Hawaii Taxing Internet Commerce

Tax or Cut?

The Hawaii state legislature is considering taxing internet commerce. This is just another example of state politicians addressing the wrong end of the problem.  In the private sector, management and labor would have to consider a combination of factors to deal with hard times. They might consider layoffs, reduction in hours, pay cuts, termination of matching 401K contributions, termination of defined benefit pension plans and reduction or elimination of health care benefits.

Your government looks at things a bit differently. They look at the other side of the equation and desperately search for ways to raise revenue through taxes and fees. Virtually every economist says raising taxes in an economic downturn is exactly what not to do. So, why is your legislature so intent on putting more of a burden on the residents of Hawaii?

To answer that question we must look at labor organizations and the conditions under which their power is gained or lost. A union’s power is directly related to the competitive environment of the employer.  A monopoly or oligopoly  conveys much more power to the unions than they would enjoy in a highly competitive market. The airline industry is a good example. Prior to 1978, when airlines were regulated, the unions were powerful. After deregulation, under the unrestricted entry of new carriers and unbridled competition, unions were forced into a concessionary mode that continues today.

Your government is a monopoly. Therefore, the public employee unions have enormous power. In Hawaii that power is further amplified. This expanded power comes from four factors:

First, According to FactCheck.org, Hawaii is tied with West Virginia as having the  lowest voter turnout in the nation. Only half of our eligible voters take to the polls.

Second: Government workers  in Hawaii constitute a significant percentage of the total work force. Hawaii ranks near the top in percentage of workers who work for the government.

Third: A higher percentage of those workers actually vote when compared to the general population.

Fourth: These workers tend to vote in a block due to union influence.

The result is that the public employees essentially put the government officials in office. Thus, the politicians are loath to adopt any cost saving measures that they would have to defend in the next election.

State and local government employee numbers nationwide have grown 40% faster than the general population. This would indicate that the power of public employee unions will only increase.

Unionized worker’s pay and benefits come from negotiated contracts. Private sector labor contracts are negotiated in an adversarial environment. Private sector union contracts are negotiated with the financial health and competitive position of the employers as factors. Public worker unions negotiate in an atmosphere in which the parties understand that the union may chose to fire the employers (through the election process). These are really not negotiations at all. They are more like the mating dance of the cranes: lots of squawking and  posturing, but the outcome has already been determined. Pay raises, working conditions improvement and increased benefits for all. Since the government (a monopoly) can simply raise its prices (taxes and fees) to cover the cost of the contract, it is less of a consideration during negotiations.

The Bureau of Labor Statistics data support the disparity between public and private sector workers. Nationwide, state and local employees receive 32% higher wages, 60% higher benefits and more job security than private sector workers. In Hawaii the disparity is probably much greater due to its high percentage of visitor industry employment. State & local government employees have superior medical, prescription and dental insurance benefits, at lower premium costs to themselves, than nearly all persons in the private sector. Retirement plans for public workers are far superior to those in the private sector. And the gap is rapidly growing as companies dump their defined benefit plans in favor of 401k and similar equity plans.

For example, medical care benefits were available to 71 percent of private industry workers, compared with 87 percent among government workers.  About half of private industry workers participated in a plan as compared to three-quarters of government workers. In Hawaii the number is closer to 100%

Sixty-one percent of private industry employees had access to paid retirement benefits, compared with 89 percent of State and local government employees.  Eighty-six percent of government employees participated in a retirement plan, significantly greater than the approximately half of private industry workers. In Hawaii the number is closer to 100%

Paid holidays, personal leave, and vacation are all much more generous for state and county employees than their public public sector counterparts.  Since 1995 property taxes nationwide have jumped 48%, that’s 30% higher than inflation.

When union officials take a non-concessionary stand they are just doing their jobs. When a politicians caves in to public union pressure, he or she is not doing their job and they are not representing the citizens of Hawaii.

Should private sector workers who are currently suffering the effects of the economic downturn in the form of pay cuts, layoffs, loss of  pensions and health care, pay more taxes and fees to support higher wages, benefits and job security for public employees? For the most part, your politicians say yes.

