A report issued last year reveals that each of the ~4,230,000 households in North Carolina owes ~$14,000 in unfunded government worker pension benefits.

Unlike your pension (if you’re lucky enough to have one), most U.S. state governments offer their employees 1950s, UAW style, defined benefit pension plans. Translation, government workers deserve an annuity. No 401(k) or 403(b) plans are good enough for North Carolina state government workers (the state has another unfunded pension plan for your local government employees, school teachers and school administrators). You might have to save for your own retirement and manage your own investments, but you can afford to pay them an annuity.

Under the 1950s-style pension, the North Carolina government is making a legal promise of a future payment to millions of workers. It’s creating a financial liability for you, its taxpayers. According to the report authors, the “good news” is that North Carolina has $68,700,000,000 in pension assets. That’s only 2% of the $3,230,000,000,000 cumulative unfunded liability for all 50 states.

~$27,000 Per Household in Unfunded Pension Debt Nationally

On average, each household in America currently owes state (and in many cases local) government workers ~$27,000 in unfunded pension liabilities. That doesn’t include federal retirees or military retirees. For further perspective, total state debt with pension liabilities included is actually almost 4.5 times the value of all outstanding state bonds.

The bad news is that North Carolina has $117,000,000,000 in liabilities, leaving an unfunded liability of $58,300,000,000.

Don’t look to the State’s pension fund to give you these numbers. According to the State the pension liabilities are only $68,700,000,000, leaving an unfunded liability of only $10,400,000,000. But that’s the beauty of accounting, isn’t it? Haven’t our state bean counters learned well from the multi-national corporations?

Creative Pension Accounting 101

The North Carolina government accounting standards require states to use procedures that severely understate its liabilities. The State does project the payment they owe to retirees. Unfortunately, the State is using an unreasonably high discount rate in its calculation. In the words of the report: “In particular, government accounting standards require them to discount their liabilities at the expected return on their assets. This approach is analytically misguided: the magnitude of pension liabilities and how a pension’s funds are invested are two separate issues that should be considered independently. In practice, the accounting standard being used sets up a false equivalence between pension payments, which are extremely likely to be made, and the much less certain outcome of a risky investment portfolio.”

Oh, the report gets better. According to the authors, “Under current pension fund investment policy, there is a wide distribution of possible future funding outcomes. The outcomes are skewed in such a way that there is a small probability of an extremely good outcome and a large probability of poor outcomes.”

The authors used the by Accumulated Benefit Obligation or “termination liability” methodology of accounting for pension promises. The state views the obligation to its workers as fully funded if the fund could deliver an annuity that would cover all retirement benefits that have already been earned. In other words, the state could view its pension liability as though all of its workers were going to quit work today, wait until the retirement age, and collect their promised benefits.

The states use a combination of the Entry Age Normal method (new service liabilities accrue as a fixed percentage of a given worker’s salary, that is, states recognize the cost of the retirement benefits accruing to a worker in a given year as a constant fraction of the worker’s salary) and a Projected Benefit Obligation method (projected future salary increases into account, but not future years of service.)

The authors used the interest rates on Treasury securities as of January 2009 to discount the projected cash flows implied by Accumulated Benefit Obligation pension promises. The states use a constant 8% rule-of-thumb discount rate.

Why is this important? “Standard financial theory suggests that financial streams of payment should be discounted at a rate that reflects their risk, and in particular their covariance with priced risks. In the case of state pension funds, the 'risk' is the level of certainty as to whether certain payments will need to be made. From this point of view, the right discount rate for Accumulated Benefit Obligation pension liabilities is not 8 percent, a rate which implicitly assumes a high covariance with the market, but rather a risk-free interest rate, like the interest rate on Treasury bills and bonds.”

Pulpsters should not that the $3,230,000,000,000 underfunding would be larger under any broader accounting measure than the more conservative Accumulated Debt Obligation methodology.

