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Social Security Not Nearly So Bad…
Previously I blogged about retirement systems since they were getting a lot of negative attention in the Florida Legislature and in Congress. One of my tenets was that the economy is more of an issue in dealing with the sustainability of retirement systems than most other factors. Specifically I outlined the current Social Security issues, noting that the long-term borrowing rate and number of people paying into the system affected the apparent long-term viability at any given point in time. I also suggested that as a result, trying to opine about the viability of any retirement system at a specific point in time is a futile exercise, unless there is some underlying political agenda. The economics changes constantly, so the long-term trends are far better means to view the viability of pension programs. After the 2008 economic collapse, few retirement systems looked like they were in good shape, yet a few years earlier, they appeared much better, much like Florida’s did..
Fast forward to 2013. After all the hoopla in Congress about the fate of Social Security and scary Congressional statements that Social Security will not be remain for future retirees unless drastic changes are made, guess what? The annual trustees’s report on Social Security (and you though Congress managed it!) reported that as a result of the economic uptick in the past couple years, the outlook for Social Security in the short term is good, and the long-term is far better than it has been in years. Surprised? Only if you don’t understand how pension systems work. The economy has improved, so the investments made by Social Security likely are getting a better return. The jobless rate has dropped, and more people are paying into the system, precisely the two things that improve the long-term sustainability of any pension system. But we don’t hear Congress talking about that because that doesn’t address the political agenda.
Worse for certain Congressional leaders, the report suggests that Social Security is positioned better than many 401K programs, the type of system some in Congress suggest should be the future of Social Security, because the risk are far lower with Social Security’s investment strategy than any 401k invested in the marketplace. They noted that most 401k programs lost half their value in the 2008 financial collapse, while Social Security’s portfolio, invested in far more conservatively, did not see near the same type of drop in investment value. The report outlined that the lower and middle class retirees were hit less severely buy the 2008 downturn than upper middle class pensioners who relied more on 401K returns. That should be no surprise either.
The findings are particularly important for lower and middle class families that receive 2/3 of their retirement income from Social Security as private pension systems become a thing of the past. Those private pension programs suffered from investments in private companies that can have shifting stock values and outsourcing of jobs to other countries – more risk and fewer payees equals unsustainable pension program. No surprise the private sector has shed many of those programs, but precisely why Social Security becomes more relevant for most Americans. The private pension systems are precisely the opposite of the Social Security model.
So why the push to try to change retirement programs? Some are in difficulty, especially where there are generous benefits, and fewer people paying in due to cuts in government employees, and at risk investments strategies that have performed poorly. All three are management issues, and the second is a political issue. Bash public employee pensioners, because fewer private entities offer them, seems to be politically popular, but it is a political means to pit people with pensions against those who do not to hide the real issue which is simply money. The investment value of Social Security’s portfolio is huge. Wall Street would love to see that portfolio in the stock market. More investment dollars will drive up stock prices. That seems good, but recall that the repeal of the 1930s vintage banking rules that prohibited banks from investing YOUR savings in the stock market, drove stock prices up fast in the 1990s, but it didn’t turn out so well in 2008. Investing Social Security’s portfolio similarly can be expected to have a similar result. And then, Social Security will really be in trouble and someone in Congress will tell you – I told you so. Maybe the better argument is that all these politicians should keep their fingers out of pension plans.
Are Pensions Really Broke?
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.
Congratulations Graduates
The first of May is traditionally been graduation month for college students. We went through our 6 ceremonies 10 days ago at FAU. It is and should be a day of celebration for the students and their families. It’s there day. Congratulations to all graduates!! Best of luck to all! The good news is that the economy is picking up. Pretty much all of our student have jobs in engineering, and employers are calling, looking for engineering interns and graduates. Good news because clearly the business community sees a growth period ahead. They are planning for construction. Governments may be planning capital projects. The stock market is up, so maybe those 401k plans have finally come back up north. Housing values are improving in some areas, so maybe we will see that sea of retirements that’s been expected for a number of years. With an economy based on attracting retirees, it’s been a while coming.
Planning for Change (like sea level rise)
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.
WHAT MAKES A GREAT LEADER?
WHAT MAKES A GREAT LEADER?
