Thursday, December 18, 2008

Asymmetric Risk, Bicycles and SUVs

Many who felt invulnerable enough to demand ever larger salary and benefit packages are discovering risk is not as asymmetric (i.e. "we're protected") as they thought: auto workers and financial-sector employees were Wave One, in 2009 municipal and local government employees will be a gigantic Wave Two.

Here is my metaphor for asymmetric risk: bicycles and SUVs. Both share the same street, both are transport--but the risks inherent in each are very asymmetric. The bicyclist (I know because I ride over 1,000 miles a year on city streets and bogus "bike lanes" which are merely white stripes on busy streets) must be alert at all times because a 1-ton vehicle can do a lot of damage to a 35-pound bike and a 175-pound rider.

I've been knocked off my bike by other bicyclists, hit huge potholes, skidded on loose gravel--the list of risks a bicyclist faces every moment on city streets is long and varied. A risk-free world is an illusion no bicyclist can afford.

The SUV driver is the exact opposite. Comfortably seated in a large vehicle of steel and safety glass, warmed by the vehicle's heater and soothed by its sound system, the driver is easily lulled into a false sense of security.

Our nation's financial situation is roughly akin to driving an SUV while sitting on the front bumper. Oh, and the brakes are iffy, the shocks are shot, the fuel tank is almost empty, and the electrical system's erratic at best. Have fun driving.

Various groups have, via massive political contributions and lobbying, attempted to sequester themselves from real-world risk. This includes government contractors, of course, and shadowy financial/banking players who were pleased to beg for relaxed oversight and regulation of their little paper games.

But the average urban dweller doesn't see these well-cloaked beneficiaries of asymmetric risk--the ones they see as protected from the risks they themselves face are city, county and state employees.

When you have either fake healthcare coverage (such as a $5,000 deductable) or no coverage at all, and you just got your hours cut, you tend to look at articles like this with a slightly jaundiced eye: Cities pay huge salaries despite fiscal crises (S.F. Chronicle)

Sure, maybe the public employees drawing $200K+ a year work long hours, but then so do tens of millions of people earning $40,000 or less in "the real world" (i,.e. private employment).

Here is how city department heads deal with threats to their perks, like their own private drivers: they reshuffle the budget as needed to keep their drivers. According to some MSM reports, local government employees are shocked by the animosity they feel from the general public. Hmm, I wonder why? Perhaps if they read the above article and this one, they would understand how asymmetric risk (i.e. we face risks squarely while you're protected by our tax payments) strikes the taxpaying public as supremely unfair: Wage freeze proposed for S.F. unions (S.F. Chronicle)

"The city currently has a $6.5 billion budget and a shortfall of up to $125 million. Next year's deficit could reach $575 million - or nearly half of the city's $1.2 million discretionary spending account.
"I don't think any of us, myself included, have really grasped the enormity of this problem," Peskin said at the meeting's start. "We are facing a truly catastrophic financial disaster."

Peskin's proposals to eliminate 22 jobs for drivers of battalion chiefs in the Fire Department and take four fire engines out of rotation have been tabled because Chief Joanne Hayes-White came up with alternatives.

Instead, she has laid off civilians, frozen vacant positions, and moved firefighters doing special projects and desk work back into the firefighting rotation to save on overtime pay."

So the city is facing an unprecedented fiscal crisis, and the battalion chiefs are moving Heaven and Earth to save their private drivers. Nice work if you can get it, eh? I would strongly suggest that the battalion chiefs consider that the asymmetries in risk are about to equalize, and as a result they maybe seeking to staff a largely volunteer fire department by 2014. In fact, they may be no battalion chiefs at all; there will only be an actual paid firefighter or two at each station; the rest of the firefighters will be volunteers.

Now that's driving from the bumper of the SUV, not from inside.

The latest news in San Francisco is that Apple is dropping out of the MacWorld trade show--the death knell to the city's fat $25 million revenue it pulled in from the show. Now subtract all the other trade shows which will be cancelled as pointless in 2009, the steep reduction in foreign tourism as the depression guts economies from the U.K. to China, and you get a city which will soon be facing not a 50% cut in discretionary spending ("only" $1.2 billion for a city of 800,000 residents-- then there's $5 billion more in non-discretionary tax-paid expenses) but a 100% cut in discretionary spending--there won't be any at all.

Welcome to life on a bicycle.

