High Altitude Thinking

Hosted by Bob Akright

Feb 03

SB 1 Won’t Fix Colorado PERA

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This letter was submitted to my state representatives.

February 1, 2010

The Honorable Dan Gibbs

Colorado State Senator, District 16

200 E. Colfax

Denver, CO 80203

The Honorable Randy Baumgardner

Colorado State Representative, District 57

200 E. Colfax

Denver, CO 80203

By: Email Delivery

RE: Colorado Senate Bill 10-001 (SB 1)

Dear Sirs,

My name is Bob Akright. I am a Tabernash (Grand County) resident, self-employed Colorado CPA, and registered republican. I have been following the progression of SB 1, “Concerning Modifications to the Public Employees’ Retirement Association Necessary to Reach a One Hundred Percent Funded Ratio Within the Next Thirty Years.”

While I accept that employers (in essence Colorado taxpayers) will need to assist in the shortfalls of PERA funding, I would request that you give consideration to the following.

In discussions with a limited number of PERA members, they are somewhat surprised that more consideration is not being given to the curtailment of the existing defined benefit plan and the introduction of some form of defined contribution plan for new members. While I understand that PERA’s board of trustees have stood in support of the current defined benefit plan, I find this logic out-of-sync with current business practices and quite frankly detrimental to many Coloradoans who are not in the program and keep their fingers crossed for social security.
The plan presented by PERA assumes an 8% rate of return on plan assets over the foreseeable future. By most accounts I believe this is viewed as a very aggressive assumption. Even as early as February 2008, Warren Buffett balked at the reasonableness of an 8% average rate of return. As you are aware, you don’t need to miss this assumption by much to cause a further significant gap in the underfunded state of PERA. The Wall Street Journal reported on January 27 that certain states (e.g. Wisconsin) are turning to leverage strategies to boost the returns on their plan assets. I hope any consideration of this strategy by the PERA board of trustees has been (or will be) appropriately vetted with the legislature.
We must appreciate that the increased demands for shoring up PERA will put further strains already challenging school district budgets. Already in the East Grand School District, PERA costs represent more than 5% of the district’s budget. This will surely increase if not rationalized with headcount reductions that will most likely occur at the lower end of the pay-grade. I would point out that in the Colorado Education Association’s support of the Rule of 88 amendment they note their support “because raising the minimum retirement age in school districts forces employees to work longer and costs district[s] money as it limits their ability to replace retiring employees at the top of the salary schedule with new employees who make less.”

There are a number of other factors that lead me to believe that if SB 1 comes into law it will require significant modifications in the “not-so-distant” future.

I would encourage each of you to re-consider any push to get SB 1 passed with what I and others believe to be significant flaws in the assumptions that purport to fix the problem.

I appreciate your consideration of my concerns.

Sincerely,

Robert J. “Bob” Akright

cc: The Honorable Al White

Colorado State Senator, District 8

Attachment:

Excerpt from Warren Buffet’s Letter to Berkshire Hathaway shareholders (February 2008) – 3 pages [redacted for blog publication]

BA

Jan 28

The American Way

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Last night we heard our president’s first state of the union address. Overall, I think he did a reasonable job of touching on the issues that are currently at hand. Whether he can action his own rhetoric is a different story.

There is one point I think requires clarification. The president referenced the common theme that for most Americans their largest asset is there home. I don’t think that is the case. I think the largest asset held out for by most Americans is the implied asset that they have in social security benefits or their state sponsored pension plans upon retirement. This is a huge issue facing most Americans – if not now certainly in the near future.

We see that most states are struggling with how to meet their obligation to state employees and we know that social security is on the brink of bankruptcy. While I don’t believe that we can solve these problems to the original commitments, we need to proactively address these issues in the context of solving our national financial predicament.

It is imperative that both federal and state governments take logical, practical and pragmatic solutions to these issues. They are some of our most daunting financial burdens and responsibilities. You will see from my previous blogs that I do not believe the California solution is either logical or pragmatic. I will soon write about the 2/2/2 Plus Plan being put forward in Colorado under Senate Bill 1. These are not solutions. They are political posturing that puts the burden somewhere down the road and around the corner. Out of sight for the next generation to deal.

This is not leadership. Nor is this responsible behavior by the adults at the table – today. Our politicians boast the intellect and capabilities of our citizens. We need to start making “us” responsible. Yes, we run the risk that putting responsibility for retirement in the hands of our citizens may find them back at the well in the future when their investments have performed poorly. But we cannot “guarantee” them a just reward at the expensive of every citizen. With citizenship comes responsibility. That is the American way.

