Archive for the 'Economics' Category

The Ben Stein-Ray Lucia Mutual Admiration Society

April 4, 2012, by Seth Hettena. 0 Comments

Actor and corporate pitchman Ben Stein charges more than $50,000 for a single speech, according to his page at the Keppler Speakers Bureau.

If that’s the case, I would love to know how much he charges Ray “Buckets of Money” Lucia for making numerous appearances each year at Lucia’s free seminars and lauding him in The New York Times as a “guru.”

Let’s face it: it’s Stein, not Lucia, who is the big draw at the seminars. Stein has made a career out of being a bow-tied smartypants ever since he famously played a dull economics teacher in the movie Ferris Bueller’s Day Off. He even sued over his signature look in this lawsuit in which he describes himself as “the most famous economics teacher in the world.” In the public’s mind, Ben Stein is what an economist looks like.

The public doesn’t know or care that Stein is a securities lawyer by trade whose credentials as an economist amount to a famous economist for a father and a bachelor’s degree in economics. Never mind that to the folks I know in the finance world think Lucia and his buckets are a joke. Never mind that anyone at Goldman Sachs who starts blabbing about buckets of money will be shot at dawn.

I doubt that Stein truly believes that the “genius” of Ray Lucia is his bucket strategy. His genius such as it is lies in his salesmanship. Lucia understands that regular people don’t want to read financial reports and SEC filings. They want to see a man who plays an economist on TV. They want to hear jokes get some free advice about what to do with their retirement nest eggs. They want a show.

So they come for a show and they leave with a new money manager, Lucia’s son, Ray Jr. It will take a while before these unsuspecting investors realize that Lucia Jr. has drilled holes in their buckets with his company’s high fees and questionable investments such as non-tradeable REITs that earn Lucia huge commissions.

Stein provides his pal Lucia an additional, equally valuable service — repeatedly dropping Lucia’s name in his business columns in The New York Times and elsewhere. Stein’s shilling got him canned from the Times, so now he name drops Lucia in his American Spectator diary.

Stein will say almost anything if you pay him. He served as an expert witness for lawyers at Milberg Weiss until the firm went down under federal indictment for bribery and fraud. He has pitched Comcast, eye drops, cars, office equipment. So it’s no surprise that Stein praises Lucia as a “guru” or a “genius” in the same breath as Warren Buffet.

But this is a particularly insidious form of advertising. If you repeat something enough times, goes the old saw, it becomes truth. Especially when you can repeat it in The New York Times.

I happened to be sitting at Morton’s restaurant in Beverly Hills a few days ago with Mr. [Phil] DeMuth and with another financial adviser for whom I have high esteem, Raymond J. Lucia (for whom – full disclosure – I am about to give a speech or two urging people to save for retirement).

Ray and Phil said something like this to me: “You know there are not a lot of shows on TV that actually teach the viewer how to be a better investor. There is a lot of stock picking and predicting what can’t be predicted, but there is not a lot that tells the ordinary Joe or Jane how to save for retirement.”

Ray and Phil were right. And they will keep being right.
~ The New York Times, Feb. 27, 2005

I was recently on a panel with the stock guru Ray Lucia, who offered overwhelming data about how impossible it was to pick stocks, trade in and out of them and fare as well as the market. His data was terrifying.
~ The New York Times, Oct. 14, 2007

I checked with my investment gurus, Phil DeMuth, Raymond J. Lucia and Kevin Hanley. None of us could see how Mr. Madoff could do what his friends said he could do.
~ The New York Times, Dec. 26, 2008

I am to give a speech at a huge gathering hosted by my pal Ray Lucia. It is about investing. He has an immense crowd of well over 1,000 people today and my job is not really to sell them anything, but to give them a general overview of the economy.
~The American Spectator, May 2010.

Now, to pack and prepare to go see my pal Ray Lucia. Ray is simply the best wealth manager I know of. He knows more about personal finance than any other person I have ever met. His advice — lots of liquidity and very wide diversification — is so sensible it has saved me from suicide many a night. This guy is a lifesaver where managing money is concerned. We are colleagues, so I am not disinterested, but even before we were colleagues, I was learning from him and being guided by him.
~The American Spectator, June 1, 2010.

