the past two years, dropping by nearly 16% last year alone.

More interesting still, the biggest drop in applications is not among the least but among the most qualified applicants — at least as measured by the ubiquitous Law School Admissions Test (LSAT). Among those who scored at the highest level (175–180), applications were down by nearly 14%; at the next highest level (170–174), they were down a whopping 20%. But at the next to lowest level (140–144), applications were down only about 6%, and at the lowest level (140 and below), only about 4%.

This leads to an interesting conjecture, especially for those who can’t believe that law schools are just businesses like any other. If law schools were run as quasi-religious institutions, solely devoted to the public good, they would respond to the obvious oversupply of attorneys and the resultant decline in the quality of applicants by cutting back on the number of students admitted. But if they are like other businesses that face a declining customer base, they will do what they have to do to attract the same number of buyers.

Specifically, my guess is that at the top-tier schools (especially the top 14, admittance to which usually requires an LSAT score of at least 165), you will see not a reduction in the size of the entering class but simply a reduction in the quality of that class, reflected in lower mean LSAT scores for those students.

We’ll see.




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Negligence of the Inept

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Most people, including many Obama supporters, were stunned when the Obama administration blamed the Innocence of Muslims video for the 9/11 attack on our Benghazi consulate. With his recent swagger ("bin Laden is dead" and "Al Qaeda is on the path to defeat"), Mr. Obama seemed to be telling us that his conciliatory diplomacy was winning the day. Surely no one could have predicted that an obscure internet video, based on an obscurer film, would cause the murders of Ambassador Stevens and three other Americans. But that was the administration’s explanation for the shattering of its Middle Eastern policy.

As for the film: all of us should have been stunned by the administration's betrayal of our First Amendment. Instead of defending free speech, Hillary Clinton denounced the film as "disgusting and reprehensible." Many liberals, of all people, condemned the producer, Nakoula Basseley Nakoula, for the violence he allegedly incited — the equivalent of yelling "Fire!" in a crowded theater. Nakoula is, by all accounts, a sleazy character. But if a third-rate, 14-minute trailer can thrust thousands of Muslims into a barbaric, murderous rage, then "Fire!" is precisely what should be shouted; the theater is already in flames.

Tiny Denmark defended the free speech of Jyllands-Posten, publisher of the Muhammad cartoons, doing so in the face of violent threats by Islamic extremists. America didn't have the spine to do; we apologized for the film, asked Google to remove it, and arrested the filmmaker.

A conflicted Google defended free speech in refusing to remove the video in the West, but caved to White House pressure in pulling it from several Arab-Muslim countries. A confused Nakoula was arrested in a disgraceful, groveling attempt to appease the Islamic world. When it comes to politically incorrect films, Muslims everywhere can now look to America for intolerence rivaling their own.

The foreign policy ineptitude of the Obama administration was exposed by its use of both the film and the arrest: the former as a pretense for causing the attack; the latter as a pretense for calming Muslims sympathetic to the attackers. White House and State Department officials were no doubt heartened by the spectacle of the Los Angeles Sheriff's Department taking Nakoula from his home, perhaps hoping that it would quench post-Arab Spring hatred of Americans. But the true spectacle was ironic: the number of law enforcement officials hustling Nakoula off to jail in the US exceeded the number of security guards protecting the four Americans murdered in Libya.

If a third-rate, 14-minute film trailer can thrust thousands of Muslims into a barbaric, murderous rage, then "Fire!" is precisely what should be shouted; the theater is already in flames.

In America, where inflammatory artwork such as Andres Serrano’s "Piss Christ" is celebrated, the moral enlightenment of the politically correct usually comes back to bite them in the ass. So it was with Hillary Clinton, who once pasionately defended the free speech right of "The Holy Virgin Mary," a painting by Chris Ofili that depicts a black Madonna smeared with elephant dung and surrounded by collaged pornographic images of female genitalia. That passion is now a distant, hypocritical memory. In the Obama era of apology and appeasement, Mrs. Clinton is embarassed by free speech. On Pakistan's “Day of Love for the Prophet,” she ran an ad featuring President Obama blathering about our tradition of religious tolerance, and herself, pleading that our government had nothing to do with The Innocence of Muslims.

The day of Muslims loving their prophet ended with 23 people killed in Pakistan alone and revealed the deep folly of Obama's Middle East policies. Violent anti-American protests spread throughout the hyper-senstitve, irony-challenged Muslim world. People burned American flags, ransacked American businesses, attacked American embassies, etc. It's hard to imagine that a more "disgusting and reprehensible" display would have happened, if Mrs. Clinton had run a free speech ad instead.

To the consternation of Barack Obama, the sons of men who hated, but respected, George Bush, have become men who both hate and disrespect him. Subsequent to the Benghazi attack, "Obama, Obama, We Are All Osama" became the chant of the new liberal Arab youth. To many, perhaps millions, of them, Obama's achievement is an abomination. He murdered bin Laden, the spiritual champion who lives in their hearts — hearts that will be inconsolably inflamed upon the release of Zero Dark Thirty, a movie celebrating the killing of their hero. That will be the day when Obama's "bin Laden is dead" mantra will come back to bite him in the ass.

And it is Obama's movie. According to documents obtained by Judicial Watch http://www.judicialwatch.org/press-room/press-releases/judicial-watch-obtains-4-to-5-inch-stack-of-overlooked-cia-records-detailing-meetings-with-bin-laden-filmmakers/, the White House worked closely with director Kathryn Bigelow and screenwriter Mark Boal to incorporate administration talking points and play up the president's role as the gutsy decision maker. To the dismay of Mrs. Clinton, our government is not innocent in the case of Zero Dark Thirty.

What, then, will the Obama administration do to prevent the rampant violence that this film will certainly incite? Pressure Sony to stop its distribution? Perp-walk Bigelow and Boal to jail? These steps may be unnecessary, if the administration succeeds in shifting blame to the intelligence community. Finally admitting that the Benghazi massacre was a terrorist attack, administration officials now tell us that they were unaware of terrorist threats converging on the consulate with the anniversary of 9/11. Had they known, measures would have been taken to protect the Americans stranded in Benghazi.

But, dashing hopes for an Obama Oscar (to go with his Nobel Peace Prize), they did know. There were numerous intelligence and DoD reports warning of the intense al Qaeda buildup in Libya during the six months prior to the Benghazi attack. According to reports such as “Al Qaeda in Libya: A Profile” (released in August), al Qaeda terrorists were probably bumping into each other in Benghazi. Ansar al Sharia held a June demonstration at Liberation Square; 15 militias showed up. Recent news reports reveal that, contrary to its repeated claims of ignorance, the administration was well aware of 13 threats or attacks on western diplomats and officials in Libya during the period. This is where president Obama's "Al Qaeda is on the path to defeat" mantra comes back to bite him, viciously.

Not only was the Obama administration cognizant of the emerging al Qaeda threat, it was aware of repeated requests from Benghazi for additional security — requests that were denied. Moreover, as al Qaeda forces were advancing, US forces were being withdrawn. According to CBS News, the State Department removed three Mobile Security Deployment teams and a 16-member Site Security Team between February and August. In the sobering aftermath of such blunders, a stern Obama warned of the consequences to countries that fail to protect Americans: we will send the FBI three weeks later, after reporters have left, examine the crime scene for an hour, and write a nasty report condemning the murders (after the election).

Not only was the Obama administration cognizant of the emerging al Qaeda threat, it was aware of repeated requests from Benghazi for additional security — requests that were denied.

