Doubling Down In Kansas

Are you familiar with the expression: if you find yourself in a hole, stop digging? The humorist Will Rogers popularized the witticism during the Great Depression, when he joked about government economic policies that appeared to be perversely designed to take bad situations and make them far worse.

Although Rogers hailed from Oklahoma, that advice could easily apply to the current state government of Kansas. Just last month, the fiscal engineers of the Sunflower State’s government budget made a decision that may come back to haunt them.

The tale of Kansas’ fiscal woes began two years ago, when newly elected Governor Sam Brownback’s massive tax reductions first took effect. He promised citizens that the tax cuts would serve as a “shot of adrenaline” that would jump-start the state’s economic prosperity.

But the growth spurt never emerged, and the tax reductions on existing income caused an immense government fiscal deficit. It also worsened the state’s unfunded pension liability, which soared to $9.8 billion.

Last month, in an attempt to reduce this $9.8 billion shortfall, the state decided to borrow $1.5 billion and contribute it to the pension plan. Budget Director Shawn Sullivan claimed that the transaction would prove to be beneficial because the fund’s “investment earnings would rise more than enough to offset annual bond payments.”

Huh? What did he mean by that? Well, Kansas officials are gambling that their investment acumen will generate sufficient total profits to pay off the bonds and still contribute significant surplus funds for the plan.

Is there anything wrong with such a gamble? In essence, the strategy is analogous to taking out a fixed mortgage on one’s house and investing the proceeds in the capital markets. On the one hand, there is always a chance that the capital markets will soar and generate huge profits. But on the other hand, there is also a chance that the markets will collapse, leaving the investor with no options for repaying the debt. And that scenario would result in a financial catastrophe.

Is it possible that Kansas’ investment strategists will actually make brilliant decisions that reduce the pension shortfall? Well, sure … that’s indeed possible. In fact, anything is possible. But if these investment strategists had made brilliant choices in the past, they probably would not have produced such a deep pension shortfall in the first place.

Nevertheless, the Kansan state government appears to have doubled down on its recent debt-plagued fiscal decisions by voluntarily plunging itself $1.5 billion deeper into debt. Few individuals — in fact, even few gamblers — are likely to bet on the state returning to fiscal health any time soon.

Retired Postal Workers vs. Homer J. Simpson

Four weeks ago, the current and future retirees of the United States Postal Service received troubling news. For the first time in its history, the Service did not possess the financial resources to make a required $5.5 billion payment into its retiree health care benefits fund. Given the billions of dollars of losses that are incurred by the Service each year, many commentators asserted that Post Office employees and retirees have reason to be concerned about the security of their future benefits.

But why is the Post Office incurring such significant losses? According to its spokespersons, its dismal financial condition is attributable to a variety of Congressional mandates. Unlike Fedex, UPS, and its other private sector competitors, the Post Office is required by law to deliver first class mail to every address in the United States six days a week. It is also required to maintain a consumer branch presence in every mail district in the nation.

Last week, though, the public learned of another reason for the losses that are being reported by the Service. Some of those losses, apparently, are directly attributable to the character of Homer J. Simpson and his animated family!

A Commemorative Flop

The Simpsons connection can be attributed to the Post Office’s 2009 decision to memorialize the television show with a commemorative series of five stamps. In order to recognize the show’s twentieth anniversary on the Fox television network, each of the show’s five major characters — Homer, Marge, Bart, Lisa, and baby Maggie — was featured on a 44 cent stamp.

The Service decided to print a billion stamps to meet the estimated demand of Simpsons fans around the world. But fewer than one third of the printed stamps were purchased by the public, and when the price of a first class letter increased by a single penny to 45 cents, the stamps became obsolete for letter-mailing purposes as well.

Ironically, two years earlier in 2007, the Post Office began distributing “Forever Stamps” that never become obsolete; under their terms of purchase, they can be utilized to mail any first class letter, regardless of the price that is in place at the time of mailing. But because the Simpsons stamps were sold with a fixed financial value of 44 cents, the Service must now write off its $1.2 million cost of printing the unwanted and unsold merchandise.

A Speculative Strategy

In comparison to the $5.5 billion missed health care retiree payment, a write-off of $1.2 million might appear to be a relative drop in the bucket. Nevertheless, the Simpsons stamp “episode” raises troubling questions about the speculative nature of the use of commemorative stamp printings by the Post Office to generate operating revenue.

For instance, do Post Office professionals possess the requisite consumer marketing expertise to predict public demand for such pop culture icons in an accurate manner? And if not, should the Service authorize such huge printing orders when demand for commemorative stamps is so uncertain in nature?

To what extent should the Post Office base its revenue generation strategy on such esoteric products as commemorative Simpsons stamps? Should it, perhaps, focus instead on developing new products and services that can be sold more broadly across the entire spectrum of the American public?

In addition, postage stamps have always been perceived around the world as tiny billboards of images that promote national societies and cultures. Is it wise for the U.S. Postal Service to rely on the images of Homer Simpson and his family members to promote the national image of the United States of America?

A Matter Of Perspective

Interestingly, the issue of the $5.5 billion missed retiree health care funding payment raises important questions about the operational policies of the Service as well. Ironically, at the present time, the retiree benefit programs of the Post Office are significantly more fully funded than the programs of most other organizations.

The pension plan of the Post Office, for instance, is more than 100% funded at a time when the mammoth California Public Employees’ Retirement System (CalPERS) and other entities are struggling to attain 80% levels of funding. And most organizations do not fund retiree health care programs at all, preferring to adopt “pay as you go” strategies that expose retirees to the possibility of benefit reductions in the future.

American firms were first required to accrue health care retirement benefit liabilities with the issuance of the Statement of Financial Accounting Standards # 106 in 1990. However, there have never been any legal requirements that firms establish funding mechanisms for health care programs in the same manner as they are required to do for pension programs.

Despite the recent missed $5.5 billion payment, the Post Office maintains a fund balance of over $40 billion to finance future retiree health care expenses. So should current and future Service retirees be worried about the security of their future benefits? The answer to this question, apparently, is a matter of perspective.