Years of State Tax Revenues Needed

At least North Carolina isn’t Ohio. Ohio would need to devote 8.75 years of tax revenue to pension funding simply to catch up on already-made promises. Of course, Ohio would need additional revenue to fund new benefits that employees earned over that time period, and would need further tax revenue to run state programs other than its retirement systems. North Carolina would only have to come up with 2.56 years of state tax revenue.

Pension Gambling On Moneys Borrowed From Government Workers?

One of the most interesting observations from a public policy standpoint is the equivalence of state pension equity investing with gambling. According to the authors: “Equity investing inside of public pension funds can be viewed as equivalent to matching liabilities with bonds, and making side bets which entail borrowing money from the states’ employees and investing in the stock market. Consider an employee entitled to a one-time, certain $10,000 benefit in 10 years, and suppose the 10-year Treasury is yielding 3.6 percent. That obligation could be matched by purchasing a 10-year Treasury for about $7,000 today ($10,000/1.03610), so the present value of the pension obligation must be $7,000. If the state invests in something else, such as equities, then it’s as if the state matched its pension liability by buying a 10-year Treasury for $7,000, and bought $7,000 in equities as a speculative investment that it funded by shorting the 10-year Treasury. There is no speculative element in funding the obligation to the employee with Treasuries. Any correct accounting of assets and liabilities will show no change in net obligations if the state moves from holding the $7,000 in Treasuries to shorting the $7,000 in Treasuries to fund their equity position.”

Let’s end with the authors’ final conclusions: “Our analysis also highlights for policymakers the perils of focusing only on average expected outcomes for invested pension fund assets. Distributions of the outcomes of state pension investments will not matter if households can systematically alter their own investment and consumption plans to offset government policy. However, given the lack of transparency of the state pension fund system,households are currently unlikely to understand what such an offset would entail. Furthermore, households face risks that are unspanned by securities markets, such as the possibility that their neighbors will move away and leave them to pay the taxes that will be levied to cover the shortfall. The lack of transparency of state pension fund systems makes it more difficult for taxpayers to optimize their own portfolios and consumption choices over the life cycle.”

The beautiful thing about an annuity is that you can move away from the state paying the annuity, thus draining the state of capital.

When you read the local news in a Progressive “news” outlet, you must understand the missing context and the filters being applied. An excellent example of the Progressive propaganda being thrust upon Chapelboro residents can be found in the lead story of the 6 October 2010 Chapel Hill News (CHN).

Ostensibly, the lead story is the remarkable financial turnaround for the Progressively-favored Weaver Street Market (WSM) supermarket chain.

In reality, the story is about crushing any chance of Mr. Geoff Gilson, a “rogue” candidate for the WSM board of directors, from getting elected to that board.

Apply the Sugar Glazing

The CHN story glowingly reports that WSM recorded a $473,272 net profit for FY2010 (ending in June). That compares to a $1,200,000 loss in fiscal 2009. It also reports a story first highlighted here in the Pulp over a year ago. WSM needed substantial loans from other sources (the National Cooperative Grocers Association's Development Cooperative and at least eight other supermarket coops) in order to avoid insolvency. (Notice how the CHN didn’t report this fact in real time, but waited for rosier times to tell the owner-consumers of WSM what was happening to their investment.)

As dutifully relayed by the CHN, according to General Manager Ruffin Slater, WSM was just going through a rough spot. The new Hillsborough store “combined with the economic downturn and competition from Trader Joe's, resulted in a decline in sales, leaving Weaver Street with an annual debt payment of over $1 million and long-term liabilities of over $10 million, the NCGA reported earlier this year.”

Really, people eat that much less in a recession?

According to Mr. Slater, ”In five years we will have paid back most of our debt. You can see that last [fiscal] year we made about $500,000 profit. We expect to be able to make a profit every year from now on. What happened in 2009 is that we just lost all that money and it was clear to everybody that the most important thing to do was to protect the financial stability of the co-op.”

