POLICEPAY ECONOMIC REPORT

Final GDP Numbers For 2010

2011-04-01T08:42:00.000-07:00

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EMPLOYER PENSION CONTRIBUTIONS ARE ABOUT TO DECLINE SHARPLY

2011-02-19T19:47:00.000-08:00

POLICEPAY.NET
NORMAN, OKLAHOMA

Many Employers Will Be Paying Zero Again

As outrageous as it may sound, it is the unavoidable consequence of financial dynamics that are already in place. This is not some satirical spoof about those who think that public safety pensions are going to be the death of us. We have no crystal ball or prophet showing us things that others cannot see. What we are about to reveal to you is so simple and easy to comprehend, you will be asking yourself why you did not see it.

Let;s begin with some basic mathematical relationships. Pay attention, this is the operative sentence.

"THE AVERAGE GROSS PENSION LIABILITY IS TEN TO TWELVE TIMES THE CURRENT COVERED PAYROLL."

Do not read further until you fully understand the last sentence. Once you comprehend that sentence, we can move on to the significance of that statement. I want be certain that you know what the terms in that sentence mean. Gross Pension Liability means the total amount that would be needed to pay off all accrued pension benefits - today. It may be fully funded or totally unfunded. It doesn't matter. Current Covered Payroll is the total annual department payroll that is subject to pension contribution. On your individual pay stub, this amount is the number used to calculate your pension contribution.

Here's the rest of the revelation - pension contributions are based on pensionable wage, while interest earned by the pension plan is based on the assets in the plan. (A 1% increase in earnings lowers the contribution rate 10% to 12% - a very high leverage rate) For this discussion, we have used standard actuarial assumptions:

Earnings by the pension plan - 8%
Wage Inflation annually - 5%

Some of you may want to argue about the earnings rate. Go head, but you are only deluding yourself. Keep in mind that the 3% gap between wage inflation and long-term earnings is very well documented. So if you feel compelled to use a lower earnings rate, you need to adjust the wage inflation rate also. Let's look at a typical pension plan with a covered payroll of $50.000,000 and a gross pension liability/fund assets of $500,000,000 that required to be fully funded each year. A few years ago, the pension plan was fully funded with a reasonable contribution rate by the city, but this year it is underfunded and some people are saying that either the plan or the city will be bankrupt is a few years.

The plan we will be looking at has a 100% current funding policy. Whatever is needed to fully fund the plan comes from the employer each year. The actuaries have determined that the normal contribution rates need to be 8% by the employee and 16% by the employer. Unfortunately, no year is ever normal - the contribution is always more or less than 16%.

Currently the city is having to contribute 50% of payroll. The mayor is all up in arms and is lobbying the legislature for pension reform. About ten years ago the pension was working very well - so well that the city did not have to make a contribution to plan for seven straight years, but those days are gone. According to a guru that that city has hired, the high pension contribution rates are here forever and he is recommending Chapter 9 Bankruptcy as an escape vehicle.

As long as the earnings rate stays at 8%, every thing is okay, but it strays there is chaos. As a buffer, most plans have a smoothing device that allows for declines in the value of the plan assets to be spread over several years - better than nothing, but woefully inadequate. So what would the earnings rate need to be to bring the employer's contribution down to zero? How about 9.6%? (1.6% more than the actuarial assumption - 1.6% X 10 = 16%). Currently, most pension plans are already above the actuarial rate of earnings and are just paying off the smoothing effect for the last two years decline. What would the earnings rate have to fall to to cause a 50% contribution rate? A mere 3.4% - an annual return of 4.6%. Let me show you the math. The employer is already paying 16%, which leaves 34% to go. If the earnings rate declines 3.4% percentage points below the actuarial assumption, it's a done deal. (3.4% X 10 = 34%)

Do you think cities have learned their lesson and will make the normal contribution when they can contribute little or nothing? You don't have to answer that question in public. What rate of interest would be needed to fully fund a plan that is only 80% funded? How about 4% above the actuarial assumption for five years? What about a 50% funded pension? Don't choke, 4% above the actuarial assumption for ten years. I know what you are thinking - "Ah ha, I've got you now. A 12% average return is impossible."

Did you know that an 8% actuarial assumption for earnings means the average, not the annual goal? A high roller retirement system can have annual earnings that range from a positive 25% down to negative 25% and yet have a 8% average over the business cycle?