This a question that has puzzled researchers for some time. Back in the 19th century we looked to enlightenment among people – mostly oriented to new ideas and processes that would move civilization forward. That helped but did not provide full answers. Of course we were still in the throes of the start of the industrial revolution. We looked at psychology to show us how to find leaders at the turn of the 20th century, but that faded in favor of trying to determine traits that made good leaders in the 1920s. The idea of traits faded as we started looking the style by which people managed (think all those tests out there), but soon found that management style, leadership perception and results were often not correlated. In the 1990s we started looking at adaptation, but as Jim Collins points out the great companies seem to have leaders that are the opposite of the charismatic leadership many seek or seek to become. It’s the plodders, who can adapt to changing facts or situations on the front lines, that seem to get results. And we only tend to notice after the fact, or well into their leadership reign, not at the beginning. In fact many of the best success stories received much criticism early on.
What this all seems to indicate is that leadership evolves, just as civilization evolves. Those that can evolve and adapt to changing conditions appear to lead the most successful organizations, but are not often recognized as the best leaders. No one set of characteristics in a person will fit each situation or challenge, but you need the ability to understand the context of the facts in order to chart a course and engage people in solutions. Without buy-in, the problem will not be solved and most challenges require thought on the part of others who are committed to the same goals as the leader. The leadership team concepts allows for the ability to delegate to those closest to the situation, or with the best skill set to resolve it, will achieve the best result and create personal accountability by creating a personal stake in the solution.
Engagement identifies another emerging hallmark of leadership which is that we all want to succeed and leaders tend to nudge their followers toward that success. Good leaders always backstop their charges, and understand that not all situations will be resolved ideally and that there may be multiple means to resolve the problem. That gives the followers the ability to “gamble” on innovative solutions without the fear of reprisals. The fear of reprisals will eliminate innovation. What you want is to lead your organization to be innovative. Organizations that foster innovation can become more effective in their industry. Isn’t that what we want? Fostering innovation is how Google develops a lot of its applications. They call it 20% time, where employees get to work on anything they want, with anyone they want, except their own projects. Think GoogleEarth, gmail, and many others. Dan Pink did an excellent discussion in his best seller “Drive.” I recommend you check it out. But then we need to ask, “When was the last time we tried something like 20% time in the utility industry?”
When do we get serious about sea level rise?
Based on my last blog, his inquiry came to me. And I think I actually have an answer: when bakers and insurance companies decide there is real exposure. Let’s see why it will take these agencies. There is very little chance, regardless of good faith efforts, significant expertise, or conscientious bureaucrats to stop growth and development. The lobby is simply too strong and local officials are looking for ways to raise more revenues. Development is the easiest way to increase your tax base. As long as there are no limits placed on develop-ability of properties (and I don’t mean like zoning or concurrency), development will continue. But let’s see how this plays out. Say you are in an area that is likely to have the street inundated permanently with water as a result of sea level rise (it could be inland groundwater, not just coastal saltwater). For a time public works infrastructure can deal with the problem, but ultimately the roadways will not be able to be cleared. Or say you are located on the coast, and repeated storm events have damaged property. In both cases the insurance companies will do one of three things: Refuse to insure the property, insure the property (existing) only for replacement value (i.e. you get the value to replace) but no ability to get replacement insurance, or the premiums will be ridiculous. We partially have this issue in Florida right now. Citizen’s is the major insurer. It’s an insurance pool created by the state to deal with the fact that along the coast, you cannot get commercial insurance. So Citizens steps in. The state has limited premiums, and while able to meet its obligations, in a catastrophic storm would be underfunded (of course in theory is should have paid out very little since 2006 since no major hurricanes have hit the state, but that’s another story).
As the risk increases, Citizens and FEMA, the federal insurer, have a decision to make. Rebuilding where repeated impacts are likely to happen is a poor use of resources and unlikely to continue. Beaches and barrier islands will be altered as a result. The need will be to move people out of these areas, so the option above that will be selected will be to pay to replace (move inland or somewhere else). Then the banks will sit up. The banks will see that the value of these properties will not increase. In fact they will decline almost immediately if the insurance agencies say we pay only to relocate. That means that if the borrowers refuse to pay, the bank may not be able to get its money out of the deal on a resale. We have seen the impact on banks from the loss of property values as a result of bad loans. We are unlikely to see banks engage in similar risks in the future and unlikely to see the federal insurers (Fannie Mae, Freddie Mac) or commercial re-insurers like AIG be willing to underwrite these risks. So where insurance is restricted, borrowing will be limited and borrowing time reduced. That will have a drastic impact on development. The question is what local officials will do about it?
