The rush to privatize.

Before we get to today's main subject, let's take a moment to revisit Gov. Scott Walker and the state of Wisconsin.

If you recall, Walker ran on a platform of "Jobs, jobs, jobs." Once elected, he seemed to forget about jobs and instead decided that his first priority was to take away the collective bargaining rights of most public employees. I say most because he did not find collective bargaining by police and fire unions to be a problem. The fact that police and fire unions supported him in the election probably didn't hurt either.

Wisconsin was no. 11 nationally in job creation when Walker took office. I understand that they are now no. 44 and projected to be no. 49 next year. So much for "Jobs, jobs, jobs." Now for privatization.

People seem to feel that moving government jobs to the private sector will be a more efficient use of resources. They tend to see government employees as the gang that can't shoot straight while private enterprise is a lean, mean fighting machine.

Our embassies used to be guarded by marines. Now they are guarded by "private contractors" who often make three times the pay of a marine. That's more "efficient?"

A huge number of our prisons are now run by private contractors. That's worked so well that 3 states recently cancelled their contracts with one of the giant private prison contractors. Instead of making things more efficient, the contractor apparently made them more profitable by doctoring staffing records to make it seem that the facility was fully staffed when it wasn't. Scandals have occurred in which judges have been bribed to send prisoners to one profit-making facility or another.

And now it seems that the Edward Snowden story has added another layer of privatization. We already knew that Snowden was employed by a private contractor--Booz Allen--instead of being a government employee. Now it turns out that Snowden's top-secret security clearance was issued based on a background check by a private contractor, USIS.

Turns out that USIS is supposed to do two checks. The second makes sure that nothing was missed in the first check. It seems that between 2008 and 2011 USIS claimed to do these second checks but actually did only half of them. This allowed them to clear more people in less time, thus qualifying for incentive awards!

Is it any wonder why the final goal of the school "reform" movement seems to be the privatization of what once was public education?

A few things to remember about your pension.

It's school budget time of year and griping about pensions earned by teachers is in the air. Here are a few things to remember about your pension:

1) There are states and municipalities which are having great financial difficulties paying for the pensions they promised their retirees. In virtually all of these situations, the problem is that the governmental unit granted the pension benefits but did not also begin to set funds aside to pay for those benefits. In the case of states such as New Jersey, Illinois, Rhode Island, California, etc. several years worth of funding were skipped in order to keep taxes low. Is this the fault of the retirees? No way! Thankfully, New York is not in this situation. Every contribution needed to fund our pensions has been made in a timely manner.

2) When I began my teaching career in 1967, schools were required to contribute about 23% of salary to the NYS retirement system. By the early 2000's that figure had dropped to less than 1%. Then came the financial collapse of 2008. The NYSTRS assumes--and has produced over 25 years-a return on its investments of 8%. When the stock market tanked, that return disappeared and schools needed to increase their contributions. Next year, the employer contribution rate will be around 14%. While that is almost half the rate from the 1960's, it represents a big jump from the less than 1% a few years ago, allowing the anti-teacher forces to yell that "pension costs have increased by over 1400% and are unsustainable." The employer contribution rate is based on a rolling 5-year average investment return.The stock market has performed well in the last few years and the losses of 2008-2009 will soon drop out of that 5-year average.

3) The average NYS teacher's pension is $39,000/year. Certainly not a huge amount. In fact, 76% of NYSTRS pensions are less than $30,000/year.

4) Unlike private-sector 401(k) plans, teacher contributions to their pension system are taxed.

5) Although public employee pensions are exempt from NY income tax, no one--private or public--is taxed on their Social Security benefits. In addition, private pension benefits are exempt from NY taxes for the first $20,000. This means that a couple with two private-sector pensions has a $40,000 exemption from NY income tax.

6) We often hear that politicians "buy" the votes of teachers and other public employees by "sweetening" pension benefits. From the 1960's through today we have seen our pensions modified from Tier 1 through today's Tier 6. Each modification has seen a decrease in benefits. Some "sweetening!"

7) Yes, we do have a COLA. But, you must be at least 62 and have been retired for 5 years before you can begin receiving a cost-of-living adjustment. In addition, the COLA--which applies to only the first $18,000 in pension benefits--is 1% or half the increase in the consumer price index, whichever is LESS. No matter how high the CPI spikes, the COLA cannot be larger than 3% of the first $18,000 of pension benefits. Hardly a kingly amount!

