Saturday, April 28, 2012

The Third Man

Carol Reed’s masterpiece, “The Third Man”, is universally regarded as one of the greatest films of all time. It will be presented tonight by Turner Classic Movies (TCM) as one of its film essentials. Personally, I regard it as a great work of art that can be viewed over and over again. The 1949 film brought together a great writer, a great director, a great cast, a great setting, great and innovative black and white cinematography, and a wonderful music score.

Graham Greene was one of the best novelists of the twentieth century but also one of the best film writers. In “The Third Man” he wrote a great story with incredible dialogue. It’s often said that films of novels don’t live up to the book, but in this case Greene and director Carol Reed turned an ordinary crime drama into a film that transcends the script.

Carol Reed used black and white images and jarring film angles to bring home the plight of war-ravaged Vienna and its many refugees who lived in four different zones occupied by American, British, French, and Russian soldiers.

Orson Welles
The cast was superb. Joseph Cotton gave the performance of his career as Holly Martins, a down and out American writer of cheap western novelettes who had come to Vienna as the behest of his boyhood friend, Harry Lime. Orson Welles gave a bravura performance as Lime but doesn’t appear until midway in the film. When he does appear, it is the most striking appearance in cinema history. The leading lady was Alida Valli, a great Italian actress little known in America. She was a beautiful actress who played with rare depth and intelligence. I cannot imagine any Hollywood actress who could have played this role.

A great supporting cast backed up the stars. British actor Trevor Howard was never better as a British officer on the trail of Harry Lime. There was also a marvelous group of unnamed Austrian or German actors: the landlady, the house porter (“dere vas a third man”), Baron Kurtz, and Doctor Winkle, pronounced Vinkle. Equally supportive was the zither of Anton Karas that did so much to set the mood of each scene.

Speaking of scenes, a few stand out and can never be forgotten. In one scene Trevor Howard takes Joseph Cotton through a hospital ward where infant victims of Lime’s nefarious penicillin scheme lay dying. There is the chase scene through Vienna’s vast underground sewer system.

 The most famous scene must be the one takes place in a huge Ferris wheel. My wife and I took the ride on a visit to Vienna and it is nothing to be scared of but Reed’s direction fills the scene with tension and drama. At the end of the ride, Orson Welles speaks the film’s most famous lines. To paraphrase. “Listen old man, during the years of the Borgias, Italy was filled with violence, bloodshed, and cruelty but it produced the Renaissance. Switzerland has enjoyed a thousand years of peace and tranquility. What did it produce? The Cuckoo clock.”

Finally, the film ends with an unforgettable scene. The camera never moves and Alida Valli is just walking back from a cemetery. Nothing seems to be going on, but everything is going on. ###

Saturday, April 21, 2012

Pension Spiking

Connecticut Governor Dannell Malloy
with political apointee Andrew McDonald

One of the ways in which public service employees augment their pension benefits is to rack up substantial amounts of overtime. It is not uncommon for police and fire chiefs to use overtime in their last years of service to substantially increase retirement income.

Elected officials have little incentive to curb this practice, known as "spiking", since they benefit from the same system. 

Consider this example from the highest level of Connecticut state government.  Almost the very first step that Governor Dannell Malloy took on taking office was to appoint a number of Democrat state legislators to posts in his new administration. Not only did this move more than triple the salaries of these appointees, it also does the same thing to their future pension benefits.

The Governor’s first appointment was Andrew Mc Donald, a Stamford lawyer, who had been making only $30000 per years as a state legislator. All Connecticut legislators are considered part-time. I believe that he had six years service as a legislator. If he had spent four more years in the legislature, his pension at age 60 would have been 20% of his pay or about $6000 per year. But if he spends only the next four years in the Governor’s office at a salary of $130000 per year, his pension at age 60 will be about $26000 per year. That doesn't seem like much but at 4% interest it takes $650000 to provide an annual income of $26000 per year. It only takes $150000 to provide $6000 per year. In effect, the taxpayers of Connecticut will add about $500000 to his retirement fund in just four years.

I don’t question his salary at his new position but what incentive will he have to reform the pension system and do away with "spiking"?

Most State and Municipal employees are covered by what is known as a “defined benefit” pension plan. There is nothing inherently wrong in this type of retirement plan, but it is very important to consider how the benefit is defined. Defined benefit plans provide an employee with a guaranteed lifetime income at retirement. The amount of the pension is based on a simple formula that includes three factors: final average pay, years of service, and a percentage of pay for each year of service.