Bankruptcy Effects on Equity Retirement Plans

The following was sent to the Obama administration’s “Strong Middle Class” web site. No response was received. The actual airline discussed in the message as been renamed XYZ to protect the “innocent:.

Subject: Equity Annuity Plans in chapters 11 and 7. Employees and retirees devastated by bankruptcy laws and lack of enforcement by the Department of Labor and ERISA.

Current bankruptcy law permits employee funded equity annuity plans (EAPs) to be terminated and annuity contracts be broken.  These funds belong to the employee/retiree and are not supposed to be a part of the corporate estate.  Yet the courts allow the raiding of these plans to cover expenses.  The trustee is permitted to charge exorbitant fees for his/her services while plan participants suffer the loss of their income.

Employees that have been retired for many years and have life annuity contracts have had those contracts abrogated.  The payments were promised for life. With plan termination they are forced to cash out and purchase a new annuity.  The cash value will likely be very low and, under current market conditions. could be nearly zero. New actuarial tables will further reduce their income.  Most retirees will  lose much of their monthly income.

The XYZ Airlines case is an excellent example.  I would be happy to provide related documentation.

XYZ’s defined benefit plans had  been transferred to the PBGC. Many retirees saw drastic cuts in the distributions due to  PBGC limits. Now, the defined contribution plan, which contains only employee money, and is supposed to  be totally separate from company assets, is under attack.

The switch from defined benefit plans to equity plans such as 401ks has exacerbated the situation and has put many retirees welfare at risk of financial ruin.

Below are pertinent points from the XYZ Airlines case in Hawaii:

1. Meetings were held behind closed doors concerning the employees defined contribution retirement plans.  There was no communications to plan members during the process. The financial future of employees and retirees was determined without  their knowledge or participation. Zero transparency.

2. The trustee refused to provide transcripts or minutes of the meetings to plan members.

3. The assets of the plan were supposed to be protected and not part of the company estate, yet the court appointed  “Retirement Board” asked the bankruptcy judge for permission to raid the assets to cover expenses. The request was approved.

4. Former XYZ management employees were appointed as members  of the Retirement Board at outrageous salaries and their names were not disclosed to the plan members.

5. The latest plan statement available to plan members was dated 1994, which violates an ERISA  requirement.

6. The “Board” has elected to terminate the plan instead of continuing it under a new sponsor.

Termination will cause extreme financial hardship, particularly  to older retirees who have elected an  annuity. Their guaranteed indexed payments, which contractually were supposed to be for life will be  abrogated and reduced to a fraction. These annuities are a contract between the financial institution  and the retiree. Arbitrarily distributing the balances to older retirees will drastically reduce their  income as they attempt to purchase a new annuity.

7. ERISA exists to protect employee retirement benefits. Plan participants have no knowledge of any  activity in this area, again due to lack of communication. The employees have a right to know the full complement  of board members and their affiliation.

8. The department of labor and ERISA have been unresponsive to written requests for information.

9. Current satus. The IRS will be making a determination as to the qualification of the plan prior to its termination.

The economic condition of the middle class cannot be improved without an overhaul of the bankruptcy code. Employees with twenty,  thirty or more years of service need protection from actions which abrogate financial agreements, particularly those dealing with their own funds such as annuities.

Communicating With Government

We are in the information age. We have the web,  emails, blogs, Twitter, Facebook and many other communications channels unheard of a short time ago. Is it now easier or more difficult to get a response from your government and elected officials?

It would appear that the overwhelming volume of electronic communications from constituents has reduced the response rate. The volume of mailed letters is probably not as great, but the so called “security” system now chokes off letters too. It is difficult to assess whether faxing a document is effective.

In the past year I have sent letters, emails and faxes to my state and federal officials on some very important issues. These documents were carefully crafted, factual and contained no vitriol. Out of about a dozen documents sent,  I received one form letter from Congressman Abercrombie, another form letter from Hawaii Governor Lingle and zero response from Senators Akaka, and Inouye. There was also no response from Congresswoman Hirono.

I have also communicated with the U.S Department of Labor in Washington, D.C and the District Enforcement Office in California regarding mishandling of corporate pension plans. Again, no response.

In the old days I received a response to every single letter to an elected official. From my personal perspective it would seem that cries in the wilderness go unheard.