Audaciously taking credit for the death of bin Laden, Obama purposefully evades responsibility for the deaths of Ambassador Stevens and his three colleagues. It is a shameless coverup for monumental ineptitude. He conceals his failed conciliatory policies, his misreading of the Arab Awakening, and his lack of interest in actionable intelligence information. Calls to seek justice and form yet another investigatory panel ("We're still doing an investigation," said President Obama, yukking it up on “The View” while FBI agents fretted in Tripoli) merely hide the negligence that left four Americans stranded in a pathetically unprotected facility to die valiantly and alone, murdered by a horde of terrorist cowards. Negligence, and ineptitude — the ineptitude that has transformed America's "Don't Tread on Me" into Obama’s "Grin and Bear It."




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Neither Real nor Right

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Won’t Back Down is a feel-good film about the power of a single individual, armed with a vision and a voice, to move a bureaucracy.

Jamie Fitzpatrick (Maggie Gyllenhaal) is a working class mother of a dyslexic second grader, Malia (Emily Alyn Lind). Malia has been assigned to the classroom of the weakest teacher in the school, and Jamie wants desperately to find a solution for her failing child. She asks the teacher to help Malia after school; she tries to have Malia transferred to the classroom of a better teacher; she signs up for the lottery of a successful charter school, where Malia must compete with 100 applicants for just three open slots. She even begs the administrator of her former school to take Malia back.

Eventually Jamie hears about a “parent-trigger law,” which provides a way for parents to take over a failing school. (“Parent-trigger law” is perhaps a poor choice of name, considering the level of frustration many parents experience, and the number of shootings that have occurred in schools recently!)

Parent-trigger laws are a fairly new concept in US public education. They were first introduced in California a few years ago, and six other states have followed so far. They apply only to failing schools, and require a majority of the parents to sign a petition and support the change. A successful bid can result in replacing the administration or faculty, creating a charter school, or closing the school and reassigning the students to better schools. Of course, teachers and their unions oppose these takeover bids, sometimes with threats and repercussions against the children of the most vocal parents.

Tenured teachers can’t be fired for being poor teachers, so they are moved from school to school. Woe to the children who are stuck in their classrooms for an entire year!

In the film, Jamie says “Let’s take over the school” with the same spritely optimism as Mickey Rooney and Judy Garland saying “Let’s put on a show.” Through sheer force of personality and salesmanship, Jamie convinces a tired and frustrated teacher, Nona (Viola Davis), to join her, and together they work to gain the support of teachers and parents. But it isn’t that easy. They must first recruit 400 parents and 18 teachers, and file a 400-page document describing their new school — while fighting union leaders and school administrators with six-figure salaries to protect and an arsenal of dirty tricks to employ.

Along the way she cheerfully tramples the property rights of her two employers by giving away free booze to potential supporters at her bartending job and working on the school project during her receptionist duties at a car dealership. Her boss is portrayed as a sharp-nosed busybody, but she has a right to expect an employee’s full attention at work, doesn’t she? And what about Jamie’s responsibility as a mother? She complains about her daughter not getting extra help from the teacher, but shouldn’t she be helping her own child learn to read? How hard is it to read with a child at a second grade level?

The film addresses most of the right problems, with union bylaws and tenure protection at the top of the list. A teacher refuses to stay after school to help a dyslexic student with her reading; it turns out that teachers are actually prevented from staying after school by their union contract. An administrator responds to each complaint with the same tired phrase, “We are addressing that,” as a way to placate the parent while promising nothing. He acknowledges that tenured teachers can’t be fired for being poor teachers, so they are moved from school to school. Woe to the children who are stuck in their classrooms for an entire year!

(Years ago I complained about a teacher who showed movies almost every day, while she played games on the computer. When I told the administrator that she showed The Lion King that day, his face darkened. “Lion King??” he raged. “I told them they couldn’t show Lion King!” Then he shrugged and added, “I know she’s a lousy teacher. There’s nothing I can do. She has tenure.” And she was the department chair to boot. I moved my daughter to a private school. But many parents can’t afford that option.)

So why don’t more parents and teachers take over their failing schools? Time is the biggest deterrent. It usually takes three to five years to get through the process of gathering support, filing papers, writing a charter, hiring teachers, and selecting curriculum. By that time, most children will have moved on to middle school. It requires a person with genuine dedication to the neighborhood to be willing to go through this effort for someone else’s kids. In the film, one teachers’ union administrator complains cynically, “When students start paying union dues, I will start protecting the interests of children,” and he’s right about that. One of the biggest problems with the public school system is that the payer is not the recipient of the service.

Moreover, it takes skill and experience to teach a class or manage a school. That same union administrator suggests that having parents take over a school is “like handing over the plane to the passengers,” and to a certain extent, he is right about that, too. Consider the kinds of neighborhoods that harbor failing schools. Parents with good educations, good jobs, and good incomes will simply move to another neighborhood, or deposit their children in private schools, as I did. They are too busy earning a living to have time to run a school.

Nevertheless, this film ends with cheering crowds and a crescendo of violins. (But is it any surprise that they manage to succeed? In a matter of months? Does Secretariat win the Triple Crown?) But there is no true victory in this film. A charter school may be better than a failing public school, but it is still based on a failing premise: although they are run by parents and teachers, these are still government schools. Salaries are still funded by local property taxes, and students are still tested according to federal standardized guidelines. The film even ends with a rap version of Kennedy’s famous message: “Ask not what your country can do for you, ask what you can do for your country.” The first is socialism, the second is feudalism. Neither bodes well for creativity and individual success. Whatever happened to “Do what you can to take care of yourself”?

The biggest deterrent to good education — standardized testing — isn’t even addressed in this film. I could write a whole treatise on the unintended consequences of “No Child Left Behind.” We now have an entire generation of young people who have been taught that there is only one correct answer to any question: the one they have been spoonfed by the teacher. Creativity and innovation are rewarded with an F.

A charter school may be better than a failing public school, but it is still based on a failing premise.

As for the teachers? They’re getting burned out too. I attended an early evening screening. Just before the film began, several groups of women walked into the theater. All of them talked to each other throughout the screening, looked at their cell phones, and went out to buy treats or visit the bathroom. I would have been more distracted, had I not been used to this kind of behavior; I’m a teacher. I interviewed these ladies after the show. You guessed it: most were teachers. They probably didn’t even realize that they were acting like their students.

Won’t Back Down is an earnest little film, one that is well intentioned but overlong and overacted. Viola Davis looks too tired to be a fighter; and Holly Hunter, normally such a fine actress, is particularly posed and affected in her delivery, her trademark speech impediment, and her gigantic hairstyle. Maggie Gyllenhaal does her best to ignite the enthusiasm of the cast in the same way her character tries to ignite the enthusiasm of the community, brightening her eyes and smiling until her face nearly explodes with goodwill. But it doesn’t work. At just over two hours, the film is 30 minutes too long for a story with no action and little suspense.

Moreover, although Won’t Back Down claims to be “inspired by true events,” it is neither true nor realistic. I couldn’t find a single actual case in which parents have successfully taken over a school under a parent-trigger law. Some have tried, but my research did not turn up any that have succeeded.

If you are genuinely interested in films about failing school systems and want to know how to fix them, I recommend two recent documentaries: Waiting for Superman (2010, directed by Davis Guggenheim) and The Cartel (2009, directed by Bob Bowdon).


Editor's Note: Review of "Won’t Back Down," directed by Daniel Barnz. Walden Media, 2012, 121 minutes.



