November 30, 2011
Behind The Headlines - Austerity
The elections are over but the screaming headlines about who is responsible for the country’s problems remain. We believe you should not be concerned about the blame game, and instead, should focus on how the deficit and debt problem will be solved and its effect upon you. There is enough blame to go around and can be shared by many. Yet, fixing blame, will not accomplish much after firing some and punishing others. There are still the core financial problems to deal with. In our November 2008 Newsletter, we hinted at the full extent of the problem. They consist primarily of a demographic problem caused by the amount of aging baby boomers, complicated by the relative shortage of younger immigrants and children of boomers. Additionally, there is the worldwide problem (not just NYC, NYS, NJ, USA etc) 50 years in the making, of making too many generous promises, that cannot be paid for out of revenues which have been fulfilled by the creation of too much debt and the creation of too many government employees, getting paid too much with too generous benefits than the current tax base can afford to pay. For example, in Greece, the public work force tripled in the past 10 years and the workers get paid 13 months of salary for 10 months of work. In New York City, a government run garbage department pays for a full day’s work of only 4½ hours. While most government employees would say they individually are not overpaid, the problem is not that of any particular employee, rather the amount of employees. If there were fewer employees, the problem would be manageable.
In Wisconsin, Ohio, New Jersey, New York, and Virginia there have been attempts to tackle the problem with mixed results; they vigorously tried to trim the number of employees and their benefits. We have witnessed the push-back of the unions of government employees culminating in the repeal of the attempt in Ohio to eliminate collective bargaining across the board.
Behind these attempts, is a terrified electorate that is afraid of losing their jobs, or have already lost their jobs, have not seen salary increases for several years, saying to politicians, I don’t care what you do, but don’t raise my taxes because I am afraid of losing my house!
Depending on your employment or political persuasion, you may differ on the extent, the cause, or the solution of the problem; but this newsletter is about the eventual solution to the problem, which has started quietly behind the headlines, and that is the ultimate answer to the problem and that is, AUSTERITY. Since raising taxes is political suicide at this point, municipalities are looking for ways to cut costs. A New Jersey Department of Treasury study has shown that for every 1% increase in taxes, New Jersey lost 4,200 residents and $520 million of adjusted gross income. Wall Street Journal 11/15/11 p. A21. People have choices and can move across borders. The wealthiest have the most amount of choices and can pay people like us to plan around the taxes. The city with the largest amount of financial professionals after New York City is Omaha, Nebraska. Omaha is seeing population growth with housing, which costs 75% less than the New York Metropolitan area. In my state of New Jersey and in my area, Princeton Borough voted to merge with Princeton Township (for cost saving reasons), the Borough of Highlands Board of Education eliminated their business office by contracting with the Hazlet Township Board of Education to do their business affairs; each will save hundreds of thousands of dollars. Highlands and Atlantic Highlands eliminated the Highlands Sewerage Commission and their employees. Each town will staff any functions with their existing Public Works Department employees; Hazlet Township, Matawan, and Keyport combined their three courts into one court and each township will annually save hundreds of thousands of dollars. Townships on the Jersey Shore will be variously sharing services and equipment instead of each having their own. This means that my leaves will not be picked up so fast!
Also in my area, two county drawbridges were privatized and the daily operations will be handed over to a private company. The 28 county employees will be fired and given an opportunity to be rehired by the new company. Out of a prior budget of $2,058,000 to operate the bridges, the county will save $572,000. Like any homeowner, hard times bring a hard fresh look at your budget. Independent 12/1/11 p. 14.
In the blue state of Rhode Island which has a $7 billion unfunded pension liability, one of the largest per capita in the nation, and a pension cost that will double to $600 million next year the public unions wanted to party like its still 1995 when the pension liability was only $1 billion. The State’s left-leaning independent governor and Democratic treasurer took a sober view and suspended annual 3% cost of living increase to the public retirees until the pension funds become solvent, raised the retirement age from 62 to 67 and shifted all workers to a new hybrid pension plan that include a modest annuity and defined contributions component. That cut the pension bill by half to $300 million and lowered the unfunded liability to ONLY $4 billion. Unions denounced the changes and threatened to file suit but 77 of the 94 Democratic lawmakers voted for the changes. Wall Street Journal 11/25/11.
Detroit, which is facing a $45 million budget shortfall, will cut 1,000 city jobs, impose a hiring freeze, and cut employees’ pay by 10% after the municipal unions refused concessions. Some say that Detroit is only four months from bankruptcy, so more austerity may be in the works.
One reason given for the snow emergency in New Jersey this year, which resulted in travelers being stranded on Route 18 in Monmouth County, was that various townships waited until the snow was 6 inches high as opposed to the usual 3 inches before sending out snow removal crews. By the time the crews reached their equipment, the snow was too high to travel in with the result that travelers and commuters were stranded and had to be rescued.
New Democratic Governors in Connecticut and New York are tinkering with cosmetic reforms and are probably playing for time and counting on an economic recovery, which will solve their problems. Governor Brown of California cannot wait since he has a $15 billion budget shortfall next year.
One can argue whether Austerity will produce good or bad results. One cannot argue that it is coming. One near term result of Austerity will be more public employee layoffs and more private company employee layoffs from the cutback of government contracts. The result will be sure to frighten the already frightened public. The public probably will respond by spending less and saving more.
As financial advisors we are available to help guide you through these turbulent times in order to increase your net worth or by protecting your net worth.
Best State Economy
North Dakota. Where drilling for gas, agriculture and a favorable business climate have caused full employment and a shortage of virtually all kinds of workers. Blue collars with a trade skill earn upwards of $100,000. A shortage of housing has forced workers to live in “man camps”.
Best NY County Economy
Chemung County. If you have a skill such as plumbing, welding, electrical, etc. All persons with trades or skills have been hired by the natural gas drillers who use the city of Elmira, in Chemung County (which is served by an interstate, railroad and airport) as a staging center to obtain materials and then transport them south into Pennsylvania which allows drilling (whereas NY and NJ does not). The gas companies recently leased 2,000,000 square feet of previously vacant office space.
As always, if you have any questions about these or any other matters, do not hesitate to call us.
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