Coyote Blog

If you have worked in a large corporation, you probably have witnessed some end of quarter or end of year sales push, to buff up the current period's results.  People who buy cars often get the advice to buy at the end of the month or year to take advantage of this motivation.  A great example of this was in the book Barbarians at the Gate, where RJR would load the channel at the end of each quarter with tons of extra inventory to buff up quarterly profits.  Of course, this just creates the incentive next year to load the channel even more to top the previous quarter's profits that were pumped up by loading.

All of this is both rational and irrational.  From a shareholder standpoint it is irrational -- the end of the reporting period is arbitrary and all the company is doing is shifting some sales a few days, rather than generating new ones.  It can even be negative for shareholders, as in the RJR case when loading caused inventory to sit on shelves for longer and get stale and thereby less appealing to customers.   For employees of the company, this can be entirely rational depending on their incentives.  While pulling sales forward to get a better grade or commission for this quarter feels good now, it can make the next quarter harder.  But who knows what will happen in the next quarter?  In a high turnover world, I could be in a new job or new company next quarter.  Anyone who has worked with corporate incentive programs knows that it is impossible to eliminate all the unintended consequences -- all one can do is minimize them.

But supporters of government superiority to private enterprise argue that this is exactly why government is superior, because it does not have these short-term focused goals.  HAH!

Politicians are among the worst at this.  It used to be they would do short term things to get elected, leaving the following election to take care of itself.  Now, they will take short term actions just to dominate the current news cycle.  Next week? That's an eternity, we have problems now.  Every single action taken over the last two years by both this and the previous administration and the current one relative to the economy have been totally short-term focused.  Let's bail everyone out.  Moral hazard?  That's the next administration's problem.  Just look at cash for clunkers, where the government paid $4000 for cars that blue-booked for $1500 all to pull September sales into August.  But they won the news cycle in August!

But the actual reason for my rant is a note I got from the Arizona Department of Revenue.  Apparently they have a program where large filers have to do a special report to pre-pay June sales tax** collections by June 29  (rather than by July 20 when they would usually be due).  As is so often the case, the law has been changed such that a special requirement for large filers had its threshold changed such that small-medium filers like myself also now have to play.  This is a sort of 13th report one must file (we file reports monthly) and the processing of it takes a lot of private time, plus the state has to hire a number of temps and pay overtime to receive this filing.

So why the special requirement?  Well, Arizona is on a July-June fiscal year, so June 29 is just about the end of their fiscal year.  And they are on a cash accounting basis (like most governments) so any cash that comes in the door, even if it is for a pre-payment of a future liability, counts as current period income.  This means that the state is spending a lot of overtime money shifting income by 21 days just to make its current period look better -- just like RJR or any other dynsfunctional private company.

But what makes this even more short term is that it only works once -- the first time.  It will make the first year this trick is applied look better, but then every year after will go back to being the same, with July losses to the prior year offset by June gains from the forthcoming year.  In fact the only way this game can work twice is if the threshold for pre-paying is lowered -- which is why I am having to fill out an extra form and pay a large bill 3 weeks in advance.  Arizona is looking for another one time gain.  And the larger the gain, the harder it will be to unwind this stupid costly process in the future.

** Footnote:  Actually we don't have a sales tax but a "transaction privilege tax."  However, that term gets me so infuriated, as it is based on the premise that private commercial transactions can be made only as a privilege granted by the government, that I refuse to use the term.  Right from the AZ DOR web site:  "the tax is on the privilege of doing business in Arizona."  Barf.  Don't let anyone tell you Arizona is a wild, libertarian, free market state.

Five years from now, one issue is going to dominate the news on the state and local level.  It's not going to be civil marriages or abortion of light rail.  It's going to be unfunded pension liabilities.  Nearly every city, county, and state government body has promised over-generous pensions to millions of their employees, and almost none of them have been putting any money aside to fund these future liabilities (unlike those evil and untrustworthy private companies, who may not always put enough aside but are at least doing something).

Most of us know that the government uses accounting methods and practices that would put private individuals in jail.  For example, Enron managers have gone to jail for accounting practices that allegedly attempted to hide liabilities and keep them off financial statements.  The government does this all the time, and routinely. 

Over the next few years, the GASB will require that governmental bodies reveal the size of these unfunded liabilities.  And you heard it here first, the numbers are going to be MASSIVE.  I am almost sure that the numbers will dwarf the shortfalls in Social Security and maybe Medicare as well.  Anyone want to be that politicians will propose to close these gaps by intelligent spending cuts rather than new taxes?  HAH!

From Cato@Liberty:

A common criticism of Social Security choice
(and defense of the Social Security status quo) is that there
are dishonest actors in private markets who would put people's private
account assets at risk of (in the words of the AFL-CIO) "corruption, waste and Enron-ization." These critics argue that society is much better off keeping Social Security in the honest, benevolent hands of Uncle Sam.

What must these critics be thinking about today's NYT above-the-fold article on teacher pension fund shenanigans in New Jersey? The lede says it all:

In 2005, New Jersey
put either $551 million, $56 million or nothing into its pension fund
for teachers. All three figures appeared in various state documents "”
though the state now says that the actual amount was zero.

Like many state and local government pension systems,
New Jersey's is woefully underfunded compared to the benefits it will
have to pay in the future. (This situation will make headlines in the
coming years, as state and local governments begin to disclose their
pension fund and retirement benefit system shortfalls in accordance
with a recent GASB
requirement.) In New Jersey's case, the shortfall is more than has been
publicly acknowledged, however: "an analysis of its records by The New
York Times shows that in many cases, New Jersey has overstated even
what it has claimed to be contributing, sometimes by hundreds of
millions of dollars."