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Sticking It to Wall Street

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Hardly a day goes by without President Obama blaming our economic woes on the "failed policies of the past." He has made Wall Street reform a top priority. In contrast to the George Bush economic delinquency that abandoned Main Street, his policies will stick it to Wall Street. He will (allegedly) prevent the financial shocks of credit bubbles and real estate booms. Ever-watchful of deceptive mortgage lenders, he will hold them and all other greedy plutocrats accountable for their financial shenanigans.

In truth, the policies of the past engendered regulations that were ignored, unimplemented, unenforced, and, more recently, applied against the wrong people. This travesty was compounded by politicians, regulators, and DOJ lawyers who failed as well. They failed miserably, yet suffered no consequences. Only the people whom regulations were supposed to protect suffered. But this time, as he campaigns for reelection, Mr. Obama tells us, incessantly, he has our back.

The policies that created the too-big-to-fail banks and the scurrilous practices that collapsed the housing market were enacted in the late 1990s, during the Clinton administration. Treasury Secretary Robert Rubin was responsible for the 1999 reversal of the Glass-Steagall Act, which had previously separated retail and investment banking. Its repeal legalized the formation of today's giant banking conglomerates. Rubin's successor, Lawrence Summers, then gave us the Commodity Futures Modernization Act (CFMA), which exempted derivatives from regulation.

With energy derivatives, Enron went on to perpetrate the largest corporate fraud in history. With collateralized debt obligations, giant banking conglomerates (Bank of America, Citigroup, Goldman Sachs, etc.) went on to become giant contributors to the sub-prime mortgage meltdown. Robert Rubin went on to earn over $126 million at Citigroup for a tenure spanning the company's Enron involvement and "merga-mania" phase and proceeding to its near bankruptcy in 2008. This was around the time when candidate Obama began blaming President Bush for the financial crisis. Obama went on to form an economic team led by people who helped create the crisis — economic geniuses such as Rubin protégésLawrence Summers and Timothy Geithner. As Washington Postwriter Steven Pearlstein put it: “The ultimate irony, of course, is that just as Rubin and Co. at Citi were being bailed out by the Bush administration, President-elect Barack Obama was getting set to announce a new economic team drawn almost entirely from Rubin acolytes.”

As an attorney, Obama represented "affordable housing" slumlords, one of whom evicted 15 poor families from their apartments in the dead of a subzero Chicago winter, two months after turning off their heat and water.

What qualified Obama to assemble a team that would, supposedly, stick it to Wall Street? As the Washington Examiner discovered in its 'The Obama You Don't Know” exposé, it was also during the Clinton years that Obama developed his knowledge of real estate and finance. In the early 1990s, heleft the community organizing business for the housing market — as an attorney representing "affordable housing" slumlords, one of whom evicted 15 poor families from their apartments in the dead of a subzero Chicago winter, two months after turning off their heat and water. This experience no doubt proved invaluable when, as president, he led our nation's efforts to recover from "the worst financial disaster since the Depression" — by selecting and relying on the very people who caused the disaster.

Geithner, who became Obama's treasury secretary, was recruited from the New York Federal Reserve Bank, where, as chairman, he was the principal government official responsible for regulating Citigroup. After years of doing nothing to deter the antics that almost bankrupted that firm, he helped forge a deal (with Treasury Secretary Henry Paulson, another Rubin colleague) that stuck it to taxpayers: a $45 billion bailout with an additional $306 billion guarantee against toxic assets.

Unfortunately, Geithner wasn't the only regulator asleep at the switch. All of them were. All of the 18 or so financial regulatory agencies charged with protecting us from Wall Street's sordid schemes failed abysmally. And they did so despite repeated warnings by the Bush administration, from April 2001 throughDecember 2007. At least the Bush administration suspected the coming crisis.

Maybe the regulators thought that Christopher Dodd and Barney Frank,the nation's top Wall Street watchdogs, would actually bark. But this fatuous duo thwarted the Bush attempts to rein in Fannie Mae and Freddie Mac. Under their feckless supervision, the capital inadequacies of the two government-backed mortgage giants crippled the housing market. And as homeowners and the real estate industry lost trillions of dollars, Barney Frank took it upon himself to cause further damage. In July 2008, when Fannie Mae and Freddie Mac stock was selling for $10.25 a share and $9.00 a share, respectively (down from $60 and $67, in January), the ever-vigilant Barney proclaimed, “I think they are in good shape going forward.” How did this ringing endorsement pay off for the many thousands who subsequently scarfed up these stocks? Today, they are selling for about $.25 a share.

For his signature Wall Street reform law, president Obama turned to Messrs Dodd and Frank, entrusting the two who didn't prevent the last crisis with preventing the next one. In a just world, they would have been impeached for the harm caused by their feckless oversight of Fannie Mae and Freddie Mac. But in Obama's world of social justice and economic fairness, they stuck it to us with the Dodd-Frank Wall Street Reform and Consumer Protection Act — an oppressive 2,300 page regulatory monstrosity that exacerbates the dominance of the "too-big-to-fail" oligopoly, reduces the competitiveness of smaller banks, and passes its immense compliance costs on to consumers. And it exempts from regulation — wait for it — Fannie Mae and Freddie Mac.

While 8 million private sector jobs have been lost, inane regulators still hold theirs, further rewarded with raises and promotions brought by the flood of new Dodd-Frank regulations.

Obama brays at the Bush trickle-down policies, but the benefits of Dodd-Frank are illusory, especially to Middle America, which remains stuck in the nightmare of Obama's regulatory trickle down: a stagnant economy, horrific unemployment, and the specter of a returning recession. Regulators are paid obscenely high salaries to protect supposedly powerless investors, bank account holders, and consumers from the wrongdoings of banks and financial institutions. Yet the latter have, in the main, gone unharmed, and so have the regulators. While 8 million private sector jobs have been lost, inane regulators still hold theirs, further rewarded with raises and promotions brought by the flood of new Dodd-Frank regulations.

If the bailout wasn’t reward enough for risky Wall Street practices, immunity from prosecution will make up the difference. After over three years of relentless investigation, Obama's Financial Fraud Enforcement Task Force has not convicted a single Wall Street miscreant of a single crime, even the imaginary crimes that regulators like to invent. Instead of the stereotypical wolves of Wall Street, Eric Holder has chosen to go after the likes of a Connecticut women who allegedly conducted a gifting table Ponzi Scheme, and a Nevada group accused of trying to control condominium home owners’ associations. Scrambling to comply with Dodd-Frank regulations, big banks are firing, not high level executives likely to commit widespread fraud, but thousands of low-level employeeswith jobs far removed from significant transactional crime. For example, Wells Fargo recently fired a 68-year-old customer service representative after discovering that he had been convicted of using a fake dime in a laundromat in 1963. Meanwhile, the legal fees for lawsuits against executives of Fannie Mae and Freddie Mac (which received over $150 billion in taxpayer bailout money) now exceed $109 million. Those fees are paid by — again, wait for it — the taxpayers.

The banking oligarchy is doing quite well under President Obama. So too is his ever-expanding regulatory leviathan. The rest of us are left to struggle through the slowest economic recovery since the Great Depression. It is a struggle exacerbated by stifling regulations, unprecedented compliance costs, and the knowledge that none of the people responsible for the financial crisis (certainly corrupt Wall Street executives, but also incompetent politicians and inept regulators) are in jail. All the sticking has been to us. Still, as the election approaches, many believe that Obama is the right man for the job. They fear Mitt Romney, who wants less regulation. Obama, of course, demands still more — especially after the shock that his Dodd-Frank reforms failed to prevent the MF Global and JP Morgan scandals. Evidently, he needs four more years to deal with Wall Street. Perhaps his supporters believe that, with his brilliant legal mind, he will find enough laws to do so. After all, he got the slumlord off with a $50 fine.