The CHN reported the “replacement” of immediate purchase discounts with annual “patronage dividends” in June 2009 as being one of the ways WSM regained its financial health. Only catch is the WSM upper management decides if there’s enough money to pay a dividend.

Sounds more like a corporation than a cooperative, doesn’t it? At least one person thinks so.

Diss the Dissident

It’s not until you get over halfway through the article that the real story emerges from the dark corners. Mr. Gilson, a lawyer by training and now a WSM “owner-employee” working the WSM hot bar, is campaigning to get elected to the WSM board. That candidacy spells trouble for the WSM bigwigs, in general, and Mr. Slater, in particular.

While Mr. Slater says the WSM board has been “fully transparent”, Mr. Gilson retorts, ”The WSM corporate office has been less than transparent with full financials. We constantly are presented with the Reader's Digest, summary form. Pie charts with no figures. Percentages with no numbers”.

By hailing that “all's well” with WSM, the CHN can neutralize the splash Mr. Gilson is trying to make among WSM owner-consumers. “Oh, Mr. Gilson is exaggerating the problem. Everything is all right now.” There's nothing like providing the fodder for a whispering campaign to stop a dissident in their tracks in Chapelboro. It's just fortuitous that this CHN article comes out as WSM owners get ready to vote on whether or not Mr. Gilson becomes a board member.

Pulpsters should take particular note that the CHN cites this Gilson quote from Mr. Gilson’s blog, but fails to tell its readers where to go to find his blog. The Pulp is more obliging, here’s where you can find Mr. Gilson’s blog.

The CHN also fails to explain why the official WSM 2010 financial report has long biographical entries about three 2010 board of directors’ candidates, but is missing Mr. Gilson. Imagine that.

The Gilson Difference

Here is what Mr. Gilson says are his reason for running for the board position.
“If you elect me, I will work consensually with the Board to:

a) Erase Weaver Street’s remaining long-term debt of some $8 million. Not by asking workers to work harder – we’re already working as hard as we can. But by changing the gameplan that says that we need to maintain a crippling debt burden of $8 million.

Once the need for the debt is gone, we workers will no longer have to struggle to repay the debt nor to find the $1 million a year to pay the bank interest on that debt.

That money will be available instead to invest in more staff and better resources. So that we can improve work conditions, food production, customer service and sales.

And so that the co-op can fully restore to us workers our hours, our proper pay levels and our dividends – along with the fulfilling work experience promised to us in our co-op’s Mission Statement.

b) Strengthen the monitoring powers of the Board of Directors, so that it is better able to persuade the corporate office to be more responsive to owners, customers and workers.

c) Reform the communication and democratic structures within our co-op, so that we get more accurate information, and so that decision-making is truly collaborative, and not merely imposed from above.”

You can easily see why the CHN didn’t want to reference Mr. Gilson’s blog. It’s loaded with juicy morsels begging for explanation.

According to Mr. Gilson, in August 2010 WSM employees were told there was a “15% increase in Weaver Street/Panzanella sales = $3.75million. We were told (in a roundabout way) by some corporate office staffers (half of whom I did not know - talk about 'them' and 'us') that we need $1 million extra next year to be able to start paying dividends again.

Of course (and I know you've worked this out all by yourself), if we didn't have to pay just under $1 million a year in interest on our long-term debt (of $8 million), then we wouldn't have to work harder to find that $1 million for the dividend, in the first place.”

Remember that claim of a 15% increase in sales revenues. The Pulp will provide a more realistic financial analysis of WSM operations at the end of this article.

The Missing Blood, Sweat, and Tears

The CHN also didn’t report as to exactly how much more the owner-workers at WSM had to work to improve the financials.

Again in Mr. Gilson’s words. “MAYBE?!? The corporate office wants me to sweat 15% more blood next year, and the Finance Manager can't even tell me why? Fine, I responded. Every time you poke me in the back to work harder, I'm just going to poke you right back and say, only when you can tell me why. That's the point at which my Department Manager (Darth Hotbar) gave me the death stare.

