Municipal Bankruptcies Would Make Raising Funds for Bridges, Schools, and Hospitals Far More Expensive

Kennon-Green & Co. Fiduciary Financial Advisor, Wealth Management, Global Value Investing

If you are a school teacher, a firefighter, a police officer, a municipality worker, or another type of government worker, the chances are high that over the next decade or two, your benefits are going to be slashed.  

The reason is simple.  There are only two ways to maintain the retirement pensions and other benefits that have been promised by the government to its workers when the plans are underfunded:

  • Increase the population base so that there are more workers supporting each retiree.  You can do this either by having more children through so-called “natural” growth where the birth rate exceeds the death rate or by opening the borders and increasing legal immigration.
  • Drastically increase taxes on the younger generations that are still working are effectively forced to “donate” an enormous portion of the paycheck they work for each week to pay taxes to support the elderly, who didn’t save themselves, or go to prison..

That is it.  If you can’t do those things, the benefits must be reduced.  To ignore these realities is no different than corporate executives who demanded investors value their firms based upon EBITDA during the dot-com bubble of the late 1990’s, which stripped out capital expenditures (as if the tooth fairy were going to show up and pay for broken down equipment in a factory that needed to be replaced)!  Self-delusion is not a viable method to dealing with financial matters.

To make it more difficult, people can easily move out of a municipality to avoid taxes, making raising tax rates far, far more difficult than on, say, the national or even state level.

Municipal Bankruptcies Would Make Raising Funds for Bridges, Schools, and Hospitals Far More Expensive

Municipal Bankruptcies Would Make Raising Funds for Bridges, Schools, and Hospitals Far More Expensive

Factor in that municipalities declaring bankruptcy on any meaningful scale would be disastrous, making raising money for things such as new school bonds or raising cash to build a bridge almost impossible, meaning that has to be thrown out of the equation.

[mainbodyad]It is detestable that we aren’t dealing with this problem.  There is something wicked about an older population who thinks that the young men and women of the nation are a commodity to be consumed, whether for taxation or war.  Often, this is shrouded in talk of “duty” and “compassion”.  But let’s call it what it is: extortion.  If the 18-year-old worker doesn’t keep ponying up more and more of his earnings, he is thrown in jail for refusal to pay his taxes.  I don’t understand how any older person can use a younger person like that.  In my family, you respect your elders but it is the job of each generation to make sure the youngest generation has every opportunity to make a better go of it.  The book of Proverbs got it right: “A righteous man leaves an inheritance for his children’s children.”  In the United States, the theory seems to be, “Go ahead and stick your children’s children with the bill because you can’t live within your means.”

Who is to blame?  The accountants and lawmakers.  Pension promises should never have been allowed unless they were fully funded at the time.  We have to stop kicking the can down the road.  Pensions can be a great way to reward loyal employees, but only if you make sure the money is put aside at the time the promise is made.

We could always inflate our way out of the problem, but then that hurts savers who did everything right.

I’m just thinking at my desk, going through the economic analysis stories and the whole system is ridiculously.  This is a mess that never should have happened.  Everyone wants more government than they are willing to pay for and then refuses to allow immigrants into the country, which is the only countervailing force that could offset the demographic dangers!  It’s as if they think pixie dust and story time is going to make these problems fade into the ether.