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Dear Leader

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I’m sure that the president's choice last night to rein in his brilliance and heart and allow Romney to “win” the debate is part of a brilliant strategy. I’ve understood Barack Obama’s brilliance from the very beginning — I bought a copy of The Audacity of Hope and Change in, like, early 2008. Before everybody else did. Some regular people are intimidated by his brilliance. And his heart. But I’m not. I understand it.

I mean, some people are saying that the president will have to lower himself to that liar Romey’s level and lie to get votes. But Barack Obama can’t lie. I mean, he just can’t — he’s too brilliant and has too much heart. Some people don’t understand that, but I do. I have an original Obama sticker on my Prius — not the Obama/Biden sticker and not a 2012 sticker, but the original “O” sticker that only charter supporters could get.

I know that some people are saying that Obama should have “hit back” at Romney in the debate. But those people aren’t true Obama supporters. They’re just pretenders who only care about the horse-race qualities of an election and don’t understand Obama’s brilliance. And heart. The man has so much heart that he can’t help being so much bigger than people like Romney. Romney and his mean-spirited dismissal of the 47%. What an elitist snob. I can’t believe he got the Republican nomination!

I realize that, at times like last night’s debate, Obama’s brilliance is a cross he has to bear. And his heart. I know that feeling — it’s something people like me and the president have in common. I mean, I’m not going to say I’m as brilliant as Barack Obama. Or have as much heart. But we do share a few similar traits.

I was on Facebook this morning, reading what Michelle had to say about how rude Romney was last night, just ignoring the rules and talking right over that weak moderator. I’m part of Michelle’s true friends circle on FB — not the one that’s open to the public, but the one where you had to have been a charter supporter to get invited. So I get to read what she really thinks. Michelle is so brilliant. Anyway, while I was reading what Michelle really thinks about the debate, I realized something: politics is beneath Barack Obama. His heart is so much bigger. And he’s so much more brilliant.

I understand something now that regular people probably don’t. You have to have been with Barack and Michelle from the beginning to get this — I mean, Michelle gets it. And Sasha and Malia probably get it, but regular people don’t understand. Barack needs a platform worthy of his brilliance and heart. If he chooses not to demean himself and pander in a vulgar popularity contest, it will prove that his brilliance and heart are just too brilliant for the common American voter.

I’ve kind of known that all along, before all the regular people started figuring it out.




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Round One: Romney

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The first of three presidential debates between Barack Obama and Mitt Romney was held last night. New Jersey governor Chris Christie had boldly predicted that the event would be a “game-changer” for the Romney campaign. As it turned out, Christie was probably overstating things. Nevertheless, Romney’s energetic performance put new life into his quest for the White House, while Obama let slip an opportunity to finish off his Republican opponent.

The immediate post-debate analysis seemed to stress style over substance. Romney, pundits agreed, looked happy to be on the University of Denver stage, while Obama appeared to endure the 90-minute debate. Romney smiled; Obama scowled. Romney was aggressive and weighed in on issues with gusto; Obama was rather detached and professorial. Romney ran roughshod over moderator Jim Lehrer; Obama was more diffident in dealing with the aging and rather incompetent PBS journalist. The performances left MSNBC’s coterie of lefties in a state of near-apoplexy, while at Fox there was smug satisfaction.

This observer thought Romney started and finished strong, while Obama scored some important points in between. The debate was to be divided into six segments. The first three concerned aspects of the economy (jobs, the deficit and debt, and entitlements) followed by healthcare, the role of government, and “governing.” The first segment ran over time — no surprise, given the flabby moderator — and time pressure caused the segment on governing to be dropped. Romney scored substantive points on Obama’s persistent deficits, his energy policy (billions thrown away on green energy boondoggles, lack of oil and gas drilling on federal land), and feeble job growth. Indeed, during the first half of the debate he dominated the stage, despite the fact that some of his arguments and assertions didn’t quite pass the smell test.

About halfway through the debate the subject of Medicare was introduced, and here Obama fought back by eviscerating the Paul Ryan voucher scheme. The president helped himself with seniors, a critical constituency that had already begun moving his way after the selection of Ryan to be Romney’s running mate. Obama also touched a populist chord with some well-chosen words regarding the regulation of Wall Street, and without having to explain or justify the absurd aspects of his main regulatory tool, the Dodd-Frank legislation passed in 2010.

That said, Obama muffed the chance to finish off Romney and end the race a month before Election Day. Obama never mentioned the notorious 47% recording, giving Romney free rein to express (which he did over and over) his love and compassion for everyone in America. He failed to mention the Republican-led House of Representatives, despite the fact that Congress is the most unpopular institution in America. He said nothing about Romney’s tax returns or overseas accounts — juicy populist targets that could have energized not just the Democratic base, but many white working-class voters who lean Republican. For Obama, this debate was definitely an opportunity lost.

Romney, down for the count coming in, picked himself up off the mat and is now back in the fight. For true conservatives — not to mention libertarians — his performance had to grate, for he tried (as usual) to be all things to all people. He was once again short on details about his major policy proposals. And he refused (understandably, since it would be political suicide) to make clear the stark choices America faces, particularly on the fiscal front. His success last night was not, with apologies to Governor Christie, a game-changer, but it does give him hope and the opportunity to make the race competitive again.

Was Obama rusty, as some pundits postulated last night, or did he hold back for fear of appearing to be an “angry black man,” something that he and his handlers have been concerned about since he first declared his candidacy for the highest office? We’ll probably never know, but the betting here is that he will be much more aggressive in the remaining two debates. That and the tendency of Mitt Romney to place his own foot firmly in his mouth will, this observer believes, lead to a second term for Barack Obama.




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Europe’s Next Tax Horizon

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If they weren’t so snide, smug, and supercilious, you would almost be tempted to pity the wretched Europeans — you know, the culturally superior members of the human race. I mean, they are more or less bankrupt, what with their “generous” and “compassionate” welfare states now running out of tax money. And, brother, do they have taxes — in the matter of taxation, they are the wet dream of Obama-worshipers. They have confiscatory income taxes (in France, now set at 75% for the highest bracket), massive property and gas taxes, and national sales taxes (aka VAT taxes) in the mid-20% range that is standard in the rapidly declining continent.

The idea of cutting the sickeningly bloated welfare state is unpopular in these benighted regimes, and normal tax sources are now taxed to the max. So the challenge to the welfare statists is to come up with new tax sources.

The Germans — ever keen and crafty — may have solved the problem. It was recently reported that the more left-wing German political parties (the Social Democrats and the Greens) are now suggesting a wealth tax of 1% on total assets of 2 million Euros or more. So even if you are retired or otherwise unemployed, but along the way you and your spouse have managed to buy a nice home, jewelry, perhaps a portfolio of stocks and bonds, maybe some artwork — the total value will be assessed (at no doubt inflated valuations — remember, the entity doing the assessment will be precisely the one that pockets the money), and looted.

Anyway, that’s where it will start. Remember, the original American federal income tax started very low (top rate of 7%). So did the VAT tax in all the European countries cursed with it. What happens is that the burst of new revenue always results in not just the expansion of existing social welfare programs but the creation of whole new ones, which — like bay cockroaches — will only grow and multiply further.