The S.F. Fire Depertment battalion chiefs are obviously willing to steer their luxury SUV from the front bumper, but as small businesses are decimated, once-plump charity endowments are slashed and corporations flee the high-tax environs of S.F., the battalion chiefs will find the steering's getting a little squirrely on their luxury SUV and they might run into a fiscal ditch.
It's been a nice gig, sequestered in the plush comfort of "safe" tax revenues, but as businesses wither and die, so do tax revenues; and the general public-- overtaxed, hours cut, benefits slashed, laid off, pissed off--may not take kindly to municipal or state "revenue enhancement" schemes whose sole purpose is protecting the benefits (i.e. dodging the risks of the real world) of public employees.

Longtime correspondent Albert T. checks in from New York City with a related story: raising fares in a recession to cover pension shortfalls:

"Here in NYC there is a proposal to (ahem) lift fares for metro/bus etc from $2 per ride to $3. to close a $1.2 billion dollar gap... The reasons are really very simple in this half-year report from the MTA. For the six-months of this year their operating revenues were $2.918 bil (not counting the grants and basically taxpayer subsidy of $3.060 bil) and expense were $6.446 billion, ergo the MTA is running on a constant gap basis with the bulk of the money coming from taxpayers in grant form.
Most of the money gets spent on (for the same period mind you, only a 6 month budget):
Salaries and wages $2.268 billion
Retirement and other employee benefits $697 M
Postemployment benefits other than pensions $828 M
ergo $3.793 goes to people with about 2/5 going to people whom are no longer working-- isn't that wonderful. (page 11 of the link)

So in essence they run a perpetual deficit with rate hikes when they need to because, hey, they have the city by the balls, if they strike everything ceases. A guaranteed pension and benefits after retirement, wonderful, wish I had the same thing. Except this comes not only from operating business but directly from the taxpayer... They could always issue more bonds short-term to cover the deficit until they bleed the money out of the taxpayer through hikes or otherwise like an extortion mob.

Not even mentioning the gross overstaffing and inefficiency of labor and other resources. Ergo 10 electricians per light bulb and full office buildings of workers doing "EFFICIENCY STUDIES".

If 10-20% of the city left or boycotted the MTA for a prologued period of time they would go bankrupt and there would be no pensions or post-retirement obligations. I find the audacity of people saying we should raise taxes on alcohol, cigarettes, taxpayers who own cars, taxpayers in general, just to keep the MTA subsidized and fat without absolutely any cuts on its side, because hey they deserve it. Right... It's appalling that these officials call on taxes to be raised just so their budgets could balance to continue robbing the public.

In other words, like an extortion mob.

Since the MTA is essentially a monopoly it is odd that we have to fork over $5 billion dollars a year to subsidize their pensions/post-retirement benefits.

Also the assumptions their pension plan makes are insane, whereby its guaranteed they will be short each and every year... (p 41 of the above report) Investment return of 8% is assumed... with projected salary increases of 3.5% - 36.2% and inflation of 2.5%

Assuming the median (3.5+36.2)/2 = 19.85% median projected salary increase projected in the plan. (kind of funny how it ends up in that 20% range almost like private equity ROIs)
Not sure if its 23 yrs ergo after 23 years you get it but it used to be 20 so that might be true.

The only people I see deserving pensions are the bus drivers and the train machinists those whom actually drive the bus/train during the day. All the other people are freeloaders in my view. Even people whom repair tracks because there is usually a crew of 20 when you only need 2 or maximum 4 people. Yes even those whom monitor the system to make sure it's running because their salaries which are above what a median bus driver/machinist makes to such a degree they shouldn't get a pension."

Thank you, Albert. Public employees will undoubtedly feel the fare increases are absolutely justified, and the disgruntlement of the public will be dismissed. Yes, the public employees were "promised" benefits, but the promises were unrealistic. Now risk is no longer asymmetric--it's spreading everywhere.

Those riding bicycles will resent those still locked inside their toasty-warm luxury SUVs, seemingly impervious to risk--and when the SUV flips over and crashes, as it most surely will, the occupants--corporate chiefs and battalion chiefs alike--shouldn't expect much sympathy.

27 new reader comments --selected from the flood of comments sparked by the 12/15 and 12/16 entries.

Here is Part III of Chris Sullins' strategic action thriller, Operation SERF: Operation SERF, Part III

Thank you, Tom S. ($50) for your continuing exceptionally generous donation to this site. I am greatly honored by your support and readership.

Thank you, Alberto R. ($20) for your on-going most generous donation to this site. I am greatly honored by your support and readership.

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