I have done the best I can, with the help of some true geniuses of finance like Phil DeMuth, Chris DeMuth, Ray Lucia, Anil Vazirani, J.W. Roth and, supreme above all of them, John Bogle and Warren Buffett, to invest wisely.
~The American Spectator, Aug. 12, 2011

Who is Jim McCarthy of CounterPoint Strategies?

August 1, 2011, by Seth Hettena. 2 Comments

????????ikoniIf you’ve found your way to this page, there’s a good chance that you’re a journalist who has just had the pleasure of meeting an unusually aggressive PR flak named Jim McCarthy.

Don't let me scare you

First off, relax. If anything, the fact that you’ve run into Jim may be a good thing. This guy has represented some major league Wall Street crooks, so there’s a chance that you’re on to something.

CounterPoint’s current and former clients include:

  • Elliott Broidy, a wealthy California investor who pleaded guilty to paying $1 million in bribes to influence former New York State Comptroller Alan Hevesi.
  • Ira Rennert’s Renco Group and its Doe Run subsidiary St. Louis, the largest lead producer in the Western hemisphere. Jim does not want you to watch this video about the company’s operations in Peru.
  • The Formaldehyde Council
  • The National Fisheries Institute (Think mercury)
  • Bond insurer MBIA.
  • The College Sports Council
  • Hedge fund founder Raj Rajaratnam, who was convicted of securities fraud. (Update: Raj Rajaratnam was sentenced to 11 years in prison.)
  • Dallas-based Kosmos Energy, majority-owned by private-equity firms Blackstone Group and Warburg Pincus.

I had the pleasure of dealing with Mr. McCarthy a few times when I was investigating one of those crooks, a guy named Elliot Broidy, so I decided to put together this handy-dandy guide for the perplexed:

Jim is president of CounterPoint Strategies, a public relations firm in Washington, D.C. that specializes in an aggressive, combative style of crisis management. Jim is the real-life version of the fictional tobacco flak in Christopher Buckley’s novel Thank You For Smoking. His job is to make your story about you.

He’s the son of liberal journalist and peace activist Colman McCarthy. The acorn fell pretty far from the tree in this case. Young Jim registered as a Republican at age 18.

Early in his PR career, Jim handled a variety of Fortune 500 and foreign government accounts for two public relations agencies in Washington, Ruder-Finn and Nichols-Dezenhall, the “brass-knuckled boys” of DC’s PR world.

Ready to pounce

In 1994, McCarthy started a boutique public relations agency, McCarthy Communications. McCarthy Communications reportedly billed one client, the Saginaw Chippewa Indian tribe of central Michigan, $280,000 for a media campaign designed to force out the head of the Bureau of Indian Affairs. Replying to a BIA spokesman who said he had never seen such tactics, McCarthy said, “I say to Mr. Hackler, welcome to the Beltway.”

A confidential McCarthy Communications proposal was obtained by The Washington Post. (See William Claiborne, “Tribe PR Drive Targeted BIA Head”, The Washington Post, Aug. 16, 1999)

McCarthy was hired by the Augusta National Golf Club in 2002 when the men-only club was under pressure by activist [[Martha Burk]] to admit women. McCarthy advised a “pugnacious” approach. “My clients appreciate that I like to get in the arena, take off the gloves and throw down,” McCarthy told Alan Shipnuck, who wrote a book about Augusta’s battle to keep women out. (See Taking on the Times”, Sports Illustrated, April 6, 2004.)

It’s the first time I’ve done this kind of media criticism as part of an overall strategy for a client, and I don’t know of any other PR firm that has done it. It’s pretty cutting-edge. Big PR firms are like large corporations in that they have always been afraid to take on the press directly, because there is this belief if you create an adversarial relationship, you will never be treated fairly again. But for a venerable institution like Augusta National to embrace that strategy, well, that has certainly opened some eyes. Now I’m trying to build media-crit-driven crisis management into stand-alone business. Who knows? Maybe I’ll be snapped up by a big, deep-pocketed PR firm.

