Monday, June 24, 2013

Benghazi, the IRS, and Obamagate


In baseball it’s three strikes and you’re out. Unfortunately, it doesn’t work that way in the game of American politics. Three scandals have recently rocked the Obama administration and it appears as if they will not go away. First, there is the ongoing investigation of the terrorist attack on the American consulate in Benghazi. Second, there is the startling revelation that the Internal Revenue Service was targeting conservative groups for special attention before the 2012 election. Third, there was the news, especially shocking to the Administrations supporters in the media, that the Department of Justice was actually targeting reporters and their sources.

I’ve been waiting for more information about these three issues but it now looks that it might be years before we know the truth. Just this past week the head of the FBI testified that he didn’t even know who was leading the investigation of the IRS or how many agents were assigned to the case. Until more information is forthcoming I would just like to mention peculiar aspects of these issues that trouble this observer.

In the first place, most of the coverage of the terrorist attack on the US consulate in Benghazi has focused on the Administration’s characterization of the event as a response to a YouTube video. Nevertheless, what President Obama and then Secretary of State Hillary Clinton knew about the attack and what they said about it pales in significance to what the Obama administration now intends to do about it.

I’ve always thought that an attack on an American embassy or consulate was the same as an attack on American soil. Yet, almost a year has gone by since the attack and there has apparently been no response on the part of our government. I believe that the President said originally that we would get the murderers and I can only hope that he meant it. Maybe he doesn’t want to tip his hand but he should at least give some indication that we are engaged in an attempt to bring the criminals to justice. It's not just a case, as Mrs. Clinton said, of making sure it won't happen again.

Secondly, when I first read that the IRS office in Cincinnati, Ohio was targeting conservative organizations for special treatment, my thoughts went back to election night in 2012. On that night every electoral map was focused on Ohio. It seemed as if Ohio would be the key to the whole election. On the map Ohio was a sea of red surrounding two islands of blue. The two blue or Democratic strongholds were Cleveland and Cincinnati.

Months before political operatives on both sides knew that Cleveland and Cincinnati were pivotal in bringing out the Democrat vote in Ohio. Is it any wonder then, that the source of the IRS chicanery would be found in its IRS office in Cincinnati? In electoral politics suppressing potentially unfavorable votes is just as important as encouraging favorable ones. It is obvious that the local IRS office in Cincinnati impeded the attempts of right wing groups to form and raise funds. What is also obvious is that the claim that a few local agents took it upon themselves to investigate right wing organizations will not fly. It is becoming increasingly clear that orders came from Washington. I’m not saying that President had a hand in this scheme. I’m just saying that his political operatives knew that everything had to be done to win Ohio.

Just one more thing about the IRS case. The story was originally broken by a high level IRS operative in Washington who in a press conference answered a reporter’s question about an audit of IRS activity. However, it turned out that the question was planted by the IRS itself. In other words, the reporter was given the question in advance. A conspiracy theorist would go to town with that one, especially since the IRS scandal knocked Benghazi off the front pages.

Finally, the government’s surveillance of reporters might have created the biggest firestorm of all except that it turned out that a reporter from Fox News had been the main target. It’s hard to believe how calmly the mainstream media swallowed this bitter pill. To give them the benefit of the doubt, the media’s docility might be excused by the revelation of the news that the National Security Agency had all of us under surveillance.

It should go without saying that any one of these scandals would have crippled a Republican administration. Just think how an issue like Iran-Contra was enough to consume all the attention of the second Reagan administration. These three scandals make Watergate seem like child’s play.


Monday, June 17, 2013

Unfunded Pension Liabilities

Every day newspapers headlines complain of the huge deficits facing government at every level. At the same time, politicians and editorial writers warn that there is a serious problem with “underfunded” pensions. A great part of the debt load in states and municipalities across the country can be attributed to pension plan shortages. Even the troubles of the Federal Post Office are attributable to an enormous gap in pension funding.

Just recently it was reported that the pension plan of the State of Illinois was “underfunded” by a colossal 90 billion dollars. In tiny Connecticut the Governor and the State legislature had to play all kinds of tricks to at least balance on paper Connecticut’s projected two year budget. The City of Detroit is on the verge of bankruptcy largely due to enormous pension liabilities. Everywhere states and municipalities are cutting necessary services and raising taxes in attempts to fully fund pension and other public service employee retirement benefits. 

