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TriMet Shows That Public Pension Reform Is Possible
By Scott Shepard and John A. Charles, Jr.
The Oregon Legislature is currently meeting, and the conventional wisdom is that reform of Oregon's overly generous Public Employee Retirement System (PERS) is impossible. According to Governor Kate Brown, we signed contracts with public employee unions, a deal is a deal, and we should just quietly accept our fate that the massive cost of PERS will lead to layoffs and service cuts at schools and other service providers.
There is another way.
The Portland regional transit district, TriMet, is not part of PERS and has been slowly reforming its pension program since 2002. As a result, 100 percent of all new employees are now in 401(k)-style pensions that have no long-term liabilities for employers. These are referred to as "defined-contribution" (DC) pensions in which monthly payments are made by management into personal accounts owned by employees. Once those payments are made, the employer has no further financial obligations. The eventual pension payouts will be a function of the market performance of whatever investments are chosen by individual employees.
This stands in contrast to "defined benefit" (DB) programs like PERS in which employees are promised various levels of retirement payments calculated through arcane formulas that leave management mostly clueless about the level of funding obligation they've agreed to. In many cases, those liabilities turn out to be much larger than expected.
The advantages for taxpayers of moving public employees into DC pensions are now evident in the actuarial valuations done for TriMet. According to the most recent valuation, projected annual benefit payments for TriMet DB pensions will peak in 2034 at $74.6 million, and then steadily decline to $6 million in 2072. They will hit zero by the turn of the century.
This was not something that TriMet did casually. Management was forced into it because of decisions made a decade earlier that caused long-term retiree obligations to explode. TriMet Board members are appointed by the governor. In the early 1990s, Governor Barbara Roberts and TriMet General Manager Tom Walsh wanted public approval of a massive expansion of TriMet's light rail empire and the tax funding to pay for it. They feared that controversy about a union contract could endanger public support.
In their efforts to avoid strife, in 1994 they granted expensive concessions to the Amalgamated Transit Union Local 757 (the ATU) on behalf of its represented employees. Loren L. Wyss, the long-serving president of TriMet, objected and his battle with Walsh became public. In back-channel communications with Gov. Roberts, Walsh made it clear that either he or Wyss needed to go. In August 1994, Wyss met with Gov. Roberts, where he submitted his resignation.
As later explained in The Oregonian,
"... the contract just approved by Tri-Met union employees will protect all its members from additional contributions to their pensions for 10 years. It will also guarantee 3 percent minimum wage increases in the future ... every single dollar of health, welfare, dental and vision plans will be paid for by the public employer; [and] the retirement age will decline to 58 within 10 years ..."
The die was set for cost escalation. In the decade from 1994 to 2004, salaries and wages increased 72 percent; annual pension costs went up 160 percent; and the cost of health care benefits rose 116 percent. These increases plus stagnant revenues in the latter half of the period resulted in a tripling of unfunded pension liabilities, from $38 million in 1993 to $112.4 million in 2002.
Fred Hansen followed Tom Walsh as general manger, and he moved new, non-union hires into DC pensions after 2002. This was a first step towards fiscal sanity. Resistance from the ATU kept TriMet from moving its new unionized workers to DC plans for another decade, by which time a citizens' committee of Portlanders had issued a report declaring TriMet "on the brink" of disaster.
During a protracted negotiation with the union in 2012, TriMet CFO Beth deHamel testified at a binding arbitration hearing,
"TriMet's union defined benefit plan would be placed on critical status and under federal oversight if it were a private pension plan subject to ERISA." She also stated that unless something was done to shore up the plan, "TriMet could be forced to default on its pension obligations or its other financial obligations in the future."
Union leadership eventually agreed to move all new members to DC pensions by 2013, while protecting existing members from reform. As a result of this delay, the union workers' DB fund remained only 59 percent funded in 2013.
Nevertheless, the trends were now moving in the right direction. The number of active employees still accruing DB pension benefits fell from 1,580 to 1,460 from 2016 to 2017 alone.In 2017, the unionized workers' DB account reached nearly 80 percent funding, with unfunded liability falling by nearly $50 million in a single year.
Neil McFarlane was TriMet general manager during that era. He commented recently, "The shift [to DC pensions] has been a success. TriMet is paying more than the required annual contribution every year right now" because the system is closed. "We will be fully funded within the next few years: five to 10 for the union plan, fewer for the non-union."