8) "I don't have a pension, why should teachers have something that I don't?" Private-sector employers saw the 401(k) as a way to drop their defined-benefit pension plans and lower their pension costs. The problem is that it costs twice as many dollars to produce the same retirement benefit in a defined-contribution (401k) plan compared with a traditional (defined benefit) pension. If employers are saving money, that can only mean that the expected benefit at retirement has to be reduced. As time goes on, people have been discovering that they have been hoodwinked by this switch. Could private-sector employers afford traditional pensions? You may recall that they are sitting on almost $2 trillion at the moment. Corporate profits are at record high levels. What do you think? Or we could all join hands and race to the bottom! (For a full discussion of the problems with 401(k) plans, see "What's so bad about 401(k)-type plans?")

Are your property taxes too high?

Let's talk property taxes. You know, the ones that pay for schools, roads, police and fire protection, the county health department and stuff like that. While you may not know how much income tax you paid last year, you probably would come close to the right amount of your property taxes. Everyone gripes about them.

Are your property taxes too high? On what do you base your answer? Really, what's the benchmark? What if your property taxes could be cut in half? Would they seem more reasonable then?

It just so happens that I'm living in the middle of an interesting experiment in tax relativity. As you may know from reading previous posts, my wife and I have built a new home in Ocala, Florida. We moved in at the end of last October. We're back in WNY this summer to try to sell our home in Fredonia. As such, we're living in two different places at pretty much the same time.

Through the magic of the internet, and the fact that both Dunkirk and Ocala newspapers are available online, we have been able to stay in touch with what's happening in both "homes."

The Ocala Star Banner reports that last Friday a "bombshell" was dropped in the schools of Marion County. We'll get to that in a minute.

First, you should know that while many in WNY are trying to get some of the smaller school districts to merge for the sake of efficiency and the ability to offer a complete educational program, Florida is years ahead of NY in this regard. All schools in each Florida county are controlled by a single countywide school board and administration. Can you imagine the hassle that would be involved in doing this in our WNY counties?

Ocala, located in Marion County, is in central Florida about 90 minutes northwest of Orlando. In population, it's about twice the size of Jameston, NY. Ocala's largest industries are agriculture, race horses and old people. Most of the horses you see in the Derby, Preakness, etc. were born and bred in the Ocala area. There are lots of "55+" communities--you must be 55 or older to live there--in the Ocala area. Part of the most famous such community--"The Villages"--is located in Marion County.

No, we didn't build in The Villages. We looked but went elsewhere. But that's a different story.

The home we built in Florida has about the same full value as the one we have in Fredonia. Our property taxes in NY are about $3900. In Florida, they will be a bit less than $1600. We're in the Forestville school district, so our NY property taxes might be considerably higher if we lived in the Village of Fredonia and the Fredonia Central School District.

We think that this big drop in property taxes is wonderful. But the people in Florida don't have the advantage of living in two places at the same time and they believe that their property taxes are oppressive.

Let's understand that it's tough to see Florida as a high-tax state. There is no state income tax. There used to be a tax on investments, etc. but that was abolished several years ago. Sales tax pays a large portion of the tax load in Florida, and we thank you for visiting Florida and leaving your sales taxes with us. Are sales tax rates high? We pay a 6% sales tax in Ocala, considerably less that WNY.

As I said, my Florida neighbors believe that they are being taxed to death. In the last year efforts to raise  funds for the local nonprofit hospital--to keep it from being sold to a for-profit hospital chain--were voted down. As was an effort to raise the needed funds for maintenance of the Marion County school buildings. Combined, these two tax increases would have meant about $130/year for the average homeowner. Voters said no.

Florida is no different from NY in that times have been tough for schools in the last few years. State aid has shrunk, but buildings still need to be maintained, busses run, staff paid, etc. The schools in both states have made valiant attempts to control costs. In order to keep tax increases low or nonexistent they have spent down their "rainy day" savings to a point at which they are mostly gone.

Then, last Friday, the Marion County School Superintendent dropped a bombshell. He announced that there was a $29-million deficit in the 2013-2014 school budget. To begin to address that shortfall, there will be 261 layoffs including firing all 160 first-year teachers and 72 teacher aides. There will also be 58 positions cut in art, music and phys. ed.

Now here's the icing on this cake. The fired first-year teachers will be replaced by certified substitutes paid $18,000/year with no benefits.