Indeed, one German “thinktank” has called for a one-time tax of 10% on all wealth over 250,000 Euros. This would likely bring in about the equivalent of 9% of GDP, and an eager exit of capital from the country.

But again, who believes it would be done just once? The same egalitarian arguments for doing it once will be used to justify doing it (say) every other year, or even every year, or even every 6 months, or even . . .




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Reverse Order

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Grace, a new play by Craig Wright, opens to a minimalist set of simple bamboo furniture, the kind you might find in a Florida beach rental. A front door and a sliding glass door stand alone, but there are no actual walls. Dominating the set is a halo of blue sky and puffy white clouds projected on the back wall and suggesting a hint of heaven. This is appropriate, because the idea of heaven dominates the theme of this play. In fact, for the first ten minutes, the audience sees nothing else. People fidget, waiting for the show to start, wondering why it is delayed. But in fact, like a Pirandello play, it has already begun.

Suddenly the halo of light turns ghastly green. Three characters, two men and a woman, enter the stage and immediately collapse to the floor. After a few moments one of them, Steve (Paul Rudd), rolls up onto the couch in a slumped position and then sits upright. His body shudders, a shot rings out, and he points a gun to his head. The scene is about to rewind. Dialogue is spoken in reverse order. The words are cosmic in timbre but out of context and confusing. More shots ring out and then everyone is standing. It is one of the most stunning opening scenes I have ever witnessed.

And then the sky is bright blue again. Sara (Kate Arrington) is cheerfully folding laundry as Steve enters their apartment with happy news. They have come to Florida to start a chain of “gospel-themed” hotels, and an investor has just committed to sending them $9 million. They are perky and happy and in love. And they believe. Oh, do they believe!

As they praise God and pray their gratitude for being guided to this place at this time for this purpose, Tim (Michael Shannon) limps onto the set shouting “Thank you Jesus F-ing Christ!” It is a primal scream of ineffable pain. His arm is secured in a sling and his face is covered in a mask to heal what appear to be hideous wounds. The set, we learn, functions simultaneously as Steve and Sara's apartment and as Tim’s apartment next door. It isn't a staging shortcut but a metaphor for how lives intertwine. It also suggests that life is far from fair or equal, despite Declarations to the contrary.

Graceis billed as a comedy, probably to attract the fans of Paul Rudd, who is best known for his comic rolls in Judd Apatow's popular and often raunchy movies (Knocked Up, The 40-Year-Old Virgin, Anchorman). Grace does have moments of biting irony. Moreover, with Ed Asner cast as Karl, the crotchety old pest control man, one would expect a play filled with offensive anti-Christian jokes and rants. Indeed, when Karl calls Steve "Jesus Freak" — and he does so frequently — the audience roars its approval. "Gospel-themed hotels"? This is, after all, what they came for.

But it isn't what they get. Grace has more in common with Greek tragedy than with light comedy. As the characters come to know one another, the play asks the audience to consider the cosmic questions: What is the purpose of earth life? Does God exist? If so, why do people suffer? If God is going to interfere in the affairs of men, why would he use a miracle to make Steve and Sara rich, but not intervene to prevent Tim’s tragedy? As Robert Frost asks in his poem “Design,” “What but design of darkness to appall? — / If design govern in a thing so small.”

Another question the playwright asks us to consider is whether the world is governed by fate or choice. Several times characters plead, "Can't we just start over?" The opening scene itself is a rewind, suggesting that a do-over would be the greatest miracle of all. Would we change things if given a second chance? Or are our actions predestined?

Although Grace poses the questions, it wisely does not try toprovide the answers. Instead, what we have is a riveting story presented through deftly acted characters who seem as though they could indeed live next door. Tim, a rocket scientist, represents the atheistic view. His earthbound job of filtering out the data noise that interferes with “pure communication” from space is a perfect foil for the worldly noise that believers filter in order to hear the “pure communication” of the spirit. Karl provides not only comic relief but a poignant back story. Asner fans will be sorry to see that he is onstage only briefly, but his part is the subtle heart of the story.

Graceis a brilliant show with brilliant staging and a brilliant cast. Paul Rudd is particularly natural as the earnest and affable young Jesus Freak — er, Christian — who feels compelled to invite everyone he knows to accept the reality of Jesus Christ. He has his standard arguments that seem to prove the existence of God — at least to him. His open smile and eager enthusiasm reveal a surface-bound testimony. Sara is the one who presents the deeper meaning of what it is to be spiritually converted. Perhaps the real gift of miracle lies not in being protected from suffering, but in being helped to endure it.


Editor's Note: "Grace," written by Craig Wright, directed by Dexter Bullard. At the Cort Theatre on Broadway, New York City, until January 6.



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The Shape of Things to Come

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On August 1, the City of San Bernardino, California, filed for protection under Chapter 9 of the U.S. Bankruptcy Code. Chapter 9 is designed for municipalities and other local governments; the federal government can’t declare bankruptcy. At least that’s what most bankruptcy experts claim.

City officials gave media outlets the same explanations that CEOs of bankrupt companies often do: the mayor explained that the City would continue to meet its payroll and pay essential bills. He said that the main reason the City was seeking bankruptcy protection was to prevent lawsuits from being filed by a couple of angry creditors.

Asked to explain the cause of the crisis, San Bernardino officials passed the buck. They said that, because of budget shortfalls at the federal and state level, California Gov. Jerry Brown and the state legislature had made changes to vehicle tax money and redevelopment agencies that stripped local governments of hundreds of millions in state funding.

One of the most destructive qualities of statism is its tendency to turn good intentions into disastrous results.

This was true. But not everyone accepted the official explanations as the whole truth. Some conspiracy-minded sorts hinted darkly about criminal wrongdoing in City offices. Others looked through San Bernardino’s filing and pointed to one of its largest creditors: the City owed the California Public Employee Retirement System (CalPERS) some $143 million in unfunded pension obligations.

For its part, CalPERS claimed that San Bernardino was using a misleading “actuarial” calculation of its obligation and actually owed something closer to $320 million.

Now, that was a fiscal emergency.

San Bernardino also drew media attention because it was the third California city in as many months to file for bankruptcy protection. In June, Stockton had sought bankruptcy protection because it couldn’t come to agreement with its employee unions on a plan to close the $26-million gap in its general fund; in July, the ski-resort town of Mammoth Lakes had filed bankruptcy (its story was slightly different, though; the Mammoth Lakes meltdown was triggered by a court judgment the town couldn't pay).

Welcome to the late stages of American statism. Government and quasi-governmental agencies battling in bankruptcy court. Political rhetoric piling high. Bureaucrats talking evasively about where tens or hundreds of millions of dollars have gone.

* * *

On July 26, San Bernardino’s Interim City Manager, Andrea Miller, and Director of Finance, Jason Simpson, delivered to the mayor and city council a report called the Budgetary Analysis and Recommendations for Budget Stabilization. The report lays out the City’s problems and various possible solutions — including several that might have avoided bankruptcy. It’s a dense and important document, a harbinger of trouble ahead for spendthrift municipalities and states.