Well, I am going to cut you lose right here partner, but remember when the compound interest locomotive runs over you and your dogma, don't say you ain't been warned - 'cause you have. All of the anguish over pension liabilities today is being done in the shadow of negative return years. Pension plans are being portrayed as being in trouble because it is impossible for the plans to recover using the actuarial assumption of 8% or 7.75%. I have bad news for all of you prophets of doom. The pension plans will earn much more than the actuarial assumption - they already are.

Welcome to Miss Potts' (my 3rd grade teacher) arithmetic lesson for today. The Gotham pension plan has had negative rates of return of 20% for 2008 and 12% for 2009. To have an average rate of 8% over ten years 2008 to 2017 (forget compounding), what will the average rate have for be for 2010 to 2017?

8% X 10 years = 80%
8% X 8 years = 64%
64% + 16% + 32% = 112%
112% / 8 = 14%

The Economy December 31, 2010

2011-02-13T21:35:00.000-08:00

Texas Sales Tax Revenue Is Exploding

2011-02-09T12:25:00.000-08:00

	Sales Tax Revenue For February, 2011 Month			Fiscal Y-T-D
	Feb-11	Feb-11	Growth	Feb-11	Feb-11
Houston	51,828,735.14	51,421,771.12	0.79%	90,225,373.90	85,363,874.01	5.69%
San Antonio	24,473,895.42	22,890,342.47	6.91%	40,271,307.52	37,649,698.38	6.96%
Dallas	22,941,027.03	22,640,249.69	1.32%	38,355,558.80	37,187,482.84	3.14%
Austin	15,637,740.38	15,405,657.16	1.50%	26,643,479.23	25,132,050.50	6.01%
Fort Worth	12,073,911.82	10,727,895.07	12.54%	19,633,486.57	17,943,180.29	9.42%
Arlington	9,176,984.67	8,993,497.13	2.04%	15,281,455.45	14,591,127.56	4.73%
El Paso	7,898,094.46	7,574,043.85	4.27%	13,442,238.24	12,777,406.88	5.20%
Plano	7,149,432.02	6,982,324.33	2.39%	12,042,587.90	11,072,539.41	8.76%
Round Rock	6,936,740.46	6,091,808.93	13.86%	11,466,238.95	11,391,411.53	0.65%
McAllen	6,977,298.90	7,151,559.79	-2.43%	11,346,443.14	11,884,788.03	-4.52%
Amarillo	6,778,133.91	6,337,858.19	6.94%	11,276,232.53	10,415,016.01	8.26%
Corpus Christi	6,619,274.76	5,884,361.36	12.48%	11,115,705.22	9,904,836.72	12.22%
Lubbock	5,838,720.59	5,488,028.56	6.39%	9,699,956.26	9,183,031.13	5.62%
Irving	5,822,226.92	4,868,748.02	19.58%	8,950,202.25	7,758,392.27	15.36%
Frisco	5,233,927.93	4,714,151.66	11.02%	8,375,539.63	7,589,280.06	10.36%
Midland	4,654,346.49	3,709,728.14	25.46%	7,950,500.13	6,131,576.71	29.66%
Sugar Land	4,810,332.74	4,665,727.53	3.09%	7,775,472.58	7,472,344.84	4.05%
Mesquite	4,875,920.71	4,174,687.80	16.79%	7,274,405.83	6,426,443.37	13.19%
Grapevine	4,185,459.84	3,730,058.39	12.20%	6,761,059.16	5,945,570.27	13.71%
Abilene	3,897,371.12	3,573,133.66	9.07%	6,652,287.36	5,937,455.37	12.03%

California Is Back - It's Real

2011-02-07T21:31:00.000-08:00

Sales Tax Revenue Exploding

Comparing the third quarter of 2010 with the third quarter of 2009, here is how things are going in the three major metropolitan areas:

San Francisco +10.82%
Los Angeles +6.62%
San Diego +5.67%

Give it up! It's over!

Is The US Economy In The Tank?

2011-02-06T22:09:00.000-08:00

POLICEPAY.NET

NORMAN, OKLAHOMA

The United States Economy is growing very rapidly. This past year, 2010, was the biggest year in history. Since 1945, the United States Economy has grown at nominal rate of 6% per year. About one-half (3%) is attributable to inflation and one-sixth (1%) is population growth. This leaves a real growth rate of 2%. What does that mean? Well, it means that we can produce 2% more goods and services with the same number of people. Put another way, a business that required 100 employees last year should be able to produce the same amount of goods and services this year with only 98 employees. This why the standard of living increases.

