Like most of the frequent posters here on Room Eight, I’m more interested in writing about the facts that aren’t generally made available and telling the stories that no one is willing to tell, rather than merely commenting on what is already being reported by others. I assume that anyone who actually reads my essays is also well read in what is being reported by the mainstream media, and is more interested in their own interpretation of those reports than mine. But today’s news has a number of items that I can’t resist calling further attention to.
The Wall Street Journal, in a front page article, reports something I have alluded to but do not have the facts to tabulate — that top executives are paying each other more and more money in pension income, copying the raid on the future perpetuated by public employee unions and state legislatures, to avoid taxes, disguise their outsized pay and, in the end, siphon off all the money from their companies. The New York Post reports a State Comptroller finding that “New York is wasting tens of millions of dollars annually by paying the medical expenses of thousands of former residents who have long since moved out of state, an explosive new audit has found.” That’s their interpretation. I’d bet they weren’t state residents to begin with. And according to Reuters, compensation experts expect Wall Street bonuses to fall by 30% to 40%. The special session of the New York State Legislature called by Governor Paterson is based on the disastrous consequences of a 20% decline. I expect 50%-plus, so with this report, we’re getting closer.
Let’s start with the executive pensions.
“At a time when scores of companies are freezing pensions for their workers, some are quietly converting their pension plans into resources to finance their executives' retirement benefits and pay,” this source reported. "In recent years, companies from Intel Corp. to CenturyTel Inc. collectively have moved hundreds of millions of dollars of obligations for executive benefits into rank-and-file pension plans. This lets companies capture tax breaks intended for pensions of regular workers and use them to pay for executives' supplemental benefits and compensation.”
By that they mean federal tax benefits. Even if they are for $millions per year, executive pensions are exempt from New York State and New York City income taxes — just like those public employees who retire in their 40s or 50s and never have to do anything for anyone else again.
“The practice has drawn scant notice. A close examination by The Wall Street Journal shows how it works and reveals that the maneuver, besides being a dubious use of tax law, risks harming regular workers. It can drain assets from pension plans and make them more likely to fail. Now, with the current bear market in stocks weakening many pension plans, this practice could put more in jeopardy.”
Of course in the public sector, deals like the 25/55 pension plan for soon-to-retire teachers doesn’t put already retired teachers at risk, because the city will have to make up for any shortfall, even if it would have to eliminate the schools to do so.
“How many is impossible to tell. Neither the Internal Revenue Service nor other agencies track this maneuver. Employers generally reveal little about it. Some benefits consultants have warned them not to, in order to forestall a backlash by regulators and lower-level workers.”
“The background: Federal law encourages employers to offer pensions by giving companies a tax deduction when they contribute cash to a pension plan, and by letting the money in the plan grow tax free. Executives, like anyone else, can participate in these plans. But their benefits can't be disproportionately large. IRS rules say pension plans must not ‘discriminate in favor of highly compensated employees.’ If a company wants to give its executives larger pensions — as most do — it must provide ‘supplemental’ executive pensions, which don't carry any tax advantages.”
Frankly, I think merely disclosing the extent of the supplemental pensions, even if they aren’t inserted into and drain the general pension plan, would cause a backlash. Massive pensions are yet another way for executives to hide excess pay, and once a pension obligation is accepted, it is a first claim on all future company income, before any profit to shareholders. Just as the pension sweeteners passed by the New York State Legislature have the first claim on all future taxes, before any public services and benefits, irrevocably and regardless of the consequences. In a sense all future profits have already been seized. And like those of public employees, these pensions the executives who sit on each others’ boards and handing each others will still be owed even if they end up in jail.
“So how can companies boost regular pension benefits for select executives while still passing the IRS's nondiscrimination tests? Benefits consultants help them figure out how…Much like other benefits-consulting firms, Watson Wyatt Worldwide Inc. markets the Qserp, or ‘qualified’ supplemental executive retirement plan, as a way to give top officers bigger benefits from the regular pension plan "without [necessarily] increasing staff benefits at all.”
All by coming up with bogus assumptions. So the executives hire the same consultants who tell them they deserve more pay to prove they are entitled to richer pensions. Does that remind you of anything? How about New York’s public employee unions hiring an actuary to prove that all the pension sweeteners passed by the state legislature will cost nothing, as found by the New York Times? Read the WSJ article and ask yourself, is our future being destroyed by two sets of thieves, or one interlocking set?
Or three, including the non-profiteers? According to the New York Post report, “the scathing – and still-secret – audit determined that nearly 30,000 people in New York City alone were improperly on the state's Medicaid rolls from November 2006 to November 2007, even while they were enrolled in the Medicaid programs of other states. Auditors from state Comptroller Thomas DiNapoli's office, using federally developed computerized record checks in 44 states, determined that nearly 13,000 of the former city residents ‘should have been investigated’ for violation of New York's Medicaid regulations.”