In 2004, McCarthy co-founded Public Interest Watch, a Washington nonprofit heavily funded by Exxon Mobil. According to BusinessWeek, McCarthy’s ex-employer, renamed Dezenhall Resources, helped create PIW in 2002 specifically to prod the IRS to go after Greenpeace.

David "Nick" Nichols

Just as McCarthy had hoped, deep pockets did find him. McCarthy Communications was hired in 2004 to represent investor Kenneth Langone, who was named in a lawsuit by then-New York State Attorney General Elliot Spitzer. On Langone’s behalf, McCarthy has repeatedly attacked the credibility of Gretchen Morgenson, a Pulitzer Prize winning business journalist for The New York Times, saying businesspeople regarded her with “pure contempt.” Apparently, Langone didn’t like it that Morgenson pointed out how Langone was a poster boy for executive overcompensation.

In 2008, McCarthy co-founded CounterPoint Strategies. McCarthy is the oversized face of CounterPoint, but behind the scenes is CounterPoint’s chairman, David “Nick” Nichols, a former investigative journalist who went on to found Nichols-Dezenhall, McCarthy’s old stomping grounds.

Before forming Nichols-Dezenhall, Nichols served as a campaign press secretary for New York City Mayor John Lindsay and then headed to Wisconsin where he served as a legislative staffer. Nichols also served for several as a senior media spokesperson for the Cuban-Haitian Task Force, which was charged with dealing with the thousands of refugees from Castro’s Cuba in the Mariel boat lift.

Share your McCarthy horror stories below:

 

 

Everyone loves an early inflation

August 5, 2010, by Seth Hettena. 0 Comments

Everyone loves an early inflation. The effects at the beginning of an inflation are all good. There is steepened money expansion, rising government spending, increased government budget deficits, booming stock markets, and spectacular general prosperity, all in the midst of temporarily stable prices. Everyone benefits, and no one pays. That is the early part of the cycle. In the later inflation, on the other hand, the effects are all bad. The government may steadily increase the money inflation in order to stave off the later effects, but the later effects patiently wait. In the terminal inflation, there is faltering prosperity, tightness of money, falling stock markets, rising taxes, still larger government deficits, and still roaring money expansion, now accompanied by soaring prices and ineffectiveness of all traditional remedies. Everyone pays and no one benefits. That is the full cycle of every inflation.

— Dying of Money: Lessons of the Great German and American Inflations, Jens O. Parsson, 1974

Glenn Beck Fuels Gold Hysteria — And Profits

July 19, 2010, by Seth Hettena. 0 Comments

I heard the other day about a man who took all his money, bought gold and buried it in his backyard. The poor fellow probably listens to commentator Glenn Beck.  

The incessant stream of end-of-the-world nonsense that Beck spews forth makes his incredibly popular radio and TV talk shows the ideal vehicle for gold advertisements.  

An average of 9 million listeners a week makes Beck’s radio show the third most popular in America, behind Rush Limbaugh and Sean Hannity. Mercy Radio Arts, aka Glenn Beck Inc., took in $32 million in revenue in the past 12 months, according to Forbes magazine.  

But this is not your traditional media advertising relationship:  

   

Anyone who listens to conservative radio is getting bombarded with messages from Santa Monica-based Goldline, which boasts that it does half a billion in annual sales of gold coins and bullion   

Others who offer testimonials on Goldline’s website are Laura Ingraham, Mark Levin, Mike Huckabee, Monica Crowley, Fred Thompson. You can listen to them shilling for Goldline here on the Goldline website.  

It would seem to be a natural fit. Gold thrives on instability and chaos, and Beck is constantly hammering home the theme that the United States is highly unstable … ergo, we should buy gold. The problem is the gold that Goldline is selling often isn’t bullion, but rare coins, which are a different animal.  

According to ABC News’ The Blotter, authorities in Los Angeles and Santa Monica are investigating complaints from Goldline customers say they were lied and misled in their purchases of gold coins and others who received something they didn’t order. The Santa Monica City Attorney’s office has set up a website to handle complaints.  