There are options to adapt to sea level rise, and both banking and insurance industries will be paying close attention in future years. Local agencies will need a sea level rise adaptation plan, including policies restricting development, a plan to adapt to changing sea and ground water levels including pumping systems to create soil storage capacity, moving water and sewer systems, abandoning roadways, and the like, and hardening vulnerable treatment plants. Few local agencies have these plans in place. Many local officials along the Gulf states refuse to acknowledge the risk. What does that say about their prospects? Those who plan ahead will benefit. Southeast Florid a is one of those regions that is planning, but it is slow process and we are only in the early stages.
Groundwater Accelerates Sea Level Rise
Regardless of the causes, southeast Florida, with a population of 5.6 million (one-third of the State’s population), is among the most vulnerable areas in the world for climate change due its coastal proximity and low elevation (OECD, 2008; Murley et al. 2008), so assessing sea level rise (SLR) scenarios is needed to accurately project vulnerable infrastructure (Heimlich and Bloetscher, 2011). We know that sea level has been rising for over 100 years in Florida (Bloetscher, 2010, 2011; IPCC, 2007). Various studies (Bindoff et al., 2007; Domingues et al., 2008; Edwards, 2007; Gregory, 2008; Vermeer and Rahmstorf, 2009; Jevrejeva, Moore and Grinsted, 2010; Heimlich, et al. 2009) indicate large uncertainty in projections of sea level rise by 2100. Gregory et al. (2012) note the last two decades, the global rate of SLR has been larger than the 20th-century time-mean, and Church et al. (2011) suggested further that the cause was increased rates of thermal expansion, glacier mass loss, and ice discharge from both ice-sheets. Gregory et al. (2012) suggested that there may also be increasing contributions to global SLR from the effects of groundwater depletion, reservoir impoundment and loss of storage capacity in surface waters due to siltation. The loss of groundwater, mainly from confined aquifers, is troubling, and currently completely unknown. The contribution of carbon dioxide, commonly occurring in deep groundwater is also unknown. To gauge the risk to property in southeast Florida, Southeast Florida Regional Climate Compact and Florida Atlantic University reviewed twelve different projections of SLR and its timing. The consensus was 3” to 7” by 2030 and 9” to 24” by 2060. From the literature review and analysis, it was concluded that approximately 3 ft. of sea level rise by 2100 would a suitable scenario and time frame to illustrate the methodology presented in this article. To allow flexibility in the analysis due to the range of increases within the different time periods, an approach that uses incremental increases of 1, 2, and 3 feet of SLR was considered for risk scenarios. An issue normally ignored in sea level rise projections is groundwater. The importance of the groundwater table in the model is that it is responsible for determining the soil storage capacity. Soil is composed of solids, water, and air (voids). Soil storage capacity depends on physical and chemical properties, water content of the soil, and depth to the water table or confining unit (Gregory et al 1999). As the rain infiltrates the soil, unsaturated pores quickly fill up, effectively raising the water table (Gregory et al 1999). For example efforts, a groundwater surface elevation map was derived based well site information available from the USGS (http://groundwaterwatch.usgs.gov) that had a minimum of 35 years of continuous data. Using GIS, an inundation model was created in GIS by subtracting the groundwater surface model from the digital elevation model with the difference in elevation being the soil storage capacity. The photo shows the evolution of these features as applied to a section of northwestern Miami-Dade County. What this indicates it that the impact of sea level rise on low-lying inland areas may be far different that the projections using the bathtub models. It also means that wellfields, sewer mains, roadways and storm water systems will be affected far more quickly than projected from bathtub models. The method used here suggested that the estimated may be off by a factor of two of three.
