"The Deep Hole"

Update on post from February 18, 2010:


Pennsylvania Pensions: From Surplus To A Deep Hole

http://www.npr.org/templates/story/story.php?storyId=124825100&f=1002&sc=igg2

Post from 2/18/2010:

The following post is a comment on this story from NPR:

Study: States Must Fill $1 Trillion Pension Gap

Unless states like Pennsylvania pass legislation to increase retirement age, reduce retirement benefits, or significantly increase employee contributions, higher taxes or significant cuts in other government programs are the only reasonable options to the pension gap problem. Assuming state lawmakers who, most if not all, have pensions through the state's defined benefit retirement system are unlikely to pass legislation that will lower their retirement benefits to account for their failure to properly fund the system in the first place (or at least incur some of the loss in investment returns due to the recession -like almost everyone else), dramatic cuts in education, healthcare, etc. are the only likely options. Since education is one of the largest state expenditures, it is unfortunate that the likely outcome is that the current generation of students will suffer at the expense of state employees' retirement. Arguably, future tuition and fee hikes will not go to improving educational outcomes but will go to current and future retirees to offset what they lost in investment returns during the recession. Other public and private employees in defined "contribution" plans have also suffered significantly from the recent recession and will bear the full effect in their retirement years but current law requires that we make those in the state's defined benefit system whole in their retirement. I'm sure many law makers and university employees in the state retirement system haven't thought through the unintended consequences yet.

Regrettably, this is just one problem in a long list. Decades of short term thinking aimed more at maximizing votes for the next election than at long term improvements in the standard of living are strangling our economy and will very likely leave future generations progressively worse off. Don’t blame the politicians; they are playing the game we asked them to play. We will only vote for politicians who can bring home the spending and lower our taxes without thinking about the consequences on future generations.

Two interesting articles on education

The New Poor, In Hard Times, Lured Into Trade School and Debt
http://www.nytimes.com/2010/03/14/business/14schools.html?partner=rss&emc=rss


Rising College Costs: A Federal Role?
http://roomfordebate.blogs.nytimes.com/2010/02/03/rising-college-costs-a-federal-role/

Energy Tax Ads Prey on the "Economically" Challenged

Have you seen these ads:

http://www.api.org/aboutapi/ads/#TelevisionAds



Do you think the people in the American Petroleum Institute's (API) ads about the Obama administration's repeal of tax subsidies for oil and natural gas companies have any idea what the issue is really about?  You've probably seen these ads and may have even agreed with the sentiments of the "average American taxpayer" being interviewed.

I suggest reading this article from the Houston Chronicle, "Key Energy Players Pump Up the Volume."

I understand that the API is a lobby group for Exxon Mobil, Chevron, BP, Marathon Oil, Shell, Sunoco, as well as others, and that they are going to spin the argument in favor of their clients, but the amount of spin in this case is outrageous.

First, to say that the Administration's proposals will increase taxes is misleading.  Congress passed the Energy Policy Act in 2005.  The act created corporate tax deductions for the oil and natural gas industries for things like drilling expenses, paying foreign taxes, cost of inputs to recover more oil and gas out of wells, lost value of property after oil and gas reserves are removed, among others.  These tax deductions are otherwise known as subsidies that lower the costs of production.  The Obama proposal plans to eliminate these tax deductions, essentially returning their corporate profit taxes back to their pre-2005 rates.  Now if you are Exxon Mobile, a company that has reported the largest quarterly net income on the planet, the elimination of corporate profit tax deductions may seem like a tax increase especially when compared to last year, or 2008.   But the Administration is really talking about removing tax deductions, deductions that were difficulty to justify in the first place, and requiring them to pay taxes like they did prior to this act.

Second, the API claims that "raising taxes" on the oil and gas industry will cost America jobs.  It may relative to last year, but not on net.  The statement has no context unless you talk about the potential jobs lost in years 2005-2010 that resulted from other spending cuts or other tax increases necessary to offset their tax deduction.  Actually, it is more likely that the government just borrowed the money they gave to the oil and gas industry from 2005-2010.  Does it make you feel any better that we pushed the cost of their tax deductions into the future, with interest? Also, you cannot just talk about jobs lost in oil and gas without talking about job increases in nuclear power which has been earmarked for the taxes collected from oil and natural gas industry.  And what about alternative energy markets?  These markets have been at a competitive disadvantage relative to oil and gas energy as a result of the tax subsidies.  Any microeconomics student knows that when the price goes up for one good, the demand for its substitute increases.  Increased demand for alternative energy means jobs and business opportunities.

Lastly, the subsidies to oil and gas keep prices lower and some think that's great for consumers.  But this comes at the expense of the environment and our national security.  I thought most of us were on board with the idea that we wanted to get off our reliance on oil?  The tax subsidies keep prices artificially low, adding to our reliance and hurting the opportunities for products and businesses who use alternatives. Also keep in mind that the artificially lower oil and gas prices come at the expense on other tax increases, reduced government spending, or more national debt, all of which translates into a higher price we all share.  Lastly, keep in mind that those lower oil and gas prices are really helpful to the big industrial users of energy, more than residential users, and that we pay a higher price because the tax subsidies are paid with our tax dollars as individuals, not corporations, provide the bulk of government revenue.