The gold 20 Swiss Franc

  

Goldline customers are often sold gold 20 Swiss Franc and other European coins. The Missouri Secretary of State’s office found in 2006 that a Goldline agent violated state law by advising an elderly woman to sell her annuity to buy gold. The woman ultimately bought 153 Gold 20 Swiss Francs and other coins.  

This is a classic bait-and-switch.  

Buying a Swiss Franc coin is NOT the same as buying gold bullion or even gold American Eagles, South African Krugerrands or Canadian Maple Leafs, all of which are linked to the spot price of gold.  

Gold 20 Swiss Francs, which are numismatic or rare coins, have less to do with gold spot prices and more to do with scarcity, condition and coin demand. In other words, if gold rises you still make not make any money.  

Goldline charges a sizeable markup on numismatic coins. According to Goldline’s own disclosure on its website:  

Our spread on semi-numismatic coins, rare or numismatic coins and rare currency currently ranges from 30% to 35%. Examples of coins which have a 30% to 35% spread include European gold coins such as the Swiss 20 Franc, the PCGS certified “First Strike®” coins, coins which have been encapsulated by a grading service such as PCGS or NGC, the Morgan and Peace silver dollars in all grades, and the Walking Liberty, Franklin and Kennedy silver half-dollars in all grades. Spreads may change based upon market conditions, availability and demand.  

Here’s how this works. If the spread on a coin is 35%, then a coin Goldline is selling for $500 is really worth only $325. The coin must appreciate $175 before you earn a profit. Again the prices of these coins move independently from the price of gold.  

According to a report issued in May Rep. Anthony D. Weiner, coins on the Goldline website were marked up an average of 90 percent compared to their melt values.  But this is unfair: rare coins value has less to do with the price of gold and more to do with scarcity and other factors.  

Mark Albarian, president and CEO of Goldline, is a coin collector. A coin collector knows what coins are worth. If you don’t, then caveat emptor — buyer beware — no matter what Glenn Beck says.

Fannie Mae Has It Right on PACE

July 11, 2010, by Seth Hettena. 0 Comments

A decision by Fannie Mae and Freddie Mac to say no to a White House-backed solar energy program has a lot of people in California pretty upset. As much as I like solar power, I have to agree the regulators got this one right.

San Diego County Supervisors Pam Slater-Price and Dianne Jacob pleaded with President Obama and the region’s congressional delegation to save the program and called the Federal Housing Finance Agency’s statement on the matter “insulting.” Gov. Schwarzenegger was disappointed. California Sen. Barbara Boxer, NYC Mayor Mike Bloomberg and many others deluged the administration with letters.

The solar-financing  program, known as “property assessed clean energy program” or PACE would have allowed homeowners in 13 San Diego County cities and unincorporated areas to write off the high up-front cost of solar panels — typically $25,000 or more — over 20 years.

The nascent program was dealt a major setback last week when the federal regulator overseeing Freddie Mac and Fannie Mae said that the federal mortgage giants will not buy or sell mortgages on homes enrolled in the program.

The Federal Housing Finance Agency said in a statement Tuesday that the liens created by the PACE program were senior to existing mortgages. FHFA said first liens “present significant risk to lenders .. and are not essential for successful programs to spur energy conservation.”

The second part of the statement is the one Jacob and Slater-Price found insulting. The first part of the statement — that first liens present significant risks — happens to be true.

San Diego County’s program was administered through the CaliforniaFIRST program. Here’s a sample Pace Agreement.

Homeowners who sign up for CaliforniaFIRST have a “contractual assessment lien” placed on each participating property covering the cost of installation plus interest.

A $25,000 solar panel retrofit would wind up costing $40,000 at 5% over 20 years. Assuming you pay $100 a month in electricity like I do, you wouldn’t save enough power to make it worthwhile.

The lien would be paid through property taxes, and liens would be bundled together and sold to investors as bonds. Communities often issue special tax assessments to cover the cost of infrastructure repairs or improvements, but PACE assessments uniquely cover improvements to a single residence.

For would-be buyers, a problem is that the lien follows the house, not the owner. It would have remained on the property even if the owner sold it.

