Hi all. Here is another radio show I did last week talking about my company Public Utility Management and Planning Services Inc. and water sustainability. Take a listen. Let me know what you think. Thanks
Fred
Are Pensions Really Broke?
Nearly 10 years ago it was predicted that the water industry would experience a large exodus of experienced workers. It did not happen; likely it was only delayed by the 2008 financial crisis. If that is the case, will there be an acceleration of retirements in the next few years? If so, what are the plans the plans for knowledge capture? GIS, work orders, MMIS, and other programs will help, but capture is important as the next “generation” of employees will not have the advantage of years of experience in finding valves, and pipes, etc. We need to plan ahead for the knowledge capture issue, develop training for newer employees and figure a means to access lost knowledge in the future. Capture is a big issue, but what we hear more of is the potential for a drain on our resources for funding these retirements? The news is full of stories of dire consequences of retirement defaults coming for the public sector. Keep in mind many utilities are publically owned and these employees are part of the public retirement systems. Is this real or a political position for another agenda? Do we need to be worried?
Interestingly it depends on whether you were looking before 2008 or after. This picture was very different. Even in my state of Florida, the pension system was fully funded before 2008, dropped just after, but has returned to near full funding as a result of the improvement in investment returns. Most of these systems rely on investment returns so changes can cause the system solvency to change rapidly over short periods of time. Looking only at a short instant in time belies the long-term truth and it is the longer view we need to look at. Good thing Wall Street normally goes up, but the impact of poor investment strategies by a limited few (2008) has significant impacts across society in everyone’s pension programs. Look at all the 401k programs – those incurred crushing blows just as pension programs did. So yes there may be problems, but many of these pension systems are not nearly as strapped as you would be led to believe in part because they have always relied on people continuing to pay into the system. Hence they always have cash flow, unlike personal accounts.
The long-term view or the impact on personal accounts doesn’t faze the “fixers” who have many ideas to “fix” the pension problem. One of the concepts championed is to change enrollment to a 401k vs a fixed benefit system. Another camp suggests privatizing. But both radically change the long-term solvency of vested employees and here’s why. Under the current concept for public retirement systems, your employer and often you, pay matching amounts into the system. According to a study done some years back in Florida, over 80% of people who get public sector jobs do not stay long enough to become vested in the system. That means that while they get their contributions back, the retirement system keeps the match, reducing long term costs to the public. All full time employees pay into the system. Retirement systems rely on cash flow from current employees for payouts to retirees, thereby protecting the invested funds and allowing the system to “weather” periodic financial difficulties. That’s why the system solvency will based on what is happening on the stock market. The system is designed to grow at a given rate, so if you reduce the people paying in, you accelerate the use of invested dollars because the cash flow diminishes. In many respects that is what happened to some of the industrial pension systems –automation and outsourcing jobs overseas cut down the payees so much that the pension system could not sustain itself. So it’s relatively easy to demonstrate that both cutting jobs through privatizing and 401k type programs accelerate the crisis and will create future burdens on the taxpaying public. These two solutions sound great, but are simply unsound.
There are other ways to mess up retirement systems. The federal workforce has decreased from 6.6 million in the late 1960s to 4.5 million today. Clearly the reduction in employees contributing will have an impact on significant federal pensions. Florida and many other states, with the windfalls on the late 1990s, reduced vesting from 10 years to 5 or 6. That means that a greater percent of people will become vested, which means more future obligations. That’s not a solution for solvency. Florida’s legislature changed the contributions from only the government entity paying (a total of 10.4%) and required employees to contribute. The employee match is their money and they get it back with interest, meaning only 7./4% remains in the system. If experience with social security and other states is an indication, both shares will have to increase so that their combined total will be in the 13-14% range. How did hat save anyone money?