Or so state Comptroller Thomas DiNapoli's office said and Fred Dicker reported. I believe, based on anecdotes I have heard over the years, that these dual state Medicaid recipients were never really New York State residents at all. Were they also on Medicaid in other states before they were New York State residents? Did they pay taxes elsewhere?
Here is what I think is going on. In states with low taxes and stingy Medicaid programs, physicians find that poor patients require expensive treatments their state is unwilling to pay for or (to hide that decision off the books) pays so little for that no one will do them. So they send these patients up to New York, where they have a cup of coffee to establish residency and the Greater New York Hospital Association provides them with a $500,000 surgery while providing jobs for Local 1199, all while filling out the Medicaid paperwork. Then they return to the state where they work and pay what taxes they do.
That’s great for the state that sends them, because they can use low taxes to lure jobs out of New York State, while New York State provides their poor residents with health care. Great for the New York hospitals, because they get more revenues, which is great for the state legislature, because they get more campaign contributions. And it’s great for the federal government, because while it has to pay up to 80% of the cost of Medicaid in some states, it only pays 50% in New York. It isn’t bad for the suburbs either, because that’s where the high-paid hospital executives live, while 25% of the bill gets shifted to New York City, under New York State’s local matching share. Everybody wins, except those who don’t count.
By the way, you may recall my reporting, over and over again, that “New York State accounted for 13.1% of Medicaid Hospital beneficiaries compared with 8.6% of all Medicaid beneficiaries. Three possible explanations include New York Medicaid recipients being sicker than average, New York recipients receiving health care in hospitals that takes place in other settings in other states, and New York State recipients receiving care in hospitals for conditions that go untreated in other states. A fourth possible explanation is that, in order to maximize revenues, New York’s hospitals are providing treatment to those who are in fact from other states and countries, a great deal for everyone except New York State and City taxpayers, and one no one wants to talk about.”
So why did all those ex-state residents the Comptroller found hail from New York City? Not because they lived there; because they were treated there. And why were Medicaid services paid for in other states? Because other state’s Medicaid programs aren’t going to pay for post-operative follow up for operations they were never involved with to begin with.
“The official called the audit's findings ‘the tip of the iceberg’ of Medicaid abuse by former state residents.” Actually, real former state residents are actually the tip of the iceberg. Those who were never state residents, and seniors who moved away for lower taxes when they retired but came back when they required nursing home or other custodial care are the iceberg. New York City and New York State are the Titanic.
And this time, there is more than one iceberg. According to Reuters:
“With more than 75,000 jobs already cut and more than $400 billion of credit losses, the proverbial blood is flowing on Wall Street. And while there are still four to five months left in the year, annual bonuses representing the bulk of Wall Street pay are expected to fall by 30 to 40 percent, recruiters and compensation experts said.”
This year, personal income tax revenues are coming in higher than expected, as the rich cash in their winners to take their capital gains at the lower 15% capital gains tax rate rather than the 25% proposed by Obama. Next year, there will be no bonuses, no capital gains, and no corporate profits to tax. In fact, the losses being run up on bad investments will be offset against any future income for years, depressing tax revenue even in a recovery. And what will happen if, in a bleak economic year, the deficit soaring and the dollar collapsing, a Democratic President and Congress are forced to raise taxes without having the money to do anything for people who are actually suffering, all while bailing out Wall Street even more? Do you think the Goldman Sachs exec appointed by the Democrats might be more likely that the Goldman Sachs exec appointed by the Republican to ask for something in exchange for that bailout? Like perhaps slightly more typical pay levels, across the whole industry? I know I would.
All this brings me back to a debate I had with a Mr. Peter Rosa in another forum many years ago. I expressed dismay that while there had been a multi-year crackdown on street crime based on the “broken windows” theory, white collar crime had been allowed to spiral out of control. His response was that street crime was worse because it was localized, and could destroy a community by making people flee, while white collar crime was spread out and only nicked any one person or place a little. But as white collar crime, and stuff that is as bad though not technically illegal, has massively scaled up, it is clear that the place it was localized in is the United States, and rather than destroying a community by driving out people it will destroy an economy and many governments by driving out money. I think we’ll notice the money leaving quite soon.
Which is why everything else in the news drives me nuts, with all kinds of people posturing in an effort to dodge the blame for what is coming. The state assembly claims a $600 million per year tax increase on millionaires will solve a $6.4 billion state budget gap, a $1 billion MTA operating gap, and a $20 billlion MTA capital gap. Bloomberg and Paterson go to Washington to tell the federal government they should send money, or be blamed for the consequences. Etc. Everything that is being talked about is peanuts. A sick joke. But today, we got a glimpse of the realities.