Chicago Gold and Silver Investing Fan Blog

Catalonia Texas Seccession

Catalonia is an autonomous community of Spain. At one point it was completely independent from Spain. During the years, calls for secession from Spain have occured. However, with the growing European debt crises, the secession movement is gaining ground in Catalonia. There is even a secession flag:

Last month over a million people marched in Bacelona(the largest city in Catalonia):

An estimated one million protestors demonstrate in Barcelona calling for Catalonia Independence(AFP photo)

See compared to other parts of Spain, Catalonian is doing well financially. Catalonians are concerned that the wealth from Catalonia is being siphoned off to Barcelona and other parts of the country. They feel their wealth is being stolen from them. This problem will only get worse. As Spain becomes even worse financially, you could see a secession movement- already large in Catalonia- rise to fever pitch. What happens then? You will see turmoil in Spain and the face of Spain could be altered.

What about here in the United States? Similarly, some states are being fiscally responsible. Texas, Montana, and now Wisconsin have leaders that are taking their states into sound financial shape. On the other hand you have states like California and Illinois who are broke and running up their debt and future obligations to soon to be unsustainable levels. What happens then? 

I suspect, you will see Illinois running to the Federal Government for financial bailout aid. What will Texas think about their federally collected tax payer money going to Illinois. Texans won't like it. There could be a day when you see masses of Texans rallying for secession.

Understanding Public Pensions

Below is article from Turning Point:

Public Pensions and Generational Theft

 

A 3 part discussion of how public pensions are destroying your future.

 

Part 1 – Understanding Public Pensions

 

If you are under 40, you should stop reading this, stop planning to buy a house and stop planning

to start a family. Just find a second job (or first, even), and become a wage slave to public pensions.

You have work to do, and you aren’t doing enough of it to pay for your police chiefs’ and teachers’

retirement.

 

Why? Recent analysis indicates that the unfunded liabilities of America’s state and local pensions are

over $4 TRILLION, and the nation expects you to shut up, get to work, and pay for that shortfall.

 

Before one can understand the full meaning of the public pension mess, they need to know how public

pensions work. Next, they need to understand what “underfunded” means relative to public pensions.

 

How Pensions Work

 

The vast majority of public pensions (at least the ones causing all the trouble) are called “defined

benefit” plans. The idea is that if the worker and employer pay into the system, the system will pay

them a “defined benefit” when they retire. As you are about to learn, the “benefits” are the problem.

 

Think of it like a bathtub for capital. Worker contributions, employer contributions and investment

income flow into the tub, and benefits (along with some incidental costs) flow out. Therefore, a defined

benefit pension system must execute two primary tasks. It must a) invest the money it receives so that it

produces a rate of return, and it must b) pay benefits to its “beneficiaries” as they retire. How hard can

that be? Pretty hard, it turns out.

 

Defining “underfunded”

 

If public employees are promised a certain amount at retirement, it isn’t hard to estimate how much

money you need a) in the [pension] tub, b) flowing into the tub, and c) flowing out of the tub as people

retire. As you estimate how much you need, you look into your tub and see how much you have. The

difference (if any) between what you need and what you have equals the level of underfunding.

 

In short, “underfunded” means that, at current rates of return, and with the people now paying into,

and people taking out of, the system, you don’t have enough money to pay what you promised. In

California, that number (shortfall) is $112 billion (for state employees alone). As we mentioned above,

nationally, that number is between $1 and 4 trillion.

 

At this point, you might ask “between $1.25 and 4 billion, that’s a wide range. Where does that come

from? Good question.

 

Currently, your local pension fund board is probably assuming it is going to get 8 or 8.5% rate of return

on their investments. If they do, the shortfall will be smaller ($1.25 Tr.) On the other hand, more realistic

analysts, who aren’t interested in cooking the books, think that a 4% rate of return is more realistic. If

 

it’s that low, then a $4 trillion shortfall is a much more realistic number.

 

Illinois and pension un-sustainability

 

If you’ve been following this issue in the media, you may know that Illinois is the poster child for

underfunded pensions, with the Teachers’ Retirement System being the most troubled. According to

their Comprehensive Audited Financial Report (CAFR), it clocks in at 46.5% funded (53.5% shortfall), and

that’s assuming an unrealistic 8% rate of return.

 

I pick on Illinois’ TRS because it illustrates, more than any pension in the nation, the source of the

problem - the massive expansion of benefits.

 

There are arguments that the state didn’t pay its “fair share.” It did. Some will point to the downturn,

and blame the recession. That’s only a small part of the problem.

 

If you want to retain just one idea from this article, it is this. The real source of the problem is the level

of benefits. Illinois and its TRS pension plan illustrate that the level of benefits slathered on the retirees

by the legislature is what “broke the bank.” Whatever the impact of other factors (investment returns

and state funding), the fact is you can’t pay actuarially impossible benefits. You will run out of money.

Furthermore, if you increase taxes to pay for these promises, you will run out of tax payers (see the

exodus from Illinois).

 

Here is how this mess steals from the younger generation. As these costs escalate, they crowd out

funding for existing government services. Education programs, police, and infrastructure all suffer, as

the taxes flow into pensions funds that are bleeding out. Society’s investment in the young dries up to

pay for public retirees and their benefits gravy train.