Read that last paragraph again because Ocala, Florida just may be the canary in the coal mines of NY public education. Most upstate districts have been using their reserves to keep the wolf from the door and it won't be long before those reserves are exhausted. If Florida residents paying half the taxes that NY folks pay won't vote to support their schools, it's unlikely that local NY taxpayers will step up.

But there's a bit more to the Florida story, besides the fact that school board members are paid $36,000/year in Marion county. Last year the state effectively reduced teacher salaries by 3%. This year, the state is giving teachers a $2500 raise.

The head of the Marion County School Board has said that the 160 first-year teachers can keep their jobs if all the Marion County teachers donate their raises to the school district.

By the way, if it weren't for tenure I doubt that it would be the first-year teachers being fired to help the budget. The move away from tenure is simply an attempt to make it easier to throw experienced--and more expensive--teachers overboard.

Thousands of NY teachers and their supporters are rallying in Albany to defend public education. Let's support them before our schools are privatized and all teachers earn $18,000/year with no benefits. Imagine the quality of teachers then!

E pluribus hubris

Well, that was a nice "vacation." We came back to WNY and did a lot of clean-up, fix-up, paint-up stuff and put our Fredonia home on the market. The "open house" was yesterday, so things are a little more calm at this point.

Let's talk about retirement and--along the way--America. We seem to live by several familiar phrases. The first to come to mind is, "We're number one!" Often followed by masses chanting, "USA, USA!"

Welcome to the wonderful world of hubris, defined as "excessive pride or self-confidence." We have the world's largest economy and biggest military so we must be doing everything right. We have nothing to learn from smaller nations. God blesses America and He/She certainly wouldn't bless us with inferior solutions to our problems.

So let's look at retirement in America. Remember the "three-legged stool" of retirement planning? Leg one was Social Security, leg two was your pension and leg three was your savings. If you're a retired NYS teacher, you almost certainly have a nice sturdy three-legged stool and, while you're probably not part of the 1%, you probably are able to pay your bills.

Don Esmonde--while discussing the views of a new member of the Clarence school board in this morning's Buffalo News--referred to that pension leg as "...benefits that disappeared in corporate America with the two-martini lunch."

By the way, if you think that replacing pensions with 401(k) plans is a good thing--or even that it makes financial sense--have a look at a post I did called "What's so bad about 401(k)-type plans?" and have your eyes opened!

On May 14, the NY Times published a special section on retirement which included an article by Steven Greenhouse titled, "How they do it elsewhere." Here's the first paragraph: "The United States can boast that it has the world’s best basketball players, fighter jets and country and western singers. But hardly anyone would ever boast that the United States has the world’s best retirement system."

According to Greenhouse, 58% of American workers have neither a pension plan nor a 401(k). Imagine for a moment what your life would be like should your pension disappear. Could you live on Social Security and your savings? Apparently 58% of today's workers will be doing just that.

USAToday ran an article this morning titled "Will U.S. workers ever be able to retire?" It included the fact that "One-third of America's [current] retirees get at least 90% of their retirement income from the [Social Security] program, with annual benefits averaging a modest $15,000 for an individual."

A new report comparing our retirement system with others around the world is referenced by both the Times and USAToday articles. From the Times: "A new report ranking various countries’ retirement systems gives the United States a C, considerably worse than the A received by Denmark and the B-plus given to the Netherlands and Australia. The study, by the Mercer consulting firm and the Australian Center for Financial Services, weighs adequacy of benefits, breadth of coverage and other factors, and points to numerous weaknesses in the American system."

"Those shortcomings include contribution rates too low to assure adequate retirements for middle-class Americans and many workers withdrawing large sums from their 401(k)’s before they retire."

"The report also cites poverty-level retirement benefits for many low-income workers and pensions that fail to keep up with inflation. It also points to the common practice of retirees withdrawing large sums from their 401(k)’s soon after retiring, leaving many without an adequate income stream if they live past 80."

Oh, did I mention that participation in the 401(k) plan at work--if there even is one--is voluntary?

Certainly, there is room for improvement. We could task our Congress with formulating a system which would provide a reasonable assurance of an adequate retirement for all American workers. If other countries can do it, so can we.

Well, there is one small roadblock and it's another much-used phrase in America: "You're not the boss of me!" And up pops the mandate.

Other industrialized nations have discovered that they can provide medical care at half the cost of the USA, while also producing outcomes that are measurably better than ours. This requires, however, that the government mandate that everyone participates.