For example, a State employee with a final average pay of $100000 and 35 years of service would usually get 2% of pay for each year of service. The employee’s pension would then amount to 70% of pay or $70,000 per year for life. Often the plans will provide a cost of living increase every year thereafter. If the State’s actuary used a 4% rate of return, it would take $1,750,000 to fund this pension.

Consider what would happen if the formula was tweaked a little. What if “final average pay” was based not on the highest 3 or 5 years of service, but on highest 10, 20, or even 30 years of service? The retirement formula used by Social Security is based on a 30-year average. In that case the State employee’s pension would be comparable to what most of us get from Social Security. Someone retiring today at age 66 would get about $28000 per year from Social Security.

I realize that a reform of this nature runs the risk of fomenting a Greek style revolution. But there is a way to phase it in gradually and begin to turn the pension ship around. It would be easy, just, and fair for the State to say that anyone retiring in the next three years would have final pay based on the highest three years of service. But for all others final average pay would be based on the number of years from now to their actual retirement. For those retiring in 10 years, average pay would be based on the highest 10 years; for those retiring in 20 years average pay would be based on 20 years, and so on.

This reform would lessen the effect of "spiking" on future pension benefits. Policemen, Firemen, Teachers, and other state employees all deserve their pensions, but no one deserves a pension that has been artificially inflated by tacking on huge amounts of overtime in the last years of service.

Finally,  there should be a cap on all retirement benefits. In the Social Security system retirement benefits have a cap. Employer and employee contributions to Social Security stop when compensation exceeds about $90000. Even if an employee earned substantially more than $90000, the retirement benefit would be based on no more than the cap.

Pension plans were originally instituted to provide a secure retirement for employees whose salaries would not enable them to save for retirement on their own. Why is it necessary to provide public pensions for doctors in State hospitals who make in excess of $250000 per year? Why is it necessary to provide pensions for athletic coaches who make over $1000000 per year?  Once these state employees pass the cap level, their high incomes should allow them to fund the rest of their retirement on their own. They already have access to tax-sheltered 401k type plans.

Elected officials and political appointees like Andrew Mc Donald should be excluded from the pension system.  This reform is small but significant since these are the people who will largely be responsible for reforming the system. Again, what incentive do they have to reform a system of which they are such beneficiaries? ###

Sunday, April 15, 2012

Millionaire Tax Sham


Any thinking person should recognize President Obama’s current attempt to implement the so-called “Buffett Rule” by imposing a higher tax rate on millionaires as the sham it is. Here are the reasons.

1. Budget experts report that at the most it will raise only $47 billion in taxes over the next ten years. That’s an average of less than $5 billion per year. This year’s budget deficit alone is projected to be over $3 trillion!

2. The President knows that this tax has no chance of passing through Congress this year. It is a bald faced attempt to gain headlines and win votes in an election year. It is not a meaningful attempt to cut the budget deficit.

3. Why didn’t he propose it three years ago when he had a majority in both houses of Congress? Instead, he and his party voted to extend the notorious “Bush” tax cuts. The President has just released his own tax return for 2011. Isn’t it funny that now that his book royalties are drying up, and his own income has dropped below a million, that he now proposes a tax on millionaires? In 2009, his income was over $5 million dollars, and in 2010 it dropped to $1.7 million. His recently released 2011 return shows an adjusted gross income of only $789674. This still keeps him in the 1% group but no one is occupying the White House in protest.

By the way, his income shows no capital gains and very little dividend income. Is this why he is so willing to increase taxes on those items?

4. A proposal to increase taxes on capital gains overlooks a very important factor.  Capital gains can only be taxed when they are realized. In other words, a taxpayer must actually sell something for a gain before it can be taxed. Someone like Warren Buffett will only pay tax on his Berkshire Hathaway gains if and when he decides to sell some stock. History shows that when taxes are raised investors usually put off taking gains.

Instead of a millionaire’s tax I would like to propose a tax that would have broad appeal. I call it the “Liberal” solution but it should appeal to Conservatives as well. Taxpayers are already allowed to voluntarily pay more taxes than they have to. On line 60 of his tax return President Obama could have elected to pay an additional or voluntary tax. He opted not to do so, and paid according to the prevailing Bush rates.

I propose that anyone who has condemned the Bush tax cuts just ask their accountant to calculate what they would have owed under the old system that prevailed during the Clinton years. This proposal should especially appeal to rich liberals in blue states like New York and California who are always in favor of higher taxes.