However, there is no way to adequately fund pensions without significant pension reform. Let me repeat. There is no way to adequately fund these pensions without significant reform. Most state and local pensions are “defined benefit” pension plans. In such plans, the benefit that an employee will receive in retirement is defined by a formula that gives employees a certain percentage of their “final average pay” for each year of service.

In other words, not matter what was earned in the early years of employment, a public service employee’s pension will be based on the much higher pay of the final years of employment. For example, a typical formula will guarantee an employee 2% of pay for each year of service. Thus, someone who reaches the normal retirement age after 35 years of service with a final average pay of $60000 will receive 70% of pay or a pension of $42000 per year for life. At 4% interest it would take a little over a million dollars to provide that annual benefit.

But how is it possible for a pension actuary to accurately predict how much money it would take to fully fund an employee’s pension? For a new employee it would take an annual payment of about $5400 earning 8% over 35 years to accumulate a million dollars. However, if the expected return is not achieved, then the actuary would have to report that the pension account is “underfunded,” and require that additional funds be added to it. So, merely a small reduction in expected rates of return would make a pension plan underfunded. In the last few years as interest rates have dropped dramatically, more and more pension plans have become “underfunded.”

Moreover, it is also very difficult for the pension actuary to predict what the employee’s salary will be in the final years of service. There is no way of knowing what inflation rates will do to salaries in the future, or where the employee’s career will lead. When a new Governor was elected in Connecticut three years ago he took more than six experienced legislators into his cabinet. As a result, their salaries more than tripled and so will their “final average pay” on which their pensions will be based. One was just appointed to the State Supreme court with a salary of $150000 per year, a figure that will soon be his final average pay instead of the $35000 he was making as a legislator. 

It’s hard to believe that “public service” employees don’t realize just how generous this formula is. Certainly, their union leaders understand. Just suggest that their membership shift into the Social Security system and you will send chills up their spine. Social Security benefits are based on average pay over 30 years of employment. In bankrupt Stockton, California a judge gave into union pressure and opted to screw the city’s bondholders rather than alter the generous pension formula. Detroit is about to go into bankruptcy and its public service unions have amassed a huge war just to resist any changes to their pension benefits.

Here is a suggestion for pension reform that will eliminate most of the existing pension liabilities without creating a Greek style revolt on the part of the public service employee unions. Gradually modify the benefit formula for all state employees so that Final Average Pay will be the average of 30 years of service instead of the highest 3 years. Phase in this modification for current employees in the following manner. Final Average Pay for employees who retire in the next 3 years would still be the average of their highest 3 years pay but for all other employees it would be the average of the number of years they have left to go before retirement.

For example, Final Average Pay for an employee retiring in 2017, 4 years from now, would be the average of their highest 4 years service. Final Average Pay for employees retiring in 2023 would be the average of their highest 10 years pay; those retiring in 2033 the average of their highest 20 years of pay; and those retiring in 2043 the average of 30 years pay.

Eventually, such a reform would enable actuaries to more accurately predict pension obligations and help to bring a degree of control and reality to government budgets at every level. It would also bring public service pensions more in line with what ordinary citizens can expect from Social Security. Has anyone ever wondered why politicians expend such time and effort dealing with public service employee pensions, and so little time in dealing with the terribly underfunded retirement plans of their constituents?


Tuesday, June 4, 2013

Battle of Midway, June 4, 1942

The anniversary of the Battle of Midway coming as it does on June 4, is usually overshadowed by remembrances of the Allied landings on the coast of Normandy on D-Day, the sixth of June. Nevertheless, if not for the American naval victory in the Battle of Midway on June 4, 1942, D-Day might never have happened.

Nowhere is the story of Midway told better than in Admiral Samuel Morison’s epic history of United States naval operations during the Second World War. Admiral Morison was a rare combination of sailor and historian. Before the war he had written a magisterial biography of Columbus that still ranks with anything ever written about that great sailor. As part of his research Morison even used a sailing ship to cover the route Columbus had taken.