At the start, the report notes:

The City of San Bernardino has been affected by the serious economic recession as have other cities and has taken steps over the last several years to reduce costs. Nevertheless, costs continue to outpace revenue due to increased operational expenses and significant rapid declines in property tax revenues as a result of a drop in property values and decline in sales tax revenue. Deficits of major proportions are projected in all five years of the forecast created as part of this project. To ensure basic operational service levels are maintained and anticipated cash flow requirements are met, steps will be needed immediately to reduce costs. . . . If these measures do not achieve immediate and substantial cost savings, then the City will have to explore other alternatives to deal with its fiscal crisis.

They didn’t. And, less than a week later, the city council decided to declare bankruptcy.

A quick side note: I’ve read Miller and Simpson’s report numerous times in the preparation of this piece; and, each time I read through it, I’m more impressed. It’s an honest assessment of how a municipal government (or, by extension, any government) can stumble into insolvency, despite the best intentions of several generations of leadership — including leadership that fancied itself reform-minded. Indeed, one of the most destructive qualities of statism is its tendency to turn good intentions into disastrous results. That tendency is on full display in the San Bernardino story.

While the report does take off on some tangents of bureaucratic jargon, most of its 49 pages are a fairly common-sense narrative of what happened. And what needs to be done to get the City back on an even financial footing.

This is how the report describes San Bernardino’s financial circumstances:

Reserves in the General Fund were exhausted years ago, reserves in the internal service funds were also depleted and the City has encumbered itself with various debt obligations and labor agreements putting additional and unnecessary risk on the General Fund.

The City has declared numerous fiscal emergencies based on fiscal circumstances and has negotiated and imposed concessions of $10 million per year and has reduced the workforce by 20% over the past 4 years. Yet, the City is still facing the possibility of insolvency due to a variety of issues including accounting errors, deficit spending, lack of revenue growth, and increases in pension and debt costs. . . .

Over the past several years, the City has utilized General Fund reserves, asset sales and one time revenues to maintain City services. To address the projected deficits in previous fiscal years, the City has reduced positions, negotiated compensation reductions, and implemented new revenue measures. Unfortunately, the decline in taxable sales and property values over the last several years has resulted in revenue losses of $10 to $16 million annually.

In other words, it had used the usual one-time, off-budget legerdemain and accounting gimmicks that spendthrift governments — and spendthrift people — instinctively employ when they expect some future windfall to make everything okay. In San Bernardino’s case, the one-time tricks had been played . . . and there was no windfall coming.

According to the report, for the 2012–13 fiscal year, the City’s expenditures would exceed revenues by $45 million. And that annual shortfall would only increase over time.

The report lays out some of the most critical financial weaknesses facing the City:

  • Because the City has used reserve funds to balance previous budgets, there are no reserves in place to balance current and future budgets.
  • Budget choices made in previous years have left the City with high capital lease balances for equipment — and no effective way to refinance or otherwise resolve those expenses.
  • Because of the loss of federal and state redevelopment funds, the City has insufficient economic development programs in place to project stronger tax revenues in the future.
  • Since the City has a current deficit in its General Fund, it does not have sufficient unrestricted cash available to pay its ongoing obligations.
  • The City has an unemployment rate above state and county averages.
  • The City has an unusually high ratio of public safety costs to overall General Fund revenues.
  • The City’s expenses were over budget in FY 2011–12 and would be massively more so in 2012–13 and following.
  • The City’s failure to complete its FY 2010–11 budget audit on time delayed necessary budget reductions, further depleting cash.
  • The starting General Fund balance has been erroneously stated for each the previous two fiscal years.

In mid-July, the San Bernardino County sheriff’s office announced that it was involved in a multi-agency criminal investigation of the City government. The sheriff’s announcement didn’t indicate whether the investigation was related directly to the City’s bankruptcy filing. It referred to “allegations of criminal activity within departments of the San Bernardino city government” and confirmed that it would focus on those General Fund balances, which had been “erroneously stated.”

And, then, the hardest truth: “It is atypical practice for cities to have adopted [sensible] budget policies” like these. That may be the biggest problem that the United States faces today.

But the City’s financial problems aren’t (or aren’t entirely) the result of malfeasance. Many of its problems are structural. San Bernardino’s population is approximately 211,000; that number has been increasing rapidly since the 1970s. Because the City is a bedroom community and has never had a substantial commercial or industrial base, its population growth has outpaced growth of tax revenues needed to provide essential services.

According to the report, the largest employers in the City — in roughly descending order — are local government agencies, California State University San Bernardino, the San Manuel Band of Mission Indians, and San Bernardino Community Hospital. The common thread? There’re all either government agencies or government-dependent entities, relying directly or indirectly on public money for the majority of the revenues.

* * *

An important strategy for avoiding structural budget deficits is to adopt a budget philosophy that can serve as a meaningful framework for maintaining financial discipline.

This may sound elementary: Reporting on a government entity’s finances clearly and for public discussion is a way for the fiduciary responsibilities of elected officials and executive managers to be understood by the public and organization. But many government entities have become so decadent that they no longer look at financial reporting in that way.

The San Bernardino report describes some “best practices” in public-entity financial management:

  • Structurally Balanced Budget. The annual budgets for all City funds should be structurally balanced throughout the budget process. Ongoing revenue should be equal to or exceed operating expenditures in both the proposed and adopted budgets. If a structural imbalance occurs, a plan should be developed and implemented to bring the budget back into structural balance.
  • Multi-Year Financial Forecasting. To ensure that current budget decisions consider future financial implications, a five-year financial forecast should be utilized by the staff and Council. The annual General Fund proposed budget balancing plan should be presented and discussed in context of the five-year forecast. Any revisions to the proposed budget should include an analysis of the impact on the forecast out years.
  • Use of One-Time Resources. One-time resources (e.g., revenue spikes, budget savings, sale of property, and similar nonrecurring revenue) should not be used for current or new ongoing operating expenses. Examples of appropriate uses of one-time resources include rebuilding reserves, retiring debt early, making capital expenditures (without significant operating and maintenance costs), and other nonrecurring expenditures.
  • Established Reserves. San Bernardino has multiple funds, based on different revenue sources and requirements. Because there are risks (both known and unknown), it is important that reserve levels in all funds be maintained as a hedge against such risks. Without proper reserves, there can be major disruptions in services when unforeseen financial demands emerge, requiring immediate attention.
  • Debt Issuance. A municipality should not issue long-term (over one year) debt to support ongoing operating costs (other than debt service) unless such debt issuance achieves net operating cost savings and such savings are verified by appropriate independent analysis. All debt issuances shall identify the method of repayment (or have a dedicated revenue source) without an impact to operations.
  • Employee Compensation. Negotiations for employee compensation should continue to consider total compensation bargaining concepts and focus on all personnel services cost changes (e.g., step increases and the cost of benefit increases). Compensation costs should be included in the five-year financial forecast to ascertain affordability to the municipality, within context of expected revenues.

Summing up these points, the report concludes:

To resolve its structural budget deficit and prevent a recurrence in the future, the City needs to adopt a budget philosophy similar to the measures above to help elected and appointed officials maintain the financial discipline crucial to a growing community like San Bernardino.

And, then, the hardest truth: “It is atypical practice for cities to have adopted budget policies” like these.

That may be the biggest problem that the United States faces today.

* * *

For decades, the City of San Bernardino — like many of its residents — counted on rising real estate prices to subsidize the shortfalls in its day-to-day operations. For the City, these subsidies took the form of sharply increasing property tax revenues; the rising revenues allowed the City’s senior officials to grow sloppy.