So what’s the solution? Two things. First, the initial way these pension plans were set up were actuarially sound. They should be revisited for contribution amounts, vesting period and expected return rates on investments (one of social security’s issues is that they own so many Treasury bonds that pay under 2% that it is hard to get a valuable rate of return). This is a project for experts, not policians to consider and evaluate. The big issue though is age for retirement. I know this is not popular, but let’s talk social security here as an example. The text of the 1935 Social Security Act says that benefits were to be granted at age 65 (Section 202). However the average age that people live to was 60 for men and 64 for women, meaning the average person NEVER collected social security. Now it is 76 and 81, which means they collect for 12 to 15 years, tremendous difference in the obligations. We all appreciate good medicine and most look forward to retirement, but keep in mind it comes with a price. Since 50 is the new 30, we probably will all probably can be working longer.
Water and sewer workers like police and fire, are vital to thriving communities. So, let’s act with caution when looking at fiscal impacts that may come to utilities in the future. Since many of these folks have, and have worked hard to secure a retirement package, it will need to be funded. But we must act judiciously when making changes to the current program. Cut off payees – and ratepayers will make up the difference. Change the type of program, and the potential for major losses occurs.
If you live on an island, and your groundwater table is tidal, what should your datum be for storm water planning purposes? Average tide? High tide? Seasonal high tide? If you are the local official with this problem, what do you do, realizing that the difference from mean tide and seasonal high tide (when most flooding occurs) is 1.5 feet? Realizing that property and infrastructure is at much higher risk for periodic inundation, does the failure to address the problem indicate a lack of willingness, understanding, hope or leadership? We see all four responses among local officials, but the “head in the sand” mode is the most curious. It’s tough challenges that often define leaders. With sea level rise, there is time to plan, construct infrastructure in stages, arrange funding, and lengthen the life of infrastructure and property. Meanwhile, those insurers, banks and the public we talked about in a prior blog wait and watch.
Hi All.
This is a radio show I did this week. One of 4 I have scheduled. It talks about me and my company, outlook, thoughts. Take a listen. Let me know what you think!
Fred
After my last post, I was asked about sea level rise and how to get started with the issue in a very “red” area as it was characterized. I have come to the conclusion that the insurance industry will make sea level rise real for politicians in those places where it is impermissible for bureaucrats to discuss it. Here’s why. Say you have a house in a low lying area that is vulnerable to sea level rise and/or storm surge. One is permanent, the other temporal, but in both cases are potentially catastrophic if you live in this house. You bought the house, got a loan for 80 or 90% of its value and then got insurance for it. Now the insurance is there to insure that if your house gets swept away or damaged, there will be enough money to pay off your loan. That’ s what many people miss. Insurance is for the bank, no you, which is why your loan documents require that you get and hold insurance while you have the house. After your loan is paid off, there is no such requirement.
Now let’s say we are out 20 years. You have enjoyed your house but have decided to sell it. Now the banks will value it and are willing to loan say 80% of its value. They of course assume that the house will increase in value with time so even if you make no improvements, if they have to foreclose on it they will get their money back (a major part of the problem with the financial crisis of 2008 was they banks could not get their money out of the properties). Even if it doesn’t, as your loan is paid down, their risk decreases. The loan documents require that you get insurance to cover your costs.
So far so good, but what happens when the insurers will not give you insurance for the full value of the property? In Florida the State creates Citizen’s to deal with the fact that private, commercial insurers saw too much risk in coastal areas and refused to issue policies. Now the State and Citizen’s have the risk. Fine, but that isn’t dealing with the same issue – if the insurer think the value of the property will decrease, or the risk increases a lot, they will not issue policies. Or they will revise policies to say they will pay once – but will not insure you for rebuilding. You may think this will not happen, but Citizen’s is already discussing this option. Hence if you lose your house, they will pay you (so you can pay the bank, and then you are on your own. Now the bank may be willing to offer you a distressed property as an options (Welcome to Detroit), but that won’t be in the same risk zone.
Take this further, let’s say Citizen’s for example says we will pay full value if you lose the house but will not insure a rebuild? That means they probably will not give insurance to the guy who wants to buy our house in 20 years. How much is your house worth now? Probably nothing, which means now the bank will be looking at your insurance coverage and say – whoa – if the house is not worth anything on a resale, that means they may not get paid when you sell your house if you sell if before it is paid off (the norm)!! That is an unacceptable risk, and they need a solution. Of course if your house suddenly has no value, it means local governments get no revenue for taxes (good for you, but bad for providing essential services like storm water. You may not believe this discussion is happening, but it is.
