The Cuomo InheritanceBy Jack Kemp
In 2000 I saw a revival of a 1905 play by English playwright Harley Granville Barker called The Voysey Inheritance. The play was later revised and readapted by David Mamet into a shorter two-act version in 2005. What held my (and Mr. Mamet's) interest was a story about a family financial firm whose leadership was about to be turned over to a young son, a man of about thirty years of age. Casually, his father informed him that the firm is essentially a Ponzi scheme where old trusted clients are paid off with money from new clients, enabling the family to live a genteel life for multiple generations in a scheme worthy of Bernard Madoff -- and that none of Mr. Voysey's siblings or their mother, is aware of this juggling (the books) act which keeps them a respectable appearing English family, able to properly marry its children into polite society. After this revelation, the father dies and his son gathers family and their oldest client and tells them all, much to his shame, the true situation: the firm is broke.
After various statements of disbelief and heated arguments, the son now finds himself in a situation where he is sued. By the end of the play, he faces the very real possibility of going to prison as head of the firm being unable to return the initially invested money to its biggest clients. Forced to string people along once again, the son now attempts to borrow and scheme -- but in the service of righting the wrongs of his father and grandfather. He works to create some sound and profitable investments to mollify both his clients and the court. The resolution was, as I recall, not shown by the play's end. We just see the son's attempt to heroically redeem his company and his family's reputation. This task was his real "Voysey Inheritance."
Now we fast forward to a different type of financial enterprise taken over by a son, namely Governor Andrew Cuomo running the State of New York, just as his father did for many years before him.
In Monday's New York Post, E.J. McMahon wrote of "A Risky Budget Gimmick: Cuomo Raids Insurance Fund" in New York State.
Gov. Cuomo is cruising toward his third consecutive on-time state budget, which will no doubt be cited as further evidence that a new era of fiscal responsibility has dawned in Albany. Yet the governor hasn't turned his back on budget gimmickry.
Case in point: Cuomo's proposed withdrawal, over the next four years, of $1.75 billion from the reserves of the off-budget State Insurance Fund (SIF), which is the leading provider of workers'-comp insurance in New York.
Much as drivers have to insure their cars in case of accident, New York employers must buy workers'-comp insurance to cover on-the-job employee injuries. The nonprofit SIF, which competes with private companies, is supposed to hold premiums as low as possible -- so SIF's financial health has an important bearing on the state's overall economic competitiveness.
E.J. McMahon goes on to relate how the governor's father Mario diverted $1.3 billion from the State Insurance Fund to the State Budget, listed as a "contingent receivable -- essentially an IOU backed by no cash." This is indeed even a newer theatrical adaption than Mr. Mamet's. Perhaps we should call it "The Cuomo Inheritance," the difference being that this time taxpayers are the ones who will be obligated to make up any shortages in the Ponzi scheme.
To make a less literary reference, I recall reading a related remark in some of the best-selling economic books of Harry Browne during the 1970s. Browne, an anti-statist, used to chastise the government's economic activities by comparing them to a failed one of his own youth. Somewhat innocent of business ventures, Browne attempted to start a "pay as you go" insurance company while having little or no financial reserves. When he submitted his application to New York State's Insurance Department, he was politely but firmly told that this was totally illegal because it was financially unsound. Although Browne later would become the Libertarian Party candidate for President of the U.S. in both 1996 and 2000, he never was in the political position to have the strict (and responsible) standards of the New York State Insurance Fund waived for his personal benefit. But enough digression.
Mr. E.J. McMahon goes on to state:
If that money had remained in SIF's investment portfolio over the past 20 years, assuming even a modest 5 percent return, the fund would now be at least $2 billion better off. As things now stand, New York's workers'-comp-insurance rates are among the highest in the nation...
While the original raids were widely viewed as an outright ripoff of temporary SIF surpluses, Cuomo and his budget staff say their proposal is different. This time, they say, they're making it possible for SIF to dispense with part of its cash cushion by legally changing the way the fund must account for "second injury" health and disability claims, which arise when a workplace mishap aggravates an employee's existing physical problem.
Now, my skills in accounting are somewhat limited. But I will venture the opinion that their proposal isn't different this time. And the situation closely resembles both the machinations of young Mr. Voysey's grandfather and father -- and what Harry Browne was stopped from doing: not using sound fiscal management in an underfunded venture.
Mr. McMahon also then states that this clever New York government accounting would result in:
The employers who'd already paid into the fund to cover future claims. Their assessments went to build up the reserves that Cuomo will now shift to the state budget. Under the governor's plan, SIF policyholders apparently will pay again to cover those second-injury claims when they do materialize.
That's why Assured Research, a New Jersey-based insurance consulting firm, describes Cuomo's proposal as a "transfer of wealth" to the state government from SIF's customers.
And then there is this bit of "ancient history." After Cuomo served as HUD Secretary in the Clinton Administration years ago, the Village Voice -- not exactly a conservative publication -- said this in 2008:
Andrew Cuomo, the youngest Housing and Urban Development secretary in history, made a series of decisions between 1997 and 2001 that gave birth to the country's current crisis. He took actions that -- in combination with many other factors -- helped plunge Fannie and Freddie into the subprime markets without putting in place the means to monitor their increasingly risky investments. He turned the Federal Housing Administration mortgage program into a sweetheart lender with sky-high loan ceilings and no money down, and he legalized what a federal judge has branded "kickbacks" to brokers that have fueled the sale of overpriced and unsupportable loans. Three to four million families are now facing foreclosure, and Cuomo is one of the reasons why.
Granted, The Voice chose its words carefully, but if Andrew Cuomo could weather that political storm and become governor of New York and a potential presidential candidate, why should he believe the public will comprehend or be outraged by a complex set of accounting procedures at the State Insurance Fund? Most of those voters who understand Mr. McMahon's article in detail will have already left New York for better managed, lower taxed states like Florida, Texas, North Dakota, and North Carolina starting decades ago. In the mid-1940s, New York had 45 Congressional Representatives. Today, after the 2010 Census, New York has 29 Representatives.
And a number of younger New Yorkers, even though they never sat through a performance of The Voysey Inheritance and made an analogy, are now awaiting their upcoming graduation to flee the state and not get stuck with other more obvious aspects of "The Cuomo Inheritance."
Granted, there are major financial problems at the national level in the U.S., well documented at this website, that cannot be avoided by merely moving out of New York. But there is something to be said for living outside a place which has been called the Empire State and is now often called... the Vampire State. As for the rest of the country, citizens there would be best served by not importing "The New New York-Chicago-California" (excuse me if I left out any reader's poorly managed state) governmental accounting methods that differ from previous unsound financial schemes only in title and calendar date.
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