 

High taxes force high earners and businesses to leave. They take jobs, tax revenues, and economic

vitality with them, leaving those who remain on the hook for even more spending. It’s an Illinois

economic death spiral, and I’ve been predicting it for years.

 

In my next piece, I’ll lay out the specifics on how Illinois benefit levels are to blame. The important thing

to remember, as you learn more about this issue, is that, after a certain point, no amount of taxpayer

support or investment returns can pay for benefits un-tethered from actuarial reality.

 

If you aren’t talking about cutting benefits, you aren’t serious about pension reform. Either that, or take

that 2nd and 3rd job, and become a pension tax slave.

 

This is the first of three installments explaining pensions and their direct effect on generational theft. 

Mayor Rahm Emanuel battling against the Chicago Teachers Union

Emanuel is forced to face the fact that unions are a burden to tax payers.

Read more in this Town Hall Article.

"The average Chicago teacher makes $76,450, nearly 30% more than the typical private sector worker in Cook County—and teachers work two months less a year."

You Know Illinois is in Serious Financial Trouble When Their Democratic Governor Has To Talk Pension Reform

Governor Quinn of Illinois is starting to talk like a Republican. He is actually proposing some sweeping pension reform for public sector unions in Illinois. In a stunning Chicago Tribune article states that Quinn proposes:

To help shore up the vastly underfunded system, Quinn called for a 3 percent increase in employee contributions and reducing the rate of cost-of-living increases. The governor also wants to raise the retirement age to 67.

This just shows you home much financial trouble the state of Illinois is in. If something is not done soon, the state will be unable to pay its bills. The democrat party has basically been the most union friendly party you can get. Now when Democrats begin admitting there is a pension problem and then start doing something about it, that is a major admission of public sector unions have really bled the system dry.

At the same time, I approach this news with caution. Quinn is still a democrat, and democrats always look to tax and spend. Quinn will find a way to screw this up. He could call for more borrowing, more taxing, and more spending. Like any Democrat, it is in their blood to tax money from someone else, borrow more than you can handle, and spend like there is no tomorrow.

 

Pensions Broke All Over the Place

Chicago is broke. At the city level, county level, and at the state level. According to a Chicago Tribune article: the city of Chicago has a pension gap of more than 25 billion, Cook County has a pension gap of 5.2 billion, and the state of Illinois has a pension gap of over 80 billion.

Everyone know we are all broke. The problem is that the mostly liberal leadership keeps getting the solution. Illinois has been run by Democrats for decades. Their solution always seems to be to blame the rich, raise taxes, raiding pension funds, and keep increasing public sector union compensation. This formula got us to this point and in Illinois they keep trying the same old formula that keeps getting us even deeper in the hole.

The county is in such a hole, even if they ask for a 1% increase in how much county employees (currently at 8.5%), they will only generate an additional 15 million dollars. That is minisully short of the 5.2 billion needed for the county pension gap.

I just cannot see any way for Illinois to get itself out of this mess without creating some massive chaos. When that happens, the unprepared will pay the most dearly.

Sears, Other Businesses Threatning to Leave Illinois

Economist article.

Illinois governor Pat Quinn raised the corporate tax rate from 7.3 to 9.5%. Now businesses are threatening to leave. Another example of a liberal policy that is backfiring. The theory sounds good to liberals: "Tax the greedy corporations." However, the reality is when you do that corporations will flee to more tax friendly states.

Local states and the Federal government seems to forget this. They are doing the same thing to the US Dollar. They are making the dollar watered down and have less purchasing power. The result will be that people will flee from the dollar to gold or something else that has real value or at least maintain its value.

Despite 67% state tax increase it looks like state layoffs and facility closings loom

In a Chicago Tribune article, it states that layoffs and facility closings seem imminent in Illinois. Governor Quinn may be forced to act in that direction because the state of Illinois is in such dire financial problem. Of course, American Federation of State, County and Municipal Employees (AFSCME) and other public sector unions are going to fight it tooth and nail. Therein lies one of the problems.

Illinois is broke. We have tried raising taxes in the tune of a 67% state income increase, we are raising toll taxes, and we are raising property taxes in Chicago. Illinois is already one of the most heavily taxed states in the nation. Taxing our way to solving problems has proven itself not to work.

It's  spending problem. A public sector union works against the interests of the citizens, because it tries to manipulate the free market. In a true free market wages are determined by what an employer can pay based on the market. If they underpay or under treat their employees, employees will just go somewhere else. In the case of public sector unions,the union leaderships knows that they have made wage agreements that are above market rates. So that means, the public is paying for artificially high union wages. If they didn't like it, they could go somewhere else.

The problem with this union game is that it only works for a while. At some point, the state (actually the tax payers) will reach a point where they can't pay them anymore, because they have run out of money. We are at that point already in Illinois.

What do the unions want us to do? Quinn has already raised taxes, we have already gotten into massive debt, and growth of the tax base is decreasing (mainly due to liberal policies, but that is another story). The only way to solve this is to cut spending. And that is what unions will never agree to because spending is their lifeblood.