So here’s what I think happens. I think the banks figure this out and start looking at vulnerability as a part of loans. I think they start thinking about what the value in 20 or 30 years might be and if they can get their loan monies back out of property. That will slow property values. I think the insurance industry does the same, and working with banks will further set the prices acceptable for vulnerable property. They are not good investments. If you own such property, you may get insurance in the short-term, but long-term your house value may decrease. At some point, your house will have no resale value, unless……
BUT there iis a big caveat to all this. Coastal areas are high value markets. Lots of activity and lots of investment opportunities. It all depends on what is being done to protect those properties, and depending on the federal governments to bail out private property is unrealistic. It is a local issues, so I also think the banks and insurance industry will start looking at what local governments are doing to protect investments in private property. Do they have a sea level rise adaptation plan? Are the storm water systems updated/upgrades/maintained? Are roads, water supplies and sewer systems capable of functioning under the changed condition? Is there a 50 or 100 year vision on how the community adapt to nature? If yes, there is comfort that investments are protected. If everyone’s head is buried in denial…..Detroit’s calling. U-haul anyone?
PS No disrespect to Detroit, my father’s hometown and the home to many of my current and departed family. For those who do not know, Detroit is high, has access to lots of water, sewer, roads, power and lots of land at reasonable cost, along with a jobs and manufacturing history. Perfect opportunity, one not lost on our ancestors.
We do 5, 10 and 20 year plans for infrastructure. But how long do we expect to this infrastructure to last? For example, how many roads only last 10 or 20 years? Most roads only seem to grow with time. Ancient Roman roads are the basis for many current roads. We keep adding roads – few are ever abandoned. They simply do not go away. So a 5, 10 or 20 year planning period makes little sense.
Roads are not the only limit. The WPA-era water mains are approaching 80 years old, and still providing good service, and our Clean Water Act-era sewer improvements are approaching 40. Sewer lines are similarly situated. Many water plants are over 70; we celebrate 100 years on many. Again, planning for only 20 years makes little sense in the context of the larger length of time.
More interesting, we rarely borrow money to pay for these projects for less than 20, 30 or 40 years. So our infrastructure outlives our plans and our borrowing. Often permits are less that the borrowing for infrastructure, which can cause stranded capacity in plants that may never be used. Miami-Dade County has such a situation – they are not alone.
Let’s look at this in the context of groundwater withdrawals. There are areas across the US where groundwater levels have fallen. They have fallen because of human activity to pump them for crops and water use. Colorado has a 100 year management plan in the Denver basin which is basically make the water last 100 years. Then what? Texas has shorter plans. The eastern Carolina drained parts of the Black Creek already, so this is not a theoretical western state issue only. How do we address this?
Or let’s go back to Miami-Dade County the outer banks of North Carolina, historical downtown Charleston, SC, and many other venues where sea level rise could impact water, sewer, storm water and roadway infrastructure. As we redevelop those area, should plans look at the true life of those assets (100 years) vs. the 20 year plan?
Both issues involve the sustainability of infrastructure systems, which means the ability to adapt them to changing future conditions. We have known for 10-15 years that stationarity is no longer accepted for future projections. But we need leadership to move the infrastructure planning to the future changing conditions.
One. That’s the mantra. I started blogging a year ago with the statement that “It’s all one water.” And that is true, regardless of the form it may be in (raw, waste, storm, reclaimed, gray, industrial, etc). But I may have used too many words. Dan Pink notes in his newest book “To Sell is Human” that one of the recent trends is to try to get your message to one word. Obama did this with “Change” in 2008 and “Forward” in 2012. Others have noted that branding to one word is in vogue with private companies as well. So what about the water industry? So what about water? Maybe we simply need to say “One.” It is all one. We can treat any water quality to meet whatever your need may be. So why differentiate the water source? There are many water associations out there for a variety of reasons including unhappiness with another associated (so they creates a breakaway group). But how does this help the water industry? There are too many water associations that are way too specialized in what they do. Differentiating them create silos, silos that make you think water is different. But we know it is not. It’s all one. So for example, the America Water Works Association is the oldest of the water industry associations and is the only one that sets standards for the industry. It has long created manuals of practice that have been updated numerous times by industry professionals. And water purveyors must treat all types of water to deliver healthy, safe water to your household, and they do, and have for over 100 years. Tap water is as safe or safer than any other option. So what would happen if AWWA were to reassert its leadership role with a new mantra that pulls the industry together. What if they tried “One”?