I wonder if the people in the ads would reconsider if they just thought about the economics.

The Business of Bears

by Matt Malick

Over the last two years, the press has obsessed over stories about and interviews with the experts that “predicted” the financial crisis.  In most cases, “predicted” is a relative term.  After all, many of these forecasters were anticipating a financial crisis for five, ten or even twenty years.  The analogy that “a stopped clock is right twice a day” is apropos. 

Presently, it is interesting that many of these same commentators have not changed their views.  They are now predicting a double-dip recession, a debt crisis, persistently high unemployment, a governmental breakdown, and unsustainable national debts and deficits.

Because markets and economies generally move in cycles of boom and bust, it would seem likely that our economy will recover, just as it has historically done over and over again.  More importantly, the majority of the economic evidence is showing stabilization or growth, which has been the trend for more than six months. 

So, why would a cadre of analysts remain so vocally negative and bearish?  The answer: it pays.  Let us take a look at two of the most prominently negative commentators.

The Atlantic Monthly’s website in early February reported on the perks enjoyed by one of these economists.  “Nouriel Roubini . . . was christened ‘Dr. Doom’ by no less an authority than The New York Times.  The notorious nickname has helped Roubini become a global economic rock star, recently seen partying with models in St. Barts.”

When not painting the town red with fashion models, Roubini works with economic models as a Professor of Economics at New York University’s Stern School of Business, as a columnist for Forbes.com, and as the cofounder and Chairman of economic consultancy RGE Monitor. 

According to a March 30, 2009 article in the now defunct Portfolio Magazine, RGE Monitor successfully monetizes its prognostications: “Subscription prices range from $10,000, for ‘reading rights,’ to more than $100,000, which includes personal meetings and consultations with Roubini or his staff.”

So, is the persistently negative Roubini more right than wrong?  That is difficult to ascertain, but a review of his many predictions indicates to us that his record is highly spotty. 

The London Times reported on October 4, 2008, during the height of the financial crisis, that he “told a London conference that hundreds of hedge funds are poised to fail as frantic investors rush to redeem their assets and force managers into a fire sale . . . He said: ‘We've reached a situation of sheer panic.  Don't be surprised if policymakers need to close down markets for a week or two in coming days.’” 

In hindsight, neither of these predictions materialized.  Very few hedge funds failed and markets across the world remained open throughout the crisis.

Another persistent naysayer is Nassim Taleb, the author of two highly successful and critically acclaimed books, Fooled by Randomness and The Black Swan. 

The fundamental point of Taleb’s Black Swan framework is that highly improbable and unforeseen events happen more frequently than experts acknowledge and that these events have a disproportionate impact on outcomes.  Therefore, according to Taleb, predictions are nothing more than a fool’s game. 

Hypocritically, for someone who does not believe in predictions, Taleb has spent most of his career in the investment management and trading professions. 

In August of 2009, on the cable financial news network CNBC, Taleb predicted that “choking debt, continued high unemployment and a system that rewards bad behavior will hamstring an economic recovery,” according to CNBC.com. 

Recently, Taleb had an interview published in ai5000 Magazine, where he revealed a fabulous calculation about investor Warren Buffet: “George Soros has 2 million times more statistical evidence that his results are not chance than Buffett does.  Soros is vastly more robust.  I am not saying that Buffet does not have skill – I’m just saying we don’t have enough evidence to say Buffett isn’t doing it by chance.” 

Like any other successful person, Mr. Buffet has had luck on his side, but we are doubtful that Mr. Taleb can quantify such good fortune.  This made-for-media comment just happens to (randomly) correspond to the launch of the paperback edition of The Black Swan and also helps to promote Taleb’s next book, for which he has received a multi-million dollar advance.

In The Great Crash 1929, John Kenneth Galbraith astutely observes, “It requires neither courage nor prescience to predict disaster. . . Historians rejoice in crucifying the false prophet of the millennium.  They never dwell on the mistake of the man who wrongly predicted Armageddon.”

Our current view of the market and the economy happens to coincide with that of hedge fund manager Barton Biggs, who described his framework in a recent Bloomberg interview: “I am often wrong, always in doubt.”  But Mr. Biggs presently feels that “People are nervous and apprehensive . . . and if you are an optimist, as I am – that things are going to work out – that’s what provides an opportunity.”  And as a professional “go anywhere” hedge fund manager, Mr. Biggs has a significant financial incentive to be correct, not just blindly optimistic.

Oscar Wilde believed that, “The basis of optimism is sheer terror.”  While Wilde viewed the glass as half empty, Winston Churchill expressed a similar sentiment when he said, “I am an optimist – it does not seem to be much use being anything else.”