The DC plan to which TriMet moved new workers has been recognized as one of the best in the country. It features low costs, high returns and a guaranteed employer contribution that is paid irrespective of employee matching contributions. As a DC plan it does not create open-ended, unpredictable public liabilities to be paid by generations as yet unborn.
TriMet has not fully banished the ghosts of unsustainable employee-benefit promises past. It still faces a massive and escalating unfunded liability driven by health care costs, known in accounting jargon as "other post-employment benefits," or OPEB. The health care benefits that TriMet granted away in the 1994 contract debacle have been described as "universal health care into the afterlife."
The description is only a minor exaggeration, as the plan offered TriMet's unionized employees health care without premiums and with mere $5 co-pays, and benefits that ran not only throughout retirement, but to the employees' spouses and dependents for fully 16 years after the employees' deaths. Total unfunded liability for OPEBs reached an astonishing $769 million dollars in 2016.
Compare: State Paralysis on PERS
TriMet's pension reform efforts offer a valuable guide to the Oregon legislature on how to contain and reverse the spiraling PERS disaster. The unfunded liabilities for PERS have grown from $16 billion to more than $25 billion in less than 10 years, even with the far-too-optimistic 7.2 percent assumed-savings rate (i.e., discount rate) in place. Were the rate adjusted down to its actuarially appropriate level, PERS' unfunded liability would explode to $50 billion or more at a stroke.
Even at the current recognized rate, funding status has fallen below 70 percent, even while mandatory payments to PERS by government employers have passed 26 percent of payroll.
Municipalities are laying off workers, depleting public services, and raising fees in order to fund the present level of recognized PERS unfunded liabilities. Some reduction in pension benefits will have to happen, one way or another. All parties will benefit from an orderly effort to reform benefits while there is still time.
The Way Forward
The state should follow the tracks laid by TriMet by moving its employees from DB to DC plans as soon as possible. As TriMet has demonstrated, this move will begin to stanch the fiscal wounds that have been inflicted by a generation of recklessly overgenerous pension benefit promises.
Unfortunately for everyone, PERS reform has been hamstrung for more than 20 years by a wayward state Supreme Court, which has thwarted previous attempts at thoughtful change with erroneous interpretations of the federal Contract Clause. The legislature will be obliged to make bigger changes than would have been required years ago. It will have to move all current workers, whenever they were hired, to DC plans for all work performed after the date of the effective legislation.
While this reform will be significant, it also will be deeply equitable. Right now, older workers are receiving higher benefits for each hour worked than ever will be available to younger workers. This isn't fair, and it may violate civil rights laws: Younger workers are more diverse than their older peers, which means that benefit reductions that affect only new workers have a disparate impact on women and minorities.
The reform will also pass constitutional muster. As the Oregon Supreme Court finally recognized in its Moro decision, correcting its long-held error, the legislature may change any benefits for work not yet performed, even for current employees.
The Oregon Legislature can and must follow TriMet's example. The sooner this is done, the less drastic any later steps will be. According to TriMet General Manager McFarlane, solving a pension crisis "doesn't get any easier with passing time."
John A. Charles, Jr., is president and CEO of Cascade Policy Institute, Oregon's free-market research center. Scott Shepard is a lawyer and was a visiting law professor at Willamette University during 2016. This essay is a summary of a case study of TriMet's pension reform written by Mr. Shepard for Cascade Policy Institute. The full paper is available here.
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Q & A with Mike Keiser, owner of Bandon Dunes Golf Resort
You are part owner and founder, along with Phil Friedmann, of Recycled Paper Greetings, the third largest greeting card company in America. Chicago is your home. In 1999, you built Bandon Dunes golf course. In the following 12 years you added four more courses to the resort -- Pacific Dunes, Bandon Trails, Old MacDonald and Bandon Preserve. Since then, Golf Digest magazine has consistently ranked Bandon Dunes as the number one golf resort in North America. Why did you choose Oregon?
I chose Oregon because it has 50 miles of undeveloped beautiful sand dunes on the Pacific Ocean. And there just happened to be 1,200 acres of sand dunes for sale at the exact time that I was looking. As soon as I took a look, I knew the site was as good as Royal Dornoch in the Highlands of Scotland.