Awhile ago, I did a blog post which discussed mandates. It was called "We have laws because "please" doesn't work." I would urge you to take another look at it.

Again, from the NY Times piece: "John A. Turner, director of the Pension Policy Center in Washington, said some foreign features might not fit American culture, like mandated participation in the pension system as in Australia and Chile. He does not advocate such a mandate."

“We’re quite different from many other countries,” he said. “There’s an emphasis on individual freedoms and rights and responsibilities versus collectivism — although I admit we will never have high pension coverage without some form of mandate.”

“In the United States, collective is a four-letter word,” agreed Harry Smorenberg, head of a Netherlands-based consulting firm on pensions and founder of the World Pension Summit."

Now if "collective" is such a four-letter word in America, I wonder why the business community spends so much time and money in "team-building" activities. Working together toward a common goal is good for the corporation, but not for individuals?

I remember a world in which conservatives actually brought forth a healthcare plan with a mandate for individuals to purchase insurance because it was a matter of "personal responsibility." Now it seems that any law requiring collective action is "unamerican."

Life would certainly be better without those tyrannical government mandates that we all drive on the same side of the road or obey the speed limit.

We're asking the wrong healthcare question: Part 4

Let's talk about how Congress handcuffs Medicare.

By law, Medicare is prohibited from negotiating drug prices. This applies both to the Part D prescription drug program as well as drugs you may receive during a hospital stay. Medicare is only allowed to ask the drug manufacturer the average sale price of the drug then add 6% to that amount when paying the hospital for the drugs they administer. The manufacturer is free to set its own price.

This process is quite different from what happens in Veterans' Administration hospitals which are free to use their buying power to negotiate drug prices.

Other developed countries regulate the price that drug companies can charge for their products. Not the USA. We pay about 50% more for a drug than in other developed countries.

The drug companies will say that they need to charge high prices to support their research and development programs. Without these programs, they say, new "wonder drugs" will be undiscovered. Brill's article says: "More than $280 billion will be spent this year on prescription drugs in the U.S. If we paid what other countries did for the same products, we would save about $94 billion a year. The pharmaceutical industry's common explanation for the price difference is that the U.S. profits subsidize the research and development of trailblazing drugs that are developed in the U.S. and then marketed around the world. Apart from the question of whether a country with a health-care-spending crisis should subsidize the rest of the developed world--not to mention the question of who signed Americans up for that mission--there's the fact that the companies' math doesn't add up."

"According to securities filings of major drug companies, their R&D expenses are generally 15% to 20% of gross revenue. In fact, Grifols [a major drug company] spent only 5% on R&D for the first nine months of 2012. Neither 5% nor 20% is enough to cut deeply into the pharmaceutical companies' stellar bottom-line net profits. This is not gross profit, which counts only the cost of producing the drug, but the profit after those R&D expenses are taken into account. Grifols made a 32.3% net operating profit after all its R&D expenses--as well as sales, management and other expenses--were tallied. In other words, even counting all the R&D across the entire company, including research for drugs that did not pan out, Grifols made healthy profits. All the numbers tell one consistent story: Regulating drug prices the way other countries do would save tens of billions of dollars while still offering profit margins that would keep encouraging the pharmaceutical companies' quest for the next great drug."

Oh, by the way, many new drugs come as the result of government-supported research paid for by the taxpayer, not the drug companies.

Why did Congress prohibit Medicare from using its vast buying power to negotiate drug prices? Remember, the medical/hospital/pharma complex spends three times what the military/industrial complex does on lobbying. What Will Rogers said in the 1930's seems to still be true: "We have the best government money can buy."

We don't have a clue about our kids' finances.

We're not done with our discussion of Brill's Time article about medical costs, but I want to share something amazing with you.

Retirees have a lot of life experiences. We grew up, received an education, spent decades in the workforce and along the way learned how to handle our family finances.

We would like to pass that experience along to our children in hopes of making their financial lives a little easier. Here's the problem: Much of what we know about family finances doesn't apply to the "mom, dad and two kids" families of today.

How can that be? Like the proverbial frog in the slowly warming water, things have changed so gradually that we never noticed.

This was driven home to me by a piece of video I recently ran across. I was stunned by how much my financial thinking was out of date. I watched the video, then got my wife and sat down with her and watched it again.