However, that wasn't the point at which I lost my temper. That was when one of the Wal-M…I'm sorry…Weaver Street corporate officials said,”We have pay raises for you.” I do believe I responded, somewhat icily, “No you don't. We made that money. Not you.”

The rest of the meeting was one of the slickest and most frightening marketing presentations I've ever seen in a co-operative. It was all about how Weaver Street is going to make more and more and more money. I'm sorry. I meant, how we workers are going to make more and more and more money (for the corporate office, mind you; not for us). And not one meaningful scintilla about why. Nor whether any of the stakeholders (especially workers) had been consulted, or would be.

So much for the declaration at the front of our Employee Handbook which states that, in accordance with co-op policy, workers must be allowed to participate in making the decisions that affect their workplace.

In three of the ten minutes allowed for comment (that is what debate for workers in our worker/consumer co-op has boiled down to – ten minutes, once a year, to respond to a marketing plan already set in stone behind a combination lock in the corporate office; but I digress).”

The Threat Of Full Transparency

Now we come to the real reason for the CHN puff piece. Read what Mr. Gilson will do if elected to the board of directors.

“1) Reviewing the co-op's finances, top to bottom, especially expenditure in the corporate office, this new marketing plan and our long-term debt, with a view to making recommendations to place our co-op on a genuinely sustainable path, ensuring the new marketing plan is not a waste of time and money, and erasing the debt in a way that no longer impacts workers so harshly.

2) Reviewing worker conditions (taking evidence, where necessary, in the strictest confidence and anonymously), including the workplace, pay and benefits, and elections, with a view to making recommendations to ensure that those conditions are once again in compliance with co-op policy that states that the work experience will be fulfilling, non-exploitative, dignified, respectful and not unnecessarily intrusive.

And any recommendations that flow from those two committees will be fully discussed with stakeholders BEFORE being implemented.”

Oh, that doesn’t sound like fun for Mr. Slater and his bigwigs.

The “Fully Transparent” Financials

The following table is the WSM Profit & Loss Statement comparing FY 2010 to FY 2009.

Remember the 15% increase in sales statement. Gee, the P&L only shows a 1.3% increase in sales. Let’s look closer at this statement. Notice how the administrative costs were cut by ~30% (a ~$378,000 savings). How is this possible?

Here’s a table showing the history of administrative costs at WSM.

Even the 3.4% operating level of 2010 is almost five times more than the levels back in 2006 or 2007. Imagine Mr. Gilson sitting on the WSM board and asking for the details behind these figures and the rapid rise in the administrative costs.

Now let’s focus on the governance costs. Here’s a table showing the history of governance costs at WSM.

Again, notice how the governance costs were cut substantially, by ~50% (a ~$60,000 savings). How is this possible? Even the 0.2% operating level of 2010 is almost twice the levels back in 2006 or 2007. It's more fodder for Mr. Gilson’s potential inquiry.

Pulpsters should note that the elimination of member sales discounts (the reason for joining a cooperative) and the changes in administrative and governance costs more than equals the loss in 2009.

Fluctuating Asset Base

The big financial story just may be the fluctuating fixed asset base on the WSM balance sheet. Back in 2006 and 2007, the respective fixed asset bases (net depreciation) were $3,450,620 and $3,215,186. WSM hadn’t built its new food house, administrative offices, and market space in Hillsborough.

Then came 2008. The fixed asset base jumped to $12,009,845. To pay for these assets, WSM long term debt rose from $544,134 in 2007 to $7,982,633 in 2008.

The fixed asset base climbed even more in 2009, to $12,204,284. That’s a ~53% increase. Yet, the long term debt only climbed to $8,449,122. A ~6% increase in debt for a ~53% increase in fixed assets, how did that happen?