You opened Bandon Dunes golf course in 1999. You were the third owner of the property to want to develop the land into a resort destination. It took five years to get the permits from the state of Oregon to allow you to build the resort. Why did it take so long, and how were you and your friend, architect Howard McKee, able to accomplish what the other previous owners failed to do in getting development permits on the southern Oregon coast?
It took my partner Howard McKee five years to get approval to build two golf courses in Bandon because the various environmental watchdog groups were forcefully against any kind of coastal development whatsoever.
In September 2015, you issued this press release about your abandonment of the project referred to as Bandon Muni (the project was predicated on a land swap agreement with the Oregon Parks Department):
Seven years ago, I hired Gil Hanse, a world renowned golf course designer to plan a destination golf course near Bandon, Oregon, to be called Bandon Links. Coos and Curry county residents would play a world class golf course for green fees as little as $10 a round. And up to 200 high school students would earn money by caddying, and they would be able to apply for college scholarships in association with the Western Golf Association, whose mission is to fund scholarships for young caddies. The project also included funding for gorse removal in the south coast area. Importantly, these programs would only be made possible by charging out of state tourists $200 to $250 a round.
The Bureau of Land Management, the federal agency with jurisdiction over a portion of the lands which would be devoted to the project, has just advised that in keeping with federal regulations the fees charged must be commensurate with other golf courses on BLM lands, and that revenues would have to be devoted to use on the property. That eliminates the funding source for subsidizing the low local rates, the scholarship program, and the off site gorse control.
Do you think that the Oregon public adequately understood what was at stake with your philanthropic vision for the Bandon Muni and the proposed land swap with the state?
What the public thinks doesn't matter to the watchdog groups. Their guiding dogma is, "Stop all development!" The public was overwhelmingly supportive, but the only reason we were approved was that the golf course was covered in non-native gorse, and we were going to remove it all. Gorse removal trumped golf course development in the eyes of the watchdog groups. Without gorse there would be no Bandon Dunes.
You remarked to the Golf Channel's Matt Ginella in 2013 about your difficulty then with Oregon state bureaucrats, "There's a cultural divide. Not to cast aspersions, but they're afraid."
You have spent several millions dollars in a partnership with the Oregon Community Foundation on the restoration of coastal streams and habitats in the south coast area of Oregon. Why was that past work not better understood and valued by state officials during discussions of the land swap? Do you think Gov. Kitzhaber's resignation a month into his fourth term played a factor in the collapse of Bandon Muni?
Governor Kitzhaber was friendly toward Bandon development and generally was in favor of South Coast development. With his resignation, we lost a strong supporter of the Bandon Muni project.
Months later in December 2015, after the abandonment of Bandon Muni, Ginella wrote an update on your vision of making Oregon an international golf destination, such as St. Andrews or Pinehurst:
When you call Mike Keiser to ask about one new golf course, there's always a chance you'll find out about two. Such was the case on Wednesday when I was following up on a story about the Boy Scouts of America Cascade Pacific Council potentially offering Keiser a 50 year lease on coastal land at Camp Meriwether in Tillamook county, located 90 minutes west of Portland, Ore. "I might or might not be pursuing two new golf courses In Oregon," Keiser said from his office in Chicago.
What happened to the plans for these two new Oregon courses? Has it just become easier to develop projects outside of Oregon that don't require elaborate and prolonged approval, despite the lip service Oregon bureaucrats give to valuing tourism?
When word got out that I was talking to the Boy Scouts about building a golf course to benefit the scouts on beautiful scout-owned land in Tillamook, the watchdogs made clear that in their view this was not a good idea (coastal development) and that they would fight it. It would have been a long fight and I think the scouts were relieved when I withdrew the project from consideration.
In 2012, you and your Canadian partner Ben Cowan-Dewar opened Cabot Links Golf Resort. Four years later you added the Bill Coore and Ben Crenshaw-designed Cabot Cliffs course. Today, Golf Digest ranks these two courses 43rd and ninth in the world.
Ginella wrote about your experience in Canada contrasted with Oregon:
If Keiser is frustrated with the politics and progress of Bandon Muni, he is enjoying the opposite experience with other budding golf destination in Nova Scotia. "It is night and day," says Keiser, "Nova Scotia has been wonderful to work with. I can't believe how helpful the Canadian government has been." He says they offered interest-free loans, they've paid to relocate a popular bakery so it's closer to the resort, and are looking to develop a commuter airport to this remote spot in Cape Breton as close as five minutes away.