But the real problem lies in the liens’ “super senior” status, which means it takes precedence over all other debts, including mortgages. So you could lose your house if you can’t or won’t pay. Take a look at this clause in the CaliforniaFIRST agreement.

The Property Owner acknowledges that if any Assessment installment is not paid when due, the Authority has the right to have the delinquent installment and its associated penalties and interest stripped off the secured property tax roll and immediately enforced through a judicial foreclosure action that could result in a sale of the Property for the payment of the delinquent installments, associated penalties and interest, and all costs of suit, including attorneys’ fees.  The Property Owner acknowledges that, if bonds are sold to finance the Improvements, the Authority may obligate itself, through a covenant with the owners of the bonds, to exercise its foreclosure rights with respect to delinquent Assessment installments under specified circumstances.

Another of the FHLA’s concerns that hasn’t gotten much attention bears noting. Homeowners who can’t afford solar panel will now become targets for shady lenders in a repeat of the whole interest-only mortgage debacle that helped fuel the housing bubble. I’m not saying that PACE will create another housing bubble, but do we really need to be adding to personal debt levels right now, especially for people struggling at the margins?

I’d love to end the burning of fossil fuels and dependence on foreign oil too. Increasing debt burdens to pay for it isn’t the way to go about it.

ALTA Responds to “Title Insurance is a Scam”

June 30, 2010, by Seth Hettena. 0 Comments

Jeremy Yohe of The American Land Title Association, the industry’s mouthpiece, has written a lengthy response to my earlier post about title insurance being a scam.

You can read the original post here and Jeremy’s comment appears here.

In his comments, Jeremy has addressed some of the concerns I raised in my piece, but did not address the well-established inefficiencies and structural flaws in the multi-billion title insurance industry.

Jeremy wrote, “A homeowner’s title insurance protects the owner for as long as they or their heirs on the property. And only need to be paid for once.”

  • Why then was my $625 title insurance fee necessary on my refinance? Chain-of-title, the major service provided by title insurance, was previously established in my case. A Lexis search would have turned up a lien or a judgment. Interestingly, though, according to CTLA’s Title Wizard, I would have paid LESS in title insurance if I had purchased my home instead of refinancing it.
  • How does ALTA explain the findings of “reverse competition” in the mortgage industry that date back to the 1980 Peat Marwick study for HUD? (Also see Consumer Federation of America, 2006 testimony before Congress; California insurance commission study on title insurance)
  • If title insurance is performing a valuable service and the “preventive measures” are keeping the title insurance industry’s loss ratio low as Jeremy suggests, why weren’t these savings passed along to me and others in the form of lower fees? Are title insurers colluding to keep prices high?
  • How is it that only one company, Entitle Direct, markets title insurance directly to consumers and, as a result, is able to offer me and many other the same service for 35 percent less? Why does Entitle Direct have such a small share of the industry? Am I a customer or merely a fee payer?
  • Why shouldn’t California copy Iowa and just put an end to the title insurance racket?

Curious to hear the answers.

CalPERS: A Legal Ponzi Scheme

June 28, 2010, by Seth Hettena. 0 Comments

chart

California’s lame-duck Gov. Arnold Schwarzenegger likes to remind us, as he did last week, that California is facing an “unsustainable path that has taxpayers on the hook for $500 billion.”

Exhibit A is SB 400 of 1999, which  increased benefits for California state government employees between 20% and 50% — without the money to pay for them.

This is in essence a legal version of a Ponzi scheme where new investors pay old ones until the whole thing collapses.

Schwarzenegger aide David Crane has called SB 400 “the largest non-voter approved debt issuance in California history.”

The bill was signed during the dot-com boom and the legislature relied on vague promises that the investment wizards at California’s giant pension system would generate the money out of thin air.

Needless to say, that hasn’t exactly worked out.

On June 16th, Schwarzenegger struck a deal with four unions representing 23,000 of the state’s 170,00 unionized workers to roll back the benefits that were given away in SB 400. If similar agreements are reached with the state’s eight other employee unions, state savings in FY 2010-11 would total $2.2 billion, $1.2 billion General Fund.

Even with the cuts, Calpensions’ Ed Mendel notes, pension benefits for CHP officers are still more generous than the days before SB 400.