While they are at it, these liberals could ask their accountants to go back and re-calculate their tax liability for the past 10 years and pay up the difference. For example, President Obama could lead the way by re-calculating the tax on his 2009 income of over $5 million.

The “Liberal” solution does not have to stop with income taxes. Wealthy liberals could opt to pay their estate taxes under the old rules as well. Moreover, instead of setting up tax-exempt foundations that will never die and never pay estate taxes, liberal aristocrats like the Clintons, the Gores, the Kerrys, the Kennedys, and the Buffetts could leave their estates to the government. Don’t they think the government will use their money as wisely as their foundations? ###

Saturday, April 7, 2012

Apple Dividend


Apple’s recent decision to declare a first time dividend later this year is not a windfall for shareholders. Company management must have its reasons for departing from the longtime no-dividend policy of Steve Jobs, but shareholder wealth augmentation is not one of them.

Theoretically, when a company pays out a dividend to shareholders, it reduces the value of each share of stock by the amount of the dividend. All other things being equal, a company with a share value of $100 would see its share price drop to $95 the day after a $5 dividend.

So, what is the benefit to shareholders? Let’s assume an individual shareholder is going to get a $600 dividend from Apple. Receipt of the dividend constitutes a taxable event, and 15% or $90 must go to the IRS. If the shareholder really needed $600, he could have sold about one share of Apple stock. In that case instead of paying tax on the whole dividend, the shareholder would only pay a 15% tax on his gain. If the stock had cost $300, then he would have only paid 15% of the  $300 gain.
While dividend paying stocks like utilities have lately been attractive to investors, nothing prevents a shareholder from selling stock to generate income. Many years ago a client told me that she needed income but never considered selling a few shares each year of a very large stock holding that had appreciated in value.

Perhaps taxes were one of the reasons that led the legendary Steve Jobs to resist the temptation to pay dividends during his long career at Apple. I’m sure it wasn’t the biggest reason since growing the business and keeping it on a firm foundation seemed to have been his top priorities. Warren Buffett has also resisted the temptation to declare dividends at Berkshire Hathaway.

It seems to me that Steve Jobs did more in his tenure at Apple to create wealth not only for himself, for his thousands of employees, and for millions of shareholders than all the community organizers and protestors who complain of the disparities of wealth in this country. Isn’t it ironic that the “Occupy” protestors all use iPhones, iPads, and iPods? ###

Sunday, April 1, 2012

Rising Gasoline Prices

What is the reason for high gasoline prices today? Liberals like to put the blame on big oil companies. They argue that these companies are profiteering at the expense of all of us. Conservatives like to blame the Obama administration for dragging its feet on drilling in the USA. They reason that if we had more supply, prices would drop.

However, it might be better to look in another direction for the reason for the high prices at the pump. Every time we fill up we exchange some money for a few gallons of gas. Instead of looking at the price of gas, maybe we should examine the value of the money we use to pay.

Let’s take an average driver who puts 12000 miles a year on his car. If the car averaged 20 miles per gallon, he would use 600 gallons in a year. At today’s price of about $4.00 per gallon, his total cost for the year would be $2400. Just imagine that instead of using cash or a credit card to pay, you used gold. At today’s price of $1640 per ounce, he would only need about an ounce and a half of gold to pay for a full year’s supply of gas.

Two years ago when gas prices were about $2.80 per gallon, the driver would have needed $1680 to pay for his 2400 gallons that year. However, in 2010 the price of gold was only $1125 per ounce. It would still have taken about an ounce and a half of gold to buy the full years supply.

In other words, the price of gold in relation to oil has hardly changed in the past two years. What has changed is the value of the paper we call money that we present at the pump. In the old days they would have this debasing the coinage.

Massive government borrowing has cheapened the value of our dollars. You’d have to be a real sucker to accept cheaper dollars for gasoline. The oil and gas we buy is the same product as always. It still probably costs about the same to drill and refine it into the finished product we use in our cars.

It is true that other factors are involved in gasoline production. Catastrophes and speculation can cause short-term swings in prices but in the long run no driller or producer is going to accept Monopoly money for their product.

We all knew this when we were children. Why don’t we understand it now? Which one of us would have traded a Mickey Mantle card for the whole Washington senator team? For that matter who today would trade Exxon or Chevron for the whole US Senate? ###