Why are the political cultures and attitudes of these two remote coastal areas, a continent away from each other, so different?
Oregon has always been an anti-development state and culture. For years they put up billboards that said, "Visit but do not stay." The thing they fear is unfettered development. That hasn't changed in the last 30 years.
Renowned golf course architect Bill Coore said recently that you are "the most influential person in golf course development today. And it is not just quantity, it is quality."
Last year, you opened Sand Valley, your first golf resort in Nekoosa, Wisconsin, to rave reviews. You plan to use the same golf architects at Sand Valley that you've used at Bandon and to build an extensive "Evans Scholar" caddie program there. Has Wisconsin benefited from your difficulties in Oregon? How much easier has the permitting process been in Wisconsin?
Definitely. It took five years to get approval for Bandon Dunes. It took Nekoosa, Wisconsin, five months to get to, "Yes, please start. And what can we do to help?" The same was true with Cabot Links in Nova Scotia: "How can we help you?"
In the Stephen Goodwin book, "Dream Golf, the Making of Bandon Dunes," he recounts this conversation that took place between you and Howard McKee after a round of golf at Bandon Dunes.
"We are environmentally inclined," Mike added, "though we don't always have the same views about the environmental movement. It's been hijacked by radicals."
"They didn't have much choice," said Howard, "since they were more or less forced into that position by uncompromising industrialists."
It has been over a decade since Howard McKee passed away, but if he were alive today would your conversation be different from the attitudes you both espoused in "Dream Golf?"
Howard McKee never trusted business people enough to give them unregulated freedom to develop. He believed in strict regulations and tough oversight. I am more trusting of free market development projects. So we would still disagree about the same things 20 years later.
Matt Ginella describes you as "the wizard of pure golf destinations." He also reported last year that you are planning to turn Sheep Ranch, which is a few miles away from Bandon Dunes, into the resort's fifth 18-hole course. You told him, "It should happen over the next two years. The site is spectacular. Approval is easy because we already own the land."
Josh Lesnik of Kemper Sports added, "There's at least as much oceanfront property at the Sheep Ranch than what was used for Bandon Dunes and Pacific Dunes combined. If Bandon Dunes isn't already considered the best pure golf destination in the world, then this is the type of site that will put it over the top. It's crazy good. It's really unbelievable."
Is this true? Will Sheep Ranch be the next course at Bandon? And you do have an architect for it?
The Sheep Ranch will be the next course. The start time is undetermined, as is the architect.
What's your favorite spot at Bandon?
My favorite spot is 200 yards from Bandon Dunes #5 -- par four. That spot was once the property line. The opportunity to buy an additional 400 acres of dune land was, in my mind, a modern day golf miracle. With the new acreage, David Kidd completed #5 and did 6, 7 and 8 all on the new land!
Following the path of fabled American golf courses such as Pebble Beach (2018) and Pinehurst (2019), what does it mean for Bandon Dunes Resort to be hosting the men's U.S. Amateur Championships in 2020?
Because I regard the U.S. Amateur as a "major" for amateur golfers, I feel honored to be able to host the world's most important amateur tourney.
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Jordan Cove Catches Two Breaks
Recently, dozens of American cities have desperately competed to be one of 20 finalists for Amazon's second headquarters - a potential $5 billion investment.
As large as that investment is, it's only half the size of what the Canadian company Veresen is planning to spend in Coos Bay - a $10 billion investment to build a liquid natural gas (LNG) export terminal and pipeline on Oregon's south coast at Jordan Cove.
Keep in mind that the median family household income in Coos Bay is just over half what it is in Washington County, and that 26 percent of the town's population now lives below the poverty line. Also keep in mind that a $10 billion investment on Oregon's south coast is on the same level as the investment Intel has made in Washington County. In other words, said Dave Kronsteiner, president of the Port of Coos Bay Commissioners, "It would be transformational for our area." Just 50 years ago, Coos Bay was the world's leading timber exporter, but the area has been greatly depressed for a long time, and trending worse.
For more than a decade, Veresen (now owned by Pempina Pipeline) has