With WSM selling real estate in 2010, the fixed asset base shrank to $10,589,988, a ~13% decrease. Yet, the long term debt only shrank to $7,077,329. A ~16% decrease in debt for a ~13% decrease in fixed assets, how did that happen?

Here’s the table.

The Gilson Analysis

Let’s return one last time to Mr. Gilson. In his opinion, “In 2008, we made an operating loss of about $400,000 – which the corporate office and Board claimed, dishonestly, was a once-off payment for extra personnel in building the Food House. In fact, it was occasioned by the fact that the FH budget was allowed to run over drastically, the borrowing ran out, and management simply dipped into our dividend to make up the difference. And then lied about it.

But this was not enough. Already we were faced with the consequences of our huge borrowing, and, unknown to any of us until the Co-operative Grocer revealed it earlier this year, our General Manager secretly arranged with the National Co-operative Grocers’ Association to borrow $1.3 million to bail out our co-op, and avoid bankruptcy.

In 2009, in order to find the money to pay the $1 million in bank interest, we took away all of the consumer-owner discounts. This was another of the many false dawns much trumpeted by the corporate office.

Yet, clearly it did not work, since we are now told we had to go out later that same year (2009), and borrow yet more hundreds of thousands of dollars in short-term loans, just to pay off that year’s $1 million bank interest charge.

Which brings us to this year (2010). I know I’m not the only worker scratching his head and wondering why our General Manager used as his rationale for extending opening hours the argument that we needed this measure to help us to break even. Um. We thought this was the argument used when taking away the consumer-owner discounts last year? [Confused yet?]

Many of us warned at the time that such a short-sighted proposal might actually lose us more sales than gain us savings from not having to pay those discounts. Is this, in fact, what happened? Did taking away the discounts actually lose us money?

Well. We don’t know. We’ll never know. Because the General Manager and the corporate office refuse to meet us face-to-face to explain, and to allow us to question them. Instead, we are limited to receiving the occasional Reader’s Digest version of the financial rationale for the decisions being made.”

If Only…

In most of North Carolina, local media would lick their lips at the thought of Mr. Gilson being elected to the WSM board of directors. Not so here in Progressive Orange County. If only WSM was run by conservative Republicans, then we would have a story to read.

If a media story is page one, above-the-fold introducing a development project, then shouldn’t the demise also be page one, above-the-fold? Not so in Progressive Chapelboro, where the boosterism never stops and all the glass is rose-colored.

In early 2007, local media announced the arrival of the UNC Innovation Center (IC) with great fanfare. It was to be the first construction on the Carolina North campus off MLK/ Blvd.Airport Drive. It was a feature story in the Triangle Business Journal.

By 11 September 2007, the News and Observer was floating stories that the town of Chapel Hill was “dragging its heels” on the IC plans.

By 28 November 2007, UNC had a public showing of the IC plans.

By 24 July 2008, UNC trustees rejected the IC design as not being “exciting enough”.

By 23 November 2008, the IC developer, Alexandria Real Estate, had put the IC plans on hold.

By 29 January 2009, the town of Chapel Hill approved a special use permit for the IC. That’s right. The approval came after the suspension was announced.

By 3 October 2010, the media announced what the smart money already knew, the IC was dead on arrival, except it never arrived.

Did the local media give the IC death the same prominence as news as the IC conception. No. It was buried inside, below-the-fold on the Chapel Hill News.

Did the local media ask UNC for an accounting? How much UNC time and money was spent on the ill-fated IC? No, no questions were asked.

Did the local media ask the town of Chapel Hill for an accounting? How much town staff time and money was spent on the ill-fated IC after the project was suspended? No, no questions were asked.

Of course, the media also fail to question Carolina North executive director Mr. Jack Evans on the astonishing numbers put forward for the new law school at Carolina North.

UNC wants to spend $95,000,000 for a 275,000 square foot palace. That’s over $345.00 per square foot. That’s $135,000 per law student. No that's not newsworthy enough to ask questions, right?

Silence is golden.