These average amounts are not the same each year, some years are better and some years are worse. It all depends on the point we are in the business cycle. The business cycle is a recurring series of years where many years of growth are follow by about one year of negative growth. For a long time, this was a 4 year cycle. Today, it is about a 10 year cycle. Where are we today? The last recession began in July of 2008 and ended in June 2009 - 12 months. The business cycle begins with the end of a recession. Base on this we are 18 months into the expansion and the current business cycle and about 7 to 8 years from the next recession. With technolgy, we should be able to lengthen the cyle. The primary cause of recessions is inventory levels being too high. The high levels are the result of imperfect information for consumption and inventory levels.

A look at Personal Income shows that all 50 states and the District of Columbia had positive economic growth over the past year. Retail sales are growing at a brisk rate. Here where we are:

All 50 states have growing economies
Output (GDP) is at an all time high
Virtually every state claiming financial ruin is not telling the truth
The political leadership of many states are advocating tax cuts
The US economy is at the beginning of the biggest expansion in history
Hang on to your hats and do not be left behind

Real Retail Sales 2000 - 2010

2011-02-06T21:38:00.000-08:00

State of The National Economy
Real Retail Sales
Million Dollars

	Year	Nominal	Inflation	Real Sales	Growth
	2000	$3,232,711		$4,035,245
	2001	$3,503,602	2%	$4,276,752	6%
	2002	$3,605,909	2%	$4,331,491	1%
	2003	$3,781,874	2%	$4,447,178	3%
	2004	$4,055,793	3%	$4,637,695	4%
	2005	$4,186,021	3%	$4,632,000	0%
	2006	$4,364,542	3%	$4,677,204	1%
	2007	$4,511,870	3%	$4,696,851	0%
	2008	$4,478,360	2%	$4,562,263	*-3%*
	2009	$4,139,381	1%	$4,178,617	*-8%*
	2010	$4,405,172	1%	$4,405,172	5%

United States Economy 2000 to 2010

2011-02-05T08:16:00.000-08:00

State of The National Economy
Real Gross Domestic Product
Billion Dollars

	Year	Nominal	Inflation	Real GDP	Growth
	2000	$9,952		$12,422
	2001	$10,286	2%	$12,556	1%
	2002	$10,642	2%	$12,784	2%
	2003	$11,142	2%	$13,102	2%
	2004	$11,868	3%	$13,571	4%
	2005	$12,638	3%	$13,985	3%
	2006	$13,399	3%	$14,359	3%
	2007	$14,062	3%	$14,638	2%
	2008	$14,369	2%	$14,638	0%
	2009	$14,119	1%	$14,253	*-3%*
	2010	$14,660	1%	$14,660	3%

Growth of Personal Income October 2009 - September 2010

2011-02-04T11:26:00.001-08:00

Personal Income Growth
October 2009 through September 2010

	3.72%	Alabama	3.98%	Kentucky	0.92%	North Dakota
	3.60%	Alaska	3.49%	Louisiana	3.32%	Ohio
	3.38%	Arizona	3.15%	Maine	4.16%	Oklahoma
	4.39%	Arkansas	3.27%	Maryland	3.38%	Oregon
	3.41%	California	3.25%	Massachusetts	3.50%	Pennsylvania
	2.94%	Colorado	3.26%	Michigan	2.95%	Rhode Island
	2.94%	Connecticut	4.07%	Minnesota	4.34%	South Carolina
	2.60%	Delaware	3.79%	Mississippi	2.87%	South Dakota
	4.22%	District of Columbia	2.88%	Missouri	4.82%	Tennessee
	3.07%	Florida	3.60%	Montana	4.66%	Texas
	3.56%	Georgia	4.05%	Nebraska	2.70%	Utah
	2.48%	Hawaii	0.76%	Nevada	4.11%	Vermont
	3.46%	Idaho	3.01%	New Hampshire	3.52%	Virginia
	3.13%	Illinois	2.68%	New Jersey	2.69%	Washington
	3.93%	Indiana	5.30%	New Mexico	3.73%	West Virginia
	4.95%	Iowa	4.01%	New York	3.98%	Wisconsin
	3.62%	Kansas	4.56%	North Carolina	3.51%	Wyoming