When the war broke out Morison was asked to be the Navy’s official historian. The Navy took pains to put him on actual ships that were very likely to see action. He was not at Midway but his account reads like an eyewitness. Below are excerpts from his depiction of the pivotal two minutes of that epic battle.

First, a little introduction. After their stunning success at Pearl Harbor in December of 1941, the Japanese had rolled up one victory after another. By the spring of 1942 Japanese strategists thought that they only had to secure the tiny island of Midway in the central Pacific to completely solidify their hegemony over most of Asia.

They sent a huge naval task force including four of their best aircraft carriers and most of their best pilots to take the tiny island in the middle of nowhere. Even though the American navy had been battered at Pearl Harbor, it was able to send a carrier force to intercept the Japanese. The Japanese had already bombed the small garrison at Midway when the American carriers came into range. Admiral Raymond Spruance was in command of the American fleet and he followed the advice of Captain Miles Browning who shrewdly predicted the location of the Japanese force. Spruance launched an immediate attack and the American planes quickly found the Japanese. Unfortunately, the initial torpedo bomber attack was thwarted by Japanese fighters (Jekes). Not one torpedo reached its target and practically all the torpedo bombers were shot down. It seemed like all was lost for the Americans. Here is Morison's account of what happened next.
The third torpedo attack was over by 1024, and for about one hundred seconds the Japanese were certain they had won the Battle of Midway, and the war. This was their high tide of victory. Then, a few seconds before 1026, with dramatic suddenness, there came a complete reversal of fortune, wrought by the Dauntless dive-bombers, the SBDs, the most successful and beloved by aviators of all our carrier types during the war.
Clarence McClusky USN.

Lieutenant Commander Clarence W. McClusky, air group commander of Enterprise, had two squadrons of SDBs under him: 37 units. He ordered one to follow him in attacking carrier Kaga, while the other, under Lieutenant W. E. Gallaher, pounced on Akagi, Nagumo’s flagship. Their coming in so soon after the last torpedo-bombing attack meant that the Zekes were still close to the water after shooting down TBDs, and had no time to climb. At 14000 feet the American dive-bombers tipped over and swooped screaming down for the kill. Akagi took a bomb which exploded in the hangar, detonating torpedo storage, then another which exploded amid planes changing their armament on the flight deck—just as Bowning had calculated. Fires swept the flagship, Admiral Nagumo and staff transferred to cruiser Nagara, and the carrier was abandoned and sunk by a destroyer’s torpedo. Four bomb hits on Kaga killed everyone on the bridge and set her burning from stem to stern. Abandoned by all but a small damage-control crew, she was racked by an internal explosion that evening, and sank hissing into a 2600 fathom deep.

Max Leslie USN.
The third carrier was the victim of Yorktown’s dive-bombers, under Lieutenant Commander Maxwell F. Leslie, who by cutting corners managed to make up for a late start. His 17 SBDs jumped Soryu just as she was turning into the wind to launch planes, and planted three half-ton bombs in the midst of the spot. Within  twenty minutes she had to be abandoned . U.S. submarine Nautilus, prowling about looking for targets, pumped three torpedoes into her, the gasoline storage exploded, whipsawing the carrier, and down she went in two sections. 
…Never has there been a sharper turn in the fortunes of war than on that June day when McClusky’s and Leslie’s dive-bombers snatched the palm of victory from Nagumo’s masthead, where he had nailed it on 7 December....
Midway was a victory not only of courage, determination and excellent bombing technique, but of intelligence, bravely and wisely applied….it might have ended differently but for the chance which gave Spruance command over two of the three flattops. Fletcher did well, but Spruance’s performance was superb. Calm, collected, decisive, yet receptive to advice, keeping in his mind the picture of widely disparate forces, yet boldly seizing every opening, Raymond A. Spruance emerged from this battle one of the greatest admirals in American naval history.
Raymond A. Spruance USN.

Admirals Nimitz, Fletcher, and Spruance are, as I write, very much alive; Captain Mitscher of Hornet, Captain Murray of Enterprise and Captain Miles Browning of the slide-rule mind have joined the three-score young aviators who met flaming death that day in reversing the verdict of battle. Think of them, reader, every Fourth of June. They and their comrades who survived changed the whole course of the Pacific War.