View our previous market commentaries at www.atwatermalick.com.

Our investment approach is straightforward, transparent and independent.  We invite you to work with us.

Trends Impacting Millersville University

Based on Millersville University Fact Book data from Fall 2000-Fall 2008, Millersville has increased the number of students faster than it is hiring faculty to teach (1). Student-Faculty ratios have increased, yet due to the significant increase in temporary part-time faculty, the rate of increase in “published” student-faculty ratios is small (6,7). There is a much larger increase in student-faculty ratios when one looks at the number of students relative to full-time permanent faculty and a significant increase in the likelihood that students will be taught by temporary instructors (8,9). In contrast to published statements on Millersville's website, the MU Fact Books indicate that the number of full-time permanent faculty has decreased (2,4).

In order to keep pace with increases in enrollment, the university has hired more temporary instructor rank faculty (3,4). Relatively to tenured and tenure track faculty, temporary instructor rank faculty are generally less credentialed and experienced. Although there are competent temporary instructors teaching on campus, temporary instructors have little to no incentive to invest additional time in university service, scholarship, or student advisement beyond teaching their contracted courses.

In addition, data from the Pennsylvania State System for Higher Education (PASSHE) indicate that today's students are bearing significantly more of the cost of their education than students of just a few years ago. Hence, while paying more and being taught, advised, and mentored by fewer permanent full-time faculty, students are complaining more about crowded classrooms, computer labs and facilities, more students per faculty academic advisor, and increased difficulty finding classes during registration.

Despite hiring less expensive faculty labor resources, there is no evidence of any reduction in costs passed on to students. One explanation is that the number of executive and professional staff has increased faster than enrollment (5,11). During this 8 year period, the university hired 41 additional faculty members, all of which, on net, were temporary instructor faculty (most part-time)(4). Also during this period, the university hired 39 additional executive and professional personnel.

Combine all of these trends and the outlook for Millersville University to maintain its reputation as a competitive, quality, public higher education institution is in jeopardy.

Fall 2000-Fall 2008:

1. Enrollment at MU is up 14.2% on an FTE basis.
2. Full Time Permanent Faculty are down 4%
3. Temporary Faculty are up 66%
4. 41 new faculty employees were added over this 8 year period. On net, 100% are temporary faculty and temporary employees replaced an additional 21 positions that were full time or part time permanent in Fall 2000
5. Executive and Professional staff increased 20.5%
6. Fall 2000: Student-to-Faculty ratio = 16.8 to 1; the Student-to-Exec&Prof staff ratio = 36.1 to 1
7. Fall 2008: Student-to-Faculty ratio = 18.4 to 1; the Student-to-Exec&Prof staff ratio = 34.2 to 1 (more students per faculty member while more executive and professional staff per student)
8. Fall 2000: Student-to-Full Time Permanent Faculty member ratio = 20.8; Fall 2008: Student-to-Full Time Permanent Faculty member ratio = 24.0 (15.6% increase which may be a better measure of the actual impact of increasing student/faculty ratios)
9. Fall 2000: Student-to-Temporary Faculty member ratio = 73.0; Fall 2008: Student-to-Temporary Faculty member ratio = 50.2 (31.2% decrease which translates into a significant increase in the likelihood that a student is taught by temporary faculty members).
10. In Fall 2000, there were 3 temporary faculty to every 10 tenured or tenure track faculty. In Fall 2008, there were 5 temporary faculty to every 10 tenured or tenure track faculty, an increase of 71%.
11. In Fall 2000, the percentage of executive and professional staff to tenured or tenure track faculty was 59% and in Fall 2008 it was 73.4%, a 24% in 8 years.

The statistics above are from the Millersville University Fact Books published online at www.millersville.edu/~ir/.  This site is accessible without login if you are on the university network.  If outside the university network, you will have to request login credentials from Institutional Research.  This is public information.  Most of the statistics reflect the period Fall 2000-Fall 2008.  I encourage all readers to review the data themselves and report any errors or suggest alternative interpretations.

Terms:

FTE: "full time equivalent" students measures enrollment at the university based on counting the number of full time students (30 credit hours in an academic year for undergrad and 24 hrs for graduate students). Therefore, two students, each attending the university for 15 credit hours over an academic year are counted as 1 FTE.

Full Time Permanent Faculty: 99% of these faculty are either tenured or tenure track. These faculty are eligible for promotion subject to review of their qualifications in a competitive process. These faculty are expected to engage in scholarship and university service.

Temporary Faculty: 85% of temporary faculty are part time. These faculty are are generally less likely to have a terminal degree, are generally less experienced teachers, have little or no expectation of scholarship, and are less likely to be involved in university service. Temporary faculty do not receive benefits.

Executive and Professional staff: These employees include executive management, deans, and professional employees of, for example, the Registrar, Bursar, Finance and Administration, Personnel, Human Resources, Admissions, and Financial Aid.