In the past, in order to keep public budgets in check, cities and states would give more generous pension and healthcare benefits in lieu of current pay raises. The reason? As is almost ALWAYS the case with government, pensions and health care costs would be incurred well into the future, often past the political term of the politician who approved the measure. This problem was SURE to affect taxpayers in the future (but they didn’t see it yet).
Unfortunately, the future is now, and these expenses are coming due. Coupled with a collapse in asset prices (stocks, real estate, etc) and the related drop in pension balances, the wave of retirees about to hit the system could potentially explode municipal budgets and force some hard decisions on voters and their political representatives. Interestingly, in many ways the same forces are at both sides of this – increasing retirees sell homes and investments – as the population ages, assets get sold and prices decline, but this is another whole article!
What you will see first is “nickel & diming” (read HERE an interesting blog article discussing the proposed hike in CA sales tax for schools). Political leaders will hope they can nickel and dime the fees until the economy “comes back” or something else magical happens. But since they can’t fight demographics and the coming inter-generational budget battles that come along with it (see my recent article HERE on that topic), they will eventually have to try more drastic measures.
One measure that some states and municipalities are trying (including spendthrift California) is to ask for money from the federal government. in order to do that, Congress and the President will have to, in collusion with the Fed, fire up the printing presses and “borrow” to spend more now (this also contributes to the inter-generational disputes as government leaders today squander the future in record dollar amounts!), but of course we put ourselves more at the mercy of China and other foreign countries because it’s THEY who are buying our debt and funding our irresponsibility (so stifle yourself Geithner and go pay your tax bill before you mouth off foolishness – see good WSJ article HERE). So this may or may not be the way to go. This of course is politically expedient so definitely EXPECT more of this.
A second option is to bite the bullet and tax the poop out of all of us. They will have to give in at some point because the nickel and diming won’t work. They’re having this quandary right now with the Massachusetts Turnpike Authority (i.e. more govt waste) and deciding to raise the toll fee going from East Boston to the main part of the city (for those of you not from Boston, East Boston, where our airport is, is across the water from the main part of the city and requires an underwater tunnel to go there and back). Of course 50% of toll revenues go to the salaries of the people collecting tolls (FYI: I find that Feed the Children is a much more efficient charity than “Feed the Toll Worker”). The “Authority” (on what?) was deciding between a drastic rise in those tolls versus nickel and diming the whole system.
A third option is to say “no mas” and simply start renegotiating contracts. I discussed the idea of municipal “bankruptcies” many months back in these articles HERE, HERE, and HERE. Apparently, if this is approved by a judge, a city can force renegotations on pay and benefits. Of course employees don’t want this (hence the support for “creative” ideas such as sales tax increases, etc.) and this is where you may see serious conflicts.
I can visualize average citizens with no interest in politics getting very interested as cities, towns and states attempt to pass massive tax increases to cover all the bills. Interestingly, this all strikes me as very similar to GM. They over-‘benefited’ these workers for so long that they blew up the company, and if not for US taxpayer life support, they would be out – and certainly many benefits would be lost or cut. I am always amazed at how some unions will seal their own demise by demanding too much. Sure it sounds great when you get it but who can pay for it? Imagine a GM bailout for EVERYONE – is it really going to happen? No way!
You must decide then, what you will do – I know my readers read my articles for information and ideas that can help them, and I think if you review my past articles, you can see that. With this article, I am trying to make you aware of the real problem, to help you make a better-informed decision when the time comes to debate your town’s property taxes, or your state’s toll fees, sales tax, etc. I also exhort you to do what you must to protect your wealth from future high taxes and potential inflation from printing press manipulation (basically printing money to bail everyone out). Consider Roth IRA’s, Roth 401(k)’s, and real asset investing.
Keep vigilant!
Chris Grande
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