In our prior blogs we talked about leaders and who they were. I got a couple comments about those on the list, and those perhaps not. So perhaps a little more digging is needed to illustrate the points. For the purposes of this commentary, let’s focus on the social leaders, often political in nature. Again, let’s do this based on quick perceptions, as opposed to deeper digging, because perception shapes our reality. I was asked about George Washington. In many respects Washington was our first “leader” in the Presidency, but his actions there were mostly non-descript. He is mostly remembered as a good wartime general. Even then, there was really nothing to indicate he was or would be a great leader in government except that everyone respected him because of his accomplishments. Keep in mind leaders are measured by their followers, so given the amount of respect for his accomplishment she commanded, Washington had many followers. But perhaps his greatest demonstration of leadership was his refusal to become our king. He noted that he had led an effort to avoid a monarchy and thought it disrespectful to those that had fallen to recreate one. He led the revolution for change, but a permanent change. He was supportive of the crazy radical liberal thinkers who actually had the audacity to think that a democracy by the people could really work. We have no appreciation of just how crazy this idea was in 1776 because we have lived it as the norm for over 200 years. But in 1776, it was anything but the norm, and the leadership in creating that democracy should rightfully be laced on James Madison, Thomas Jefferson and James Monroe, all of whom played major parts in developing the Federalist papers, Constitution and Declaration of Independence. All had a vision of what the US could be and were able to bring others along to implement it. Each was perhaps more of a leader as President than Washington.
But our first great leader was Lincoln, who was not always that popular as President. Again there was nothing particularly distinguishing about Lincoln that would lead one to think he would be a great leader, but the struggles Lincoln had faced throughout his life had prepared him for the darkest hours of the young USA. He inherited a situation where half the country had an economy based on slave labor, did not recognize slaves as people but as property, were determined to maintain their way of life and were willing to risk armed conflict to preserve it regardless of the impact on the young union. Prior presidents and Congresses had refused to alter the status quo to keep the peace, which really festered the issue for many years and hardened positions further. When the CSA attacked Fort Sumter and Lincoln acted. Lincoln set a course to protect the union at all costs. He refused to recognize the CSA as a legitimate nation (which would later make their re-entry to the union easier), instituted marshal law by executive declaration and set about to rework (change) the federal bureaucracy to support the wartime effort. He recognized that money would be an issue, so he set a competitor, Salmon P. Chase, to create the central banking system, a major change in how a government did business. Marshal law restricted activity that might be detrimental to the union, a radical departure from the past. He bided his time before the change to emancipate former slaves by executive proclamation, and allowing them to fight as full members of the army. He updated the military, and despite setbacks with generals, kept changing them until they provided the results he wanted. He pursued new developments in weaponry, yet made sure he engaged the servicemen with frequent visits to the battlefield and hospitals. He created a vision, and became the living personification of it. The citizens of the north bought into his vision and mission and sacrificed significantly. In the end he preserved the union, and offered the rebels readmission with relatively limited penalty. He was unfortunately assassinated prior to seeing his full vision. The ugliness of civil rights that lasted another 100 years likely would not have made Lincoln happy.