In March of 2007, Elizabeth Warren was invited to Berkley to give the Jefferson Memorial Lecture. Note to conservatives: Although Warren is now a U.S. Senator, there is nothing even close to a partisan remark in this video. Warren was invited to lecture because she was becoming recognized for her work on bankruptcy and the conditions leading American families into financial peril.

Warren is to financial information what the late Carl Sagan was to science. She can make her topic interesting and easily understandable. Once I got past the dean of the graduate school who introduced Warren, I couldn't stop watching.

The video runs 57 minutes, but you can stop it and come back to it later if desired. (Just remember the time you stopped, then use the "scrubber" bar to fast forward back to that point.)

Warren contrasts the financial situation facing a typical family in 1970 with one in 2005. You will be amazed at the differences you did not understand. Educators will be particularly struck by the difference in educational costs to a family wanting their children to enter the middle class. This occurs around 48 minutes into the video.

Here is the video, Trust me, it is worth your time:

We're asking the wrong healthcare question: Part 3

In part 1 and part 2 we began digesting Steve Brill's recent Time magazine cover story in which he says that we should be asking why our healthcare bills are so high as opposed to who will pay those bills.

In part 2 we learned some things about nonprofit hospitals, including the fact that the average nonprofit hospital makes a greater profit than the average for-profit hospital. "In hundreds of small and midsize cities across the country...the American health care market has transformed tax-exempt "nonprofit" hospitals into the towns' most profitable businesses and largest employers, often presided over by the regions' most richly compensated executives." With a profit margin averaging about 12%, what do "nonprofit" hospitals do with their profits?

They start by buying up medical practices. The doctors in these practices will send their patients to the hospital lab for tests, X-rays, CAT scans, etc. When sending patients for inpatient or outpatient care, the doctors will recommend the hospital "affiliated" with their practice.

"In a trend similar to what we've seen in nonprofit colleges and universities--where there has been an arms race of sorts to use rising tuition to construct buildings and add courses of study--the hospitals improve and expand facilities (despite the fact that the U.S. has more hospital beds than it can fill), buy more equipment, hire more people, offer more services, buy rival hospitals and then raise executive salaries because their operations have gotten so much larger. They keep the upward spiral going by marketing for more patients, raising prices and pushing harder to collect bill payments. Only with health care, the upward spiral is easier to sustain. Health care is seen as even more of a necessity than higher education. And unlike in higher education, in health care there is little price transparency--and far less competition in any given locale even if there were transparency. Besides, a hospital is typically one of the community's larger employers if not the largest, so there is unlikely to be much local complaining about its burgeoning economic fortunes."

 "Nonetheless, hospitals...are able to use their sympathetic nonprofit status to push their interests. As the debate over deficit-cutting ideas related to health care has heated up, the American Hospital Association has run ads on Mike Allen's Playbook, a popular Washington tip sheet, urging that Congress not be allowed to cut hospital payments because that would endanger the '$39.3 billion' in care for the poor that hospitals now provide. But that $39.3 billion figure is calculated on the basis of the chargemaster prices. Judging from the difference I saw in the bills examined between a typical chargemaster price and what Medicare says the item costs, this would mean that the $39.3 billion in charity care costs the hospitals less than $3 billion to provide. That's less than half of 1% of U.S. hospitals annual revenue and includes bad debt that the hospitals did not give away willingly in any event."

And let's not forget lobbying costs. You probably thought that the defense and aerospace industries were big spenders in Washington. Or maybe you would have guessed in would be the oil companies. "According to the Center for Responsive Politics, the pharmaceutical and health-care-product industries, combined with organizations representing doctors, hospitals,nursing homes, health services and HMOs, have spent $5.36 billion since 1998 on lobbying in Washington. That dwarfs the $1.53 billion spent by the defense and aerospace industries and the $1.3 billion spent by oil and gas interests over the same period. That's right: the health-care-industrial complex spends more than three times what the military-industrial complex spends in Washington."

That lobbying is done because there is a lot of money to be made in healthcare. "We may be shocked at the $60 billion price tag for cleaning up after Hurricane Sandy. We spent almost that much last week on health care. We spend more every year on artificial knees and hips than what Hollywood collects at the box office. We spend two or three times that much on durable medical devices like canes and wheelchairs, in part because a heavily lobbied Congress forces Medicare to pay 25% to 75% more for this equipment than it would cost at Walmart."

That's coming up in the next post.