Market or be Outmarketed
Municipal drinking water is strictly regulated by the USEPA. We spend a lot of time testing our water, producing reports, and providing our customers with information on our results. The results show it works, because the number of incidents of contaminated water are few, and rarely affect larger utility systems. We are so good at providing water that the public expects their water to be safe, yet the buy bottled water? Wait, huh? Bottled water? Bottled water is not regulated by the USEPA and is not subject to the same requirements as potable water. There are less than three full time people at FDA inspecting bottled water facilities, versus thousands reviewing public water supplies. Water utilities run millions of analyses per year and must publish the results. So why do they buy bottled water when our water is safe?
Keep in mind that in many areas of the world, the bottled water industries move in and compete for the same supplies as we currently use. North Florida is rife with arguments over flows to springs as are other areas. Some of the water is simply repackaged tap water. So in addition to competing for our customers, they are competing with the sustainability of our drinking water supplies. Then there are the hundreds of thousands of bottles that end up in landfills. More impact on sustainability. At the same time, bottled water is more costly that gasoline, which everyone complains about, but that does not stop the purchases? So what’s up?
Marketing that’s what. We don’t market water. I noted in an earlier blog that we simply don’t market our product, which has allowed others to compete for the same dollars. Customers complain about rate hikes, (averaging about 5% per year for the past 10 years according to the new AWWA study), yet they happily pay over $4/gallons for many of the popular bottled waters, more and more cable channels, fancy phones, etc. Not that any of these commercial products are per se bad, but none are required for survival like water.
Interestingly when we do market, it reaps positive results. New York and San Francisco have seen the wisdom of marketing for year. They ship New York tap water to Florida to make Brooklyn style bagel because Florida Water doesn’t taste the same. DC Water changed its name, and began a marketing campaign that changed public perception of the utility and has allowed it to start dealing with its infrastructure backlog. Some of their ideas include branding the water, and having restaurants serve it in marked glasses, paid for by the utility. Signs on drinking fountains, in schools and even sales of tap water in stores are options some utilities have started. But the key is started. Marketing takes dollars, to reap benefits. Who knows, maybe tap water is the next bottled water….
Optimizing Water Supplies in the Face of Climate, Economic and Population Demands
The world population is expected to grow to over 9 billion by 2050, an exponential trend that has continued for several hundred years and see no end it site. Megaregions as people flock to cities and industry will be commonplace. The question is how will water supplies be impacted, or impact this trend. Interestingly it varies everywhere. For example, China and India are not expected to reap major benefits from climate changes, so their economies will grow as will populations. They continue to construct coal fired power plants, and impact carbon dioxide and pollution levels, which does not help the climate issues. Recall that Beijing was basically shut down for several days recent due to smog – seems like I recall the first air pollution regulations stemming from Henry the VIII decision to move the coal plants out of London during his reign 500 years ago because of pollution, but perhaps we need to relearn history J. Of course China and India are expected to be less affected than the more historically developed countries in the northern latitudes that have been moving to renewable and less impactful power solutions with good reason. Aside from these two economies, the rest of the northern latitudes are likely to see changes in temperature, variation in precipitation patterns and drought frequency changes. That has major impacts for a billion people who will see water supply shortages occur much more often, and create a whole host of “winners” and “losers” in the water supply category. Conflicts may result from the need to change increase water supplies as desperation kicks in. Lawrence Smith, in his book 2050, suggests that while the far northern countries, the US, Russia, the Scandanavian countries, and Canada may see more land for agriculture and more water (at least in some areas), those warmer countries in the sub-Sahara, will become more desperate and dangerous to the world order. Water will be the new oil, and the tipping point for sustainability, akin to peak oil, needs to be developed. The cost will be significant, but the failure will be catastrophic to global economies. This is part of why the global pursuit of renewable power, local solutions and green jobs. It is why the definition of sustainable water supplies continues to evolve as we understand that the impacts, or the constraints of water supplies is far more reaching than most engineers and planners have traditionally dealt with. AWWA published a Sustainable Water CD several years ago. It was a series of papers of different aspects of sustainability as applied to water resources. The last paper summarized the findings and compared it to the initial paper discussion. The conclusion was the concept is evolving. Climate, power, agriculture, natural systems, local economies, local economic contributions to regional and national economies and politics all impact pure science recommendations for water supply allocation. The question is can we overcome the politics to create a optimized science solution to sustain water supplies and economies. An old Native American proverb comes to mind: We do not inherit the Earth from our grandparents, we borrow it from our grandchildren.
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