Democrats led by Gov. Gray Davis signed SB 400 as a thank-you to the unions that helped end 16 years of Republican rule in California the previous November.

Even though the legislature is controlled by Democrats. It needs to be said that the bill was supported by both parties. It passed unanimously in the Senate. Only seven members of the 80-member California Assembly voted against it.

The most notorious passage in the bill provided highway patrolmen with 3 percent of final pay for each year served at age 50, a significant improvement of the pre-SB 400 formula of “two at 50″ — 2 percent of final pay for each year served at age 50.

This is much, much more than 1 percent increase.

Before SB 400, a highway patrolman had to work 45 years before he could retire with 90 percent of pay. The bill shaved 15 years off that time, allowing them to retire with 90 percent of pay after 30 years on the job.

In 2008-2009, a full third of the payroll for all highway patrolman now goes into their retirement accounts.

CalPERS believed they could cover the additional costs through “continued excess returns” and said it expected that contributions from the state would hold steady at $350 million.

Instead, the compound annual growth rate of CalPERS investments grew a pathetic 1.6 percent from 1999 to the end of 2009. On June 16th, the same Schwarzenegger announced his deal with the unions, CalPERS announced that it was raising the state’s contribution to $3.9 billion.

CalPERS unfunded liability, the percentage of benefits promised that can be covered by the fund’s assets, has risen from $158 billion in 1999 to $238 billion last year.

With its myriad accounting trips, CalPERS can “smooth” (hide) losses for generations. Some day the bill will come due.

It’s looking increasingly doubtful that there will be anybody left to pay it.

The Scam Known as Title Insurance

June 25, 2010, by Seth Hettena. 12 Comments

“Ever feel like you’ve been cheated?” singer Johnny Rotten famously asked at the end of the Sex Pistols tour of America.

I sure did when I refinanced my home last year and I had to fork out $625 to Chicago Title for title insurance.

Title insurance for a refinanced home loan? This makes no sense.

I paid title insurance to ensure there were no issues when I first bought my home in 2002, so why was I paying for it again?

The answer is simple: Title insurance is a swindle. A scam. A shakedown, a hustle.

When Title Companies Compete, You Lose

Title insurance is less than 1 percent of the price of the home, so we tend to overlook it.

In economics, this is “inelastic” demand, meaning it is not sensitive to price.

Title insurers can virtually charge whatever they wants — even, as in my case, for doing nothing at all.

The result is an industry devoid of competition.

A 2005 report to California Insurance Commissioner John Garamendi found that competition for title insurance and escrow services in California “does not exist.”

A total of four companies control virtually the entire market for title insurance. Chicago Title is owned by Fidelity National Financial Inc., which is the nation’s biggest title company with more than 45 percent of the market.

In California — the big money maker for the industry — title insurance is marked by “reverse competition.” The title insurers don’t compete for business from homebuyers like me, the ones who actually  pay for the service. Instead they pay illegal rebates and kickbacks to a real estate agent, a lender or homebuilder in exchange for business referrals.

The California Land Title Assocation’s Title Wizard service lets you compare prices for title insurers. Here is what the big four would have charged for my home refinance:

Chicago Title $625
Old Republic $645
Stewart Title $625
First American $605

This is a pretty clear cut picture of what collusion looks like.

A toll on the road to home ownership

Title insurers would do quite well in Afghanistan and Iraq or any place where nothing gets done unless certain people are paid.

You don’t get a mortgage without title insurance. It’s that simple. My title insurance “expired” when my first mortgage was paid off. If I wanted to refinance, I had to have title insurance.

Title insurers have managed to set up a toll booth at the entrance to the U.S. housing market, which at its peak was worth more than $20 trillion.

All those tolls add up: During the housing bubble, operating income for title insurers grew 270 percent, soaring $4.8 billion in 1995 to $17.8 billion in 2005.

The money pours in, but it doesn’t come back out. Do you know anyone who actually filed a title insurance claim?

Chicago Title paid out a meager 5 percent on nearly $4 billion worth of title premiums, according to the company’s SEC filing.

