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Archive for December 21st, 2007

Municipal Tensions

Friday, December 21st, 2007

Tonight I want to point you to something that might make you uncomfortable.  Don’t worry, it is for a good purpose.

Depending on where you live in the US, various states and municipalities are more or less prepare for the onslaught of cash flow that they will have to pay baby boomer employees after they retire.  Here’s a very good summary of which states are prepared, and which are not, from the Pew Charitable Trusts.  As for pension benefits, they are relatively well funded, with 85% of the accrued benefits funded.  Other Retiree benefits (mainly health care) are only 3% funded.

Only ten states are more than 96% funded on pensions: Oregon, Utah, South Dakota, Wisconsin, Tennessee, Georgia, Florida, North Carolina, Delaware and New York.  Ten states are less than 70% funded on pensions: Hawaii, Kansas, Oklahoma, Louisiana, Illinois, Indiana, West Virginia, Connecticut, Rhode Island, and New Hampshire.

But as for other retiree benefits, 32 states have funded nothing at all (0%).  See the graph on page 42.  They will either pay it out of cash flow (from increased taxes), or decrease the benefits, because they are not guaranteed as pension benefits are.   Only one state is in good shape, Wisconsin (my home state), which has its other retiree benefits 99% funded.  Next best are Arizona (72%), Alaska (65%), and North Dakota (41%).   In a word — ugly.  Either promises will have to be rescinded, or taxes raised.

It’s worth looking at this report because these matters will be upward drivers of taxes starting about five years from now, and lasting for two decades beyond that.  It will be a big political fight.  Taxpayers will do their best to reduce benefits to state and local government workers who worked at lower salaried jobs, knowing that they would make it up on better benefits.  Alas, but the benefits may be less than expected.

Now as far as the US goes, Federal DB plans are unfunded, including Federal Employees, Social Security and Medicare.  Holding US Government bonds doesn’t count, those are just indicators of future taxation.  Higher future taxation from the US government will be a fact of life.  I don’t argue with it.  They’re bigger than me.

States and municipalities may be another matter, though.  Many municipalities are even worse funded than the states, and their taxation capabilities are more limited.  People can leave to go to other places in the US.

My advice: review the pension and other benefit funding levels of your state, and any other places that you get taxed (county, city, assessment district).  Figure out now whether your taxes are likely to rise or not, and ask yourself whether you can live with it or not.  This is somewhat cold-blooded, but you need to act on this in the next 2-3 years.  Five years out, and this will factor into land values and a wide number of other economic variables, making any move less economic.

The Virtue of Lunch with Friends

Friday, December 21st, 2007

I really enjoyed being an investment grade corporate bond manager.  I enjoyed interacting with credit analysts and sales coverages, and the hurly-burly of price discovery in markets that were thinner than optimal.  My credit analysts were professionals, and I never went against them; at most, I would explain to them why market technicals favored a delay in the action they proposed.  But I would never permanently disagree.  What they wanted to buy I would buy, and sell I would sell, eventually.  The level of communication evoked greater effort from them.  Machiavelli was wrong.  It is better to be loved than feared, at least in the long run.  I have gotten more out of associates and brokers by being altruistic than through transactional constraint.  People will give far more to someone that cares for them, than someone that threatens them, in the long run.  (The short run is another matter…)

Now, this is not my character.  I tend to be shy, and constant interaction pushes me out of my comfort zone.  But when others are depending on me, I push myself harder, and do what needs to be done for the good of others.  I can’t let down those who rely on me.

Yesterday I had lunch with three friends and a new friend.  Two were sales coverage, and two from the firm that I used to work for.  It was fascinating to hear the tales of woe in the structured securities markets (worse than I expected, and I am cynical).  It was also fascinating to consider why investors for a life insurance company, which has a liability structure that would allow them to buy and hold temporarily distressed assets, does not do so.   A lot depends on how short-term the investment orientation of the client is, and this client is definitely short-term oriented.

I talked about my new CDO model, and about what I write about for all of you who read this blog.  The summary of our discussions is that it is a tough environment out there, and one that is particularly not kind to complex securities.  After the lunch, which the sales coverages generously paid for (at present, I don’t know what I can do for them), I went back to the office of my old friends, and reacquainted myself with one of the best consumer/retailing credit analysts period, who is a very nice woman.  I also talked with my former secretary, who is sweet, and was always a real help to me and all of the staff.

Friends.  I am richer for them.  I am richer for being one.  Beyond that, it is excellent business to live life in such a way that your business dealings leave people happy for having dealt with you.  I am truly blessed for all the business friends that I have gained.


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.

Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions.

Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

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