BA

Jan 21

S&P 500 Performance “Bending the Economic Map”

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“Bank of America Announces 2009 Net Income of $6.3 Billion”

“Wells Fargo Reports Record Full Year Net Income”

“JP Morgan Chase Reports Full Year Net Income of $11.7 Billion”

“Goldman Sachs Reports Net Earnings of $13.3 Billion”

Just a few of the headlines from the past week.

In his 2003 book, Deep Survival: Who Lives, Who Dies and Why, Laurence Gonzales dedicates a chapter to an orienteering term called “bending the map”. He describes it as “trying to make reality conform to your expectations rather than seeing what’s there.” Used in the context of someone who is lost, he articulates how one can persist to follow their mental map even though their surroundings are telling them it’s wrong.

Since its 52-week low (666.79) on March 6, 2009, we have seen the S&P 500 increase by an amazing 72% when it hit its 52-week high (1,150.45) on January 19, 2010. Although it has given back 3% in the last two days, it has still had an impressive ride since last March. Is economic recovery at hand?

I think there are a number of factors that should compel us to stop and consider if the performance of financial markets is “bending the economic map”.

First, while we have seen improved performance in corporate earnings, including the larger financial institutions, we should be cautious as to what this really means.

In yesterday’s 4th quarter earnings release, Bank of America CEO Brian Moynihan reported, “As we look at 2010, we are encouraged by signs the economy is improving, as we have seen in the stabilization of our credit costs, particularly in the consumer businesses. That said, economic conditions remain fragile and we expect high unemployment levels to continue, creating an ongoing drag on consumer spending and growth.”

As unemployment continues at high levels this will have a trickle down effect on the fiscal health of federal and state budgets.

Second, despite last week’s comment by JP Morgan CEO Jamie Dimon that “Commercial real estate is a train wreck, but it’s already happened”, I find it still uncertain as to the ultimate fallout of lower valuations and the appetite for banks and investors to re-capitalize these assets. If the current banks are being too optimistic we may see another wave of writeoffs coming in the first half of 2010. More pain to come from commercial lending will certainly impact an already tightened credit market further de-stabilising growth and stability of small and medium businesses. Keep in mind that it is with certainty that we have not seen a major chunk of the problems that will still come from community and regional banks.

Finally, the past few quarters have undoubtedly reflected some benefit from federal stimulus monies that have been used to defer layoffs and shore up a portion of state budgets. It is less clear that these efforts can be extended beyond the first half of 2010 which will result in further pressure on consumer spending in the second half of the year.

Layoffs and cost cutting may drive capital markets, but they don’t pave main street. Unemployment will continue as a significant issue in 2010 – both economically and socially. Hopefully Congress and the current administration can keep their eye on the ball during this mid-term election year dealing substantively with reality and not wasting time (ours) “bending the map.”

BA

Jan 15

Tragedy and Responsibility (Guest Contribution)

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by Rich Devlin

On the morning of November 25, 2009, a popular bartender was found lying unconscious in the snow in a trailer park in Winter Park, Colorado. The 42 year old, Kevin Gilbert, was pronounced dead shortly thereafter in a local hospital. The preliminary autopsy report listed the cause of death as hypothermia. The report also noted facial injuries.

The police properly and thoroughly investigated Gilbert’s death. The investigation showed that Gilbert, and his 24 year old friend, Beau Grega, had done a lot of drinking that night and both were quite intoxicated. After leaving a local bar, they walked to Graga’s home (which was an old bus) but were unable to start a fire to keep warm so they headed to another friend’s trailer. Witnesses in nearby trailers report hearing loud and incoherent voices around 2AM. A trailer resident told police he believed Grega physically tried to help Gilbert into a trailer and then heard a loud noise like someone falling into the deck railing.

When the sun rose, Gilbert was dead and Grega was “slow to remember details.”

After the investigation, Grega was arrested and charged with criminally negligent homicide—an unintentional killing caused by the defendant’s gross deviation from the standard of reasonable care.

Criminally negligent homicide is when someone kills their children by leaving them seat-belted and locked in a car in the blazing sun. It’s also when someone shoots and leaves the victim without medical care. In such cases, the defendants may not have intended the victims to die, but they did die because the defendants’ acts so deviated from an acceptable standard of care.

In this case, Grega didn’t cause Gilbert’s death, Gilbert’s own acts did. Gilbert voluntarily drank beyond his ability to come in out of the snow. That Grega somehow managed to find shelter doesn’t mean that he is responsible for his friend’s failure to survive.

Grega will live forever with the horror that he might have been able to prevent his friend’s death. Putting him in jail for years would compound the tragedy. More broadly, are we all now subject to arrest for failing to save our friends and neighbors from their own poor choices?

Rich Devlin is a practicing attorney and Winter Park resident.