Warren Buffett has a famous quote that’s relevant to this sloppiness (though it pains me some to quote such a chiseling crony capitalist): “It’s only when the tide goes outthat you discover who’s been swimming naked.” When the southern California real estate market collapsed, the tide went out. And San Bernardino was caught without its shorts.

The report takes a hard look at the City’s prospects for regaining some of the property revenues it lost to the collapsing California real estate bubble:

There are actually two bottoms for housing. The first is new home sales, housing starts and residential investment. The second is sale prices. Sometimes these can happen years apart.

Calculaterisk.com [an economics web site cited by one of the City’s property tax consultants] reports that the first housing bottom was spread over a few years from 2009 until 2011. They believe the second bottom, prices, hit in March 2012. This doesn’t mean prices will increase significantly any time soon. Usually, toward the end of a housing bust, normal prices mostly move sideways for a few more years. Real prices adjusted for inflation could even decline for another 2 or 3 years. . . .

Because we do not anticipate much growth with housing new starts or employment in the near future . . . we should assume construction-related permit activity will also be flat or possibly continue with its decline. Permit activity within most California cities has been very volatile with trends pointing to decreasing activity.

This is an interesting and useful discussion of cycles in the real estate market. But it hints at one of the many problems that come when a government agency tries to “time” a market. If San Bernardino’s consultants are right and a real estate market has a two-part bottom — and if those two parts occur years apart — predicting trends in property tax revenues at or near the bottoms is practically impossible.

In the end, all the report could conclude is: “The rate of revenue growth has not been sufficient to meet the contractual and debt obligations of the City.”

* * *

Every financial crisis — whether it involves a municipality, a company or a family — has two parts: expenses that are too high and revenues that are too low. The drop in property tax revenues was only half the reason for San Bernardino’s lurching deficit. The other half was the City’s expenses. And expenses are the thing bankrupt entities of any sort have to address first when they’re trying to emerge from their crises.

Here’s how the report describes San Bernardino’s expenses:

Roughly half of the annual deficit is attributed to unfunded liabilities in City Retiree Health, Workers’ Compensation and General Liability accounts.

The remaining half is attributed to increasing operational costs and the end of employee concessions. As early as FY 2009–10, expenditures exceeded revenues and the City had begun to utilize prior year fund balances to avoid service cuts or delays in projects. Because expenditures continue to exceed revenues, fund balances have been depleted and have reached a critical point in 2012–13 where the City will begin the year with an actual deficit and significant cash flow constraints.

Put into perspective, this projected deficit in 2012–2013 represents almost 38% of the General Fund budget for that year. The remaining fund balances cannot pay for ongoing operating costs and large sustained reductions will be required. Reducing ongoing expenses must largely come from ongoing reductions in personnel costs since these costs represent about 75% of total General Fund expenditures. Of the personnel costs in the General Fund about 78% are for public safety.

City of San Bernardino Public Safety and Fire expenditures consume the majority of the budget, some 73% of the General Fund in FY 2011–12. And personnel costs in total account for about 85% of the General Fund.

When the southern California real estate market collapsed, the tide went out. And San Bernardino was caught without its shorts.

“Public Safety” is, of course, bureaucratese for “police.” The problem that San Bernardino and other bankrupt local governments face is that the most essential service they provide citizens is police and law enforcement. Everything else — education, parks, growth management plans, performing arts centers, and sports stadiums — pales in comparison to keeping cops on the streets. And crime to a minimum.

Here’s the report’s suggestion for cutting the cost of law enforcement in the City:

To substantially reduce costs in the public safety services, the City will need to reduce staffing, or seek out contract opportunities for the City’s Police Department to provide services to adjacent communities. In recent years, several municipal police departments have provided services to others under contracts for service. In fact, its common place for public safety departments to share dispatch services.

This is an important point to consider for the future of local governments. Cities, at least smaller ones, may not be the most efficient mechanism for financing law enforcement. As the report suggests, a regional law-enforcement infrastructure may be more cost-effective. This suggestion won’t sit well with many mayors and city councils, since their authority over the local constabulary is often their strongest source of political power.

But, when a bankrupt city like San Bernardino has three-quarters or more of its financially unsustainable budget dedicated to “public safety” expenses, it has abdicated the political power that comes with being the boss of the cops.

* * *

The San Bernardino report notes that “reductions to the expenditure side of the budget are not going to produce the level of savings that will be needed to balance the budget.” And, to boost revenues, it suggests increases in or additions of the following municipal taxes:

  • Real Property Transfer Tax
  • Utility User Tax
  • Sales Tax
  • Transient Occupancy Tax
  • 911 Communications Fee
  • Fees for Recovering Paramedic Costs

With bureaucratic resentment, the report notes that “all would require voter approval.”

In the meantime, the City has to find other, more immediate, ways to raise money. In this effort, the report circles back to an idea that it’s already admitted is bad for the City’s long-term fiscal health. Even though the report warns against paying for ongoing expenses with one-time transactions, the authors can’t ignore the quick money available from privatizing real estate:

Currently the City [owns] 294 parcels with total book value of $300 million and a likely sale estimate of less than $100 million dollars. Given the City’s 18% of the property assessment, the sale of these parcels would generate roughly $18 million dollars. The City may also wish to explore selling or leasing some of the parcels at below-market rates in order to incentivize developers and other business interests to spur additional economic development and development-related revenues.

Selling assets doesn’t improve the financial prospects of a city — or a business, or an individual — in the long-term. But insolvent entities don’t have the luxury of making the long term a priority. They need to survive the near term. So, they sell things.

The report tries to inject some wisdom into the breathless discussion of raising taxes and selling off real estate. On these matters, it concludes:

. . . the pursuit of new revenue sources and/or increasing existing revenues is a strategy that can no longer be ignored. However, seeking to increase revenues that are subject to large fluctuations should not be treated as a cure-all. As was the case with revenue received during the real estate boom, some increased revenue could be short-lived.

Therein lies the problem. Governments at any level are rarely able to see past the short-term. Even — or especially — when their press releases talk about the importance of long-term vision, statist entities rarely have it. Twenty years ago, hundreds of books and thousands of articles were written about the long-term vision of Japan’s mighty Ministry of International Trade and Industry. How the mighty have fallen. MITI doesn’t exist any more.

* * *

All of this discussion is really just a warm-up act for the 800-pound gorilla at the center of San Bernardino’s problems: the expanding amount of money required to maintain the pensions owed to retired City employees. Here’s how the report describes this issue:

. . . the City is faced with increasing pension costs, as CalPERS adjusted the investment returns increasing retirement costs to all its members starting in FY 2013.

The City’s costs for employee retirement have increased from $1 million in FY 2006/07 to nearly $1.9 million in FY 2011/12. By FY 2013/14 the annual cost will be over $2.2 million. To put this into perspective, the City was spending about 9% of its General Fund budget on retirement costs in FY 2006/07. In FY 2011/12 it will need to spend 13% of the budget on those costs, and by FY 2015/16 it will require 15% of the budget for retirement obligations. [This] is basically an overhead cost over which the City has little control over in the short term.

California law grants CalPERS extraordinary powers (essentially, taxing powers) by which it can demand payments from cities, counties, schools districts, etc, if it runs short of the money needed to meet its defined-benefit pension distributions. Kind of like a cash call to members of business partnership.