Our next leader also inherited a difficult situation – FDR. The nation was at the depths of the Great Depression caused by banking speculation in real estate, economic collapse in Europe and other factors, creating rampant unemployment, and devolved financial system. A few starts and stops aside, FDR convinced Congress to borrow and spend money for construction WPA projects that updated or initiated water, sewer, parks, storm water and roadway projects that updated much of the south and rural areas. He created regulations for banking and securities, including separated banking and investment monies that protected us (until many were repealed in 2000), insured personal banking accounts through the creation of FDIC, created oversight agencies like the SEC, and initiated social security in response to the banking crisis that left many older Americans in poverty, which was the start of the societal social net. In the second half of his terms, he led a frightened nation to victory in WWII, setting up the greatest economic boom on US history. He also died before his vision was fully realized, but his successor, led us through to plan to avoid the errors in dealing with the defeated after WWI, developing the Marshal Plan to rebuild the defeated German and Japanese economies and creating a better model for international communication (United Nations). Both built on changes from past thinking about how to deal with the issues.
The next social leader was never elected: Martin Luther King led us to the completion of Lincoln’s dream to integrate all Americans into one nation. He gained champions in Presidents Kennedy and Johnson, who pushed forward civil rights legislation along with major changes in policy in the form of Medicare and Medicaid. Even Johnson acknowledged that signing the Civil Rights legislation would create a backlash among certain Americans who would abandon his party. But he made the hard choice to change.
Arguments could be made for Teddy Roosevelt, who led us to setting aside parks, and Woodrow Wilson in WWI. It is not a coincidence that President Obama was pursued “Change” as a mantra, although he has yet to be able to institute consensus for a lot of change. For most of the rest of our political leaders, what leadership did they display? Harding? Buchanon? Grant? Andrew Johnson? Taft? Hoover? Tyler? So many others. Leadership is indeed difficult to come by, but leadership is defined by dealing with an opportunity, and the leaders are agents of change to resolve that issue, not the status quo. Too many of our political leaders have desperately attempted to maintain the status quo. As I have mentioned in classes I have taught to elected officials – no one remembers, and no one builds statues to the guy who refused to raise taxes. We remember and build statues to those who implement change, not those that maintain the status quo. And while all changes may not be positive, trying to return to the 1890s, is not leadership.
My thoughts are with those in Boston. A terrible incident surrounding a wonderful springtime celebration where some one or some group that has decided that violence is somehow an appropriate means to make a point, a point that so far has escaped us in Boston. No one deserves to be impacted by events like that.
All such acts are terrorism, domestic or otherwise. We need to understand that the goal of terrorism is to disrupt our day-to-day life, to scare people, make them afraid to do normal activities, to cause their withdraw from society, to bankrupt business and disrupt economies by slowing cash flow and disrupt governance. All to make some point. Or because they are crazy. Crazy people do crazy things; we expect it, but are always surprised when it happens.
My message to those who did this – so you are crazy, have some issue with someone, are unhappy or want change. There are doctors and appropriate channels for change, so why disrupt people’s lives? What does this accomplish? That’s the eternal question. Such behavior cannot be tolerated and tends to make us stronger.
For the rest of us, we do society and those directly impacts an injustice to “accept” it, to tolerate it or to ignore it. May we judiciously pursue the guilty and bring them to justice. We all must do our part. Special thanks to all those already helping – the blood donors, first responders, people on the scene who helped. In the meantime, as FDR said the “only thing we have to fear is fear itself.” Defy their goals! Don’t give into their desire to disrupt us. May our healing begin…
Let’s think about great leaders in business and politics in the US. Our two greatest leaders were Lincoln and FDR. Lincoln led us through challenging times, but his means to govern and organization of the federal government was a huge change from those before him. FDR led us through the challenge of the Great Depression and WW2. But government and the world was hugely different as a result of his tenure in Office (and thanks to Truman for completing it).
Other political leaders included all those crazy radical forefathers who had the audacity in 1776 to think that average people could actually govern themselves. We have no conception to day what a crazy idea that was in the 18th century as we take it for granted today. Teddy Roosevelt changed how we viewed open space. But mostly is change that people wrought that made them leaders.
In business, Ford changed how car were made in an effort to sell more at lower costs. Edison changed the world with the light bulb. Los Angeles would not exist if William Mulholland had not conceived of bringing water and power across the mountains. So is it change or challenge that creates leaders? Or both? Or something else?
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