Where Covid, protests, and low rates collide
EDITOR'S NOTE
One of my all-time favorite Mungerisms is the "lollapalooza effect."
There are so many things you see differently once you absorb the thinking of Berkshire's Charlie Munger. And observing that most major events have multiple, simultaneous causes--not one single cause--is one of them. The financial crisis of '08-09, for instance. Was it the banks' fault? Was it the borrowers'? Was it Fannie Mae's? The answer is not any single one of them. The answer is not taking sides. It's realizing that it took all of them to make it happen. As Munger put it in his famous Harvard speech: "What you should search for in life is the combination, because the combination is likely to do you in."
And right now, the combination of low rates, Covid-19, and the George Floyd protests does not bode well for local police forces, or any other local services.
Start with low rates, the biggest underlying problem for local budgets. Low rates increase the size of current pension obligations, because money can't compound as quickly to meet future bills. You need to put $30 aside today, say, to pay $100 in the future, versus just $10 or $15 when the 10-year Treasury yield was above 5%. And that extra $15 or $20 has to come out of somewhere in the budget, or else you have to raise taxes or borrow the funds. The pension funding gap was already $4 trillion as of December. It's why The Economist warned that "Police officers, teachers and other public workers face a brutal reckoning."
And that was before coronavirus hit. The pandemic has decimated local budgets because revenue collections from sales tax and income tax have collapsed. State and local budgets will lose an estimated $270 billion through the middle of next year, per Morgan Stanley. Money from the federal government and the Federal Reserve will at best try to fill that hole, while the underlying pension funding problems remain. The pandemic has also pushed rates to record lows, with the 10-year still only yielding around 0.75%.
And when tough choices have to be made in coming years about which local services get what, the murder of George Floyd and the enormous protests over it have likely just pushed the local police further down that list. The mayor of Los Angeles just announced that $100 to $150 million of his $1.8 billion local police budget will be cut and reallocated to communities of color. (Another $100 million or so will be cut from other sources.)
Feels like a lollapalooza effect.
One final point: the only way to avoid further budget cuts, other than borrowing, is to raise taxes. And Illinois--the most extreme example of pension underfunding--shows to what extent governments will go. The state "doubled its gas tax last year...tripled a real estate transfer tax, and raised taxes on cigarettes, vaping, electricity and even dry-cleaning fluid. It made marijuana legal and taxable. It approved gambling, so casinos can be taxed, too. Tags for virtually all cars and trucks went up in January," per The New York Times.
As much ink is spilled over national politics, the real drama in coming years will play out locally--with far fewer reporters and resources to cover it.
See you at 1 p.m!
Kelly
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