This creates a great deal of moral hazard. The San Bernardino report describes this in painful detail:

To address growing public safety pension obligations, the City issued pension obligation bonds (POBs) in 2005. This is a common strategy to reduce unfunded liabilities through the issuance of fixed-rate bonds. . . . the City’s annual pension costs were reduced by $2 million after the issuance of the bonds. However, at the time of the issuance of bonds and subsequent deposit of bond proceeds into the City’s public safety account, CalPERS lost a significant amount of its pension portfolio. The market losses have negatively impacted the City beyond the losses of its deposited funds and have completely reserved all the saving realized from the issuance of POBs.

So, CalPERS’s shoddy investments negated any advantage for the City in issuing pension bonds. The City is still responsible for paying back its bonds…and CalPERS can demand additional money from the City to make up for CalPERS’s bad investments.

It’s as if you refinance your home mortgage to get a lower interest rate. But, after agreeing to the refi, the bank reneges and raises your interest rate back to where it was before and then increases the principal amount of your loan because it lost money on an investment scheme involving Greek bonds.

Twenty years ago, hundreds of books and thousands of articles were written about the long-term vision of Japan’s mighty Ministry of International Trade and Industry. Today, MITI no longer exists.

CalPERS divides the payments that it demands — which it calls “rates” but which aren’t “rates” in any insurance or actuarial sense — into two parts: employee rates and employer rates. According to the San Bernardino report:

It has been a common practice for San Bernardino and many other agencies to pay both parts of the rates. However, recently the City was able to negotiate with the employee groups for all new hires after October 2011 to pay the full employee share. . . . The City could negotiate with current employees to pay all or a portion of the employee share. Further, the City could negotiate any level of sharing with its employees and is not limited to [traditional formulas]. Some cities are planning for [their employees to pay] a greater share of PERS costs than what has commonly been referred to as the “employee share.”

This is an overlooked point. CalPERS can raise the “rates” it demands from local governments as much as it needs to; and those local governments can simply pass CalPERS’s higher demands onto their workers. Or file bankruptcy.

In the years leading up to its bankruptcy filing, San Bernardino did what conventional wisdom suggested for getting its pension obligations in order. It negotiated a “two-tier” retirement benefit program wherein newly-hired employees receive a smaller retirement benefit than more senior employees. But the effects of these new deals are still years away. According to the report:

Savings under this program will build with workforce turnover, as employees under the current system retire and are replaced by employees at the new rate. Therefore, initial cost reductions are minimal but savings to the City in the long term will be significant.

Long-term solutions for near-term problems — the opposite of what a prudent financial manager should propose. In the meantime, the City was still desperate to cut costs. Immediately.

As California’s local governments downsize their employee bases, even slightly, a shrinking number of remaining employees end up paying CalPERS “rates” to support the pension demands of a growing number of retirees. This system is not sustainable. In fact, it’s a bubble . . . if not a Ponzi scheme.

Some senior elected officials in California — including, to his credit, Gov. Jerry Brown — have started to discuss “pension reform” as a pressing issue for the state. But their talk remains rather academic; in the real world, for San Bernardino, annual pension costs have grown from $1 million in FY 2006-07 to $2.2 million in FY 2012-13. That’s a shocking increase in a sunk cost — and one that’s not affected by anything the City does today, including layoffs, restructurings, assets sales, etc.

As the report notes: “costs are increasing at rapid rates significantly beyond increases in revenue and are no longer affordable to most public agencies.”

* * *

So, downsizing local government workforces is a Gordian knot.

The layoff program used by most local governments and public agencies in California is referred to as the “Golden Handshake,” made available under the California Public Employees Retirement Law (Gov. Code, 20903). The Golden Handshake, also as known as the “CalPERS Two Years Additional Service Credit” benefit, requires a local government to provide two additional years of service credit for the calculation of pension benefits to “employees who retire during a designated window period because of imminent demotions, mandatory transfers or layoffs.” While it can provide some short-term savings, this arrangement adds to a city’s future retirement costs and limits management flexibility. For example, the Golden Handshake requires an employer to establish a “window period of at least 90 days and no more than 180 days” to solicit early retirees.

This is a kind of madness. Cities on the verge of bankruptcy don’t have six months to wait for workers to come forward for early retirement. So CalPERS’s union rules end up being largely irrelevant in the circumstances where action is needed, like the ravings against “greedy corporations” of a 30-year-old graduate student at a bottom-tier university.

As the San Bernardino report notes:

The cost-effectiveness of these programs must be examined within the context of an aging workforce. . . . the program [must] be carefully managed to ensure that the option is only offered in instances where a financial justification exists. If that is not the case, the City could be put itself in a situation where additional layoffs are needed to pay for early retirements.

That last line reads like something out of George Orwell. Or: the beatings will continue until morale improves.

Out of this Orwellian muck, the City has to keep streets open and police on them. The essential elements, to most people, of the social contract. So, for the foreseeable future, local governments like San Bernardino will be faced with firing some workers . . . or firing more. Faced with an existential threat to the notion of “city” itself. As the report concludes:

The revenue forecast shows that significantly lower costs will be required for the foreseeable future. During this period of time, it has been noted the that Council, residents and businesses in the City expect and deserve a well well-maintained street network, nice manicured parks, cultural opportunities, well-maintained neighborhoods, in addition to fundamental public safety services. The challenge to the City will be to identify what it can afford and how that relates to the type of community services it wants to provide.

Indeed.

* * *

These problems are only going to get worse in the coming years. As the federal government reaches the limits of its borrowing capacity, it will be forced to cut back on block grants and other disbursements to the states. As the states have to deal with these cuts — and structural problems of their own — they’ll cut payments to cities and counties.

And the cities and counties will go bankrupt.

Even in bankruptcy, California’s cities and counties won’t be able to correct their economic models without restructuring the pensions that they promised public employees in more prosperous (or what seemed like more prosperous) times. According to a February 2012 Stanford Institute for Economic Policy Research report, public-employee pension spending in California grew an average of 11.4% a year between 1999 and 2010. That’s twice as fast as spending growth for essential budget items like public safety, health and sanitation.

These problems aren’t limited to California. As Reuters recently noted:

CalPERS has long argued that pension contributions cannot be touched even in a bankruptcy. But firms that insure municipal bonds have strenuously objected to the idea that pension payments should come ahead of bond payments. The outcome of how CalPERS and bondholders are treated as creditors . . . and whether CalPERS receives preferential treatment . . . will have broad implications for local governments around the country.

In the weeks since its bankruptcy filing, San Bernardino has slogged along. It made payroll in August and September. Miller and Simpson are still in their jobs, trying to keep things running in some semblance of order.

The City plans to layoff more employees and shut down libraries and has reduced its annual shortfall from about $45 million to $7 or $8 million. But this still isn’t sustainable.

The multi-agency criminal investigation hasn’t produced any results. Yet. Some locals say that it has more to do with political theater (specifically, a feud between San Bernardino’s mayor and city attorney) than any prosecutable crimes.

Even in bankruptcy, California’s cities and counties won’t be able to correct their economic models without restructuring the pensions that they promised public employees.

The real battle remains between San Bernardino and CalPERS. And this is a battle that neither side seems particularly interested in joining. The City, like many bankrupt debtors, seems to believe that the longer it delays a resolution of the money it owes CalPERS, the lower the final number will be. CalPERS, on the other hand, seems to be concerned that the San Bernardino bankruptcy will expose it as another of Warren Buffett’s naked swimmers. Or, more in line with its haughty history, an emperor with no clothes.

CalPERS lawyers can cite statute and weep well-rehearsed tears over pabulum like “fairness” and “austerity” but they can’t get blood — or $320 million — from a turnip.

And the City of San Bernardino is merely the first of many turnips ahead.

p




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