More on Illinois Pension Mess

Author: David Kotok, Post Date: May 5, 2016
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“David, I can’t believe that you put your name on this poisonous bilge. Whatever the problems of the Federal and State tax systems, it’s dangerous nonsense to allow them to be laid at the feet of educators who, in the main, are relatively underpaid.”

Paul Gambles, an investment professional whose office is in Bangkok, Thailand, tweeted the above response to the guest piece we posted that discussed the Illinois pension system’s paying of excessive pensions to educators. If you missed it, the link is here (http://www.cumber.com/more-revealed-in-illinois/). Paul then sent an extensive email letter that I will place at the bottom of this commentary.

Some bullets follow.

1. Nothing in our guest commentary by OpenTheBooks.com discussed teachers’ salaries. Paul Gambles ignored that fact. He also did not dispute the facts outlined in the commentary. The piece did discuss gross pension irregularities. We continue to find the political decisions and associated behavior that permit pension underfunding and overpayment to be despicable. We continue to write about the issue, and we use pension underfunding as a credit criterion in our municipal bond selection process.

3. Furthermore, we can find nothing to support Paul’s assertion that underpayment of teachers during their careers should be offset by overfunding of pension benefits as a means to adjust their compensation. Paul may believe that is appropriate, but nothing we can find in the serious research supports that method of compensation.

4. Paul admits to insufficient research in support of his assertions. Readers who wish to do so may read below the entire viewpoint he articulates.

5. Paul has resorted to the technique of employing a distraction to blunt an argument. He skirts the issue of overpayment of pensions by asserting that teachers aren’t paid enough. One has nothing to do with the other.

It is true, however, that if you ask teachers, they are likely to tell you that they deserve more than they are paid. And if you ask the same teachers whether their government should operate without funding their pensions, they will likely say that is bad policy and they are worried about collecting their retirement compensation. I’ve had this discussion personally with retired teachers from school systems in Illinois, and they are worried. They do not trust their government, and who can blame them? I’ve also asked them how they view the compounding inflation indexing that raises their pensions above the level of their earnings spike, and how they feel about spiking their final year’s pay. They candidly admit that they disdain the process, but they nearly all say, “If it’s available, why shouldn’t I take it?’

Paul, we thank you for the email and discussion. We would not, however, characterize our guest writers’ comments as “poisonous bilge.” The fact is, their research work was stellar and precise. Everything was documented. The pension situation in Illinois has taken the state down to the lowest credit rating among the 50 states. Vendors in Illinois are delayed in getting paid. And Illinois taxpayers are watching their state incur higher and higher financing costs as destructive policies and practices remain uncorrected.

Paul Gambles’s email is below. – David Kotok

Dear David,

I was disappointed and surprised that you endorsed this for a number of reasons:

I haven’t checked recently but IIRC in relation to the demand for and the academic quality of graduates joining the teaching profession, starting salaries seem to have been consistently lower quartile for an extended period – which seems to be largely driven by the strong supply of capable undergraduates wanting to follow the profession. I assume that this is for 2 reasons:

i) Teaching is a vocation and salary isn’t the primary factor.
ii) The security of tenure and also retirement and other benefits help to offset the low starting salaries.

I also understand that education authorities have become increasingly creative/aggressive in terms of keeping qualified/experienced staff salaries constrained (e.g. the inability to transfer seniority from state to state or in some cases even within states from district to district).

I’m no expert on the above so I may have some of these assertions incorrect/incomplete but what I do believe is that educators are generally not relatively well paid, especially with regard to their social utility and importance to society and the risk is that the best educators will move outside the State system or to more lucrative overseas posts at a greater rate of knots than in the past and that once brain drains start, they can be very difficult to correct.

Therefore I think that a few examples, that ultimately don’t amount to a hill of beans, that in the minds of more political, less critically minded thinkers than yourself really just reduce to public employee/teacher-bashing are a very dangerous meme. US public finances face many challenges and waste / misallocation of resources/abuse of the system is a part of that but to enable the implication that this is why the Illinois or any other pension system and ultimately public finances are in danger of collapse is very misleading. I’ve read many analyses of the challenges facing US public sector retirement provision and undoubtedly there are many factors from increased longevity, to ZIRP/diminished returns but these are all outputs. If we accept that in general real salaries in the US are too low from almost every applicable metric and that teacher pay is especially low and is compensated by the expectation of unusually benefit provision, then the input that is failing in US public finances (if there is one – because quite frankly there is way too much focus on government/state/agency debt when that matters little in the scheme of things compared to private debt levels) is income. The US still collects far too little tax especially from exceptionally high earners but above all from profiteers from capital. Making a profit from financial capital, whether in public equities, private equities, real estate or other forms, is an essential and valuable part of the US capitalist economy. But taxing passive returns (such as gains on public common stock or land holdings) at a lower rate than earned income, places a lower value on human capital than financial capital. Having read your articles, engaged via email and shared a TV podium with you, I hope you don’t think it presumptuous that I assume that I know you well enough to believe that in everyday life (such as with employees or clients) you value human capital more highly than financial capital – when you meet a client I can’t picture you saying “I have no interest in you as a person; I’m only interested in your investable wealth.”

Therefore, in my opinion, to promote this very dangerous meme implicitly (whatever the disclaimers may say) with your highly valued imprimatur doesn’t do justice to the thoughtful, deep person that I feel that I have come to know. It’s a tempting, easy meme to buy into but ultimately it’s so susceptible to misrepresentation that it’s very, very dangerous.

The above is simply my opinion, offered in good faith and with great respect. I hope and trust that it’s received in that way.

Best regards as always,

Paul Gambles

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