In the insurance world, this percentage is known as the “loss ratio.” The loss ratio for title insurance is among the very lowest in the insurance industry. Auto and home insurers pay 80 percent of premiums.

What is Chicago Title doing with my money? The biggest expense on Chicago Title’s 2009 income statement isn’t personnel costs. It’s the whopping $1.9 billion in commissions paid to agents who drum up business.

What you can do.

Title insurance is not required by law in California. However, it’s standard operating procedures as most lenders won’t fund a mortgage without it. But you can shop around.

One alternative is Entitle Direct, which sells title insurance direct to the consumer. Entitle Direct doesn’t pay agents so it is able to charge a third less than most of the big title firms.

I could have saved $268 if I had gone with Entitle Direct. If you don’t feel that it’s worth the trouble, well, I guess then Johnny Rotten had it right.

The State of San Diego’s Pensions

June 23, 2010, by Seth Hettena. 0 Comments

In a little noticed report, two finance professors examined the true cost of state government pension underfunding.

Their findings are mind-boggling.

Robert Novy-Marx and Joshua Rauh found that collectively, the pensions of the 50 U.S. states are underfunded by $3.23 trillion. And that doesn’t even include local government pensions.

Most pensions calculate future obligations using a method that only an actuary could love: the “individual entry-age normal cost method.”

The exceedingly dull explanation of this is that a worker’s retirement benefits are funded over the course of his or her entire career.

But this measurement doesn’t show how much the pension owes right now.

Novy-Marx and Rauh ask how much would a pension plan owe if the entire workforce were laid off today.

They call this the “accumulated benefit obligation.” In San Diego, it’s known as the “present value of future benefits”  They both refer to the same thing: the amount of money needed to pay off the entire plan if the workforce were laid off today:

For a pension plan to be considered fully funded, its assets should be at a minimum be equal to the accumulated benefit obligation.

The city of San Diego’s official unfunded liability stands at $2.1 billion using the entry-age normal method. The county’s is less than a billion.
When we look at what the plan would owe if it were terminated today, those figures rise considerably.

Negative Equity in the San Diego Housing Market

June 8, 2010, by Seth Hettena. 0 Comments

San Diego’s housing market may have much further to fall.

So says a new report from the NY Federal Reserve that calculates how many homeowners will become renters over the next few years.

In San Diego, 16 percent of homeowners will become renters, according to the study

This measure assumes that homeowners who owe more than their homes are worth — i.e. negative equity — are in effect renters.

Since the homeownership gap reflects the extent of negative equity in the housing market, it is also a gauge of the potential downward pressure on the offcial homeownership rate. Assuming that house prices do not appreciate over the next several years, negative equity households will very likely convert to renters when they move out of their current homes because they will be unable to save enough to cover the negative equity, the transaction costs of selling their existing home, and a down payment on another home. As these transitions from owning to renting take place, the homeownership gap will narrow, with the offcial homeownership rate dropping toward the effective rate.
The official rate of homeownership in San Diego is 55 percent. But the Fed’s analysis of federal loan data shows that only 39 percent of homeowners will get some money back when they sell.
The difference between these two numbers yields the homeownership gap. And barring a huge rise in prices, that’s where we are headed.
It’s bad, and it may even be worse. According to the paper, these numbers may actually understate the extent of the problem.If you use Case-Shiller’s numbers, only 35 percent of San Diego homeowners have positive equity.  So the gap grows to 20 percentage points.
This has far-reaching implications:
Consider, for example, that the Case-Shiller-based effective homeownership rates for … Detroit, New York City, San Diego, and San Francisco are all under 50 percent. That is, the median household in these areas is in a negative equity position and no longer has strong financial incentives to behave as an owner. While the effects will vary with the distribution of negative equity households across the municipalities within these metro areas, a high share of these households could result in reduced maintenance of the housing stock, an increased risk of housing vacancies, and less stable neighborhoods over time—developments that could have repercussions for local law enforcement. Moreover, the predominance of “non-homeowners” in these metropolitan areas could lead to a decline in citizen participation in local affairs, with a concomitant loss of vigilance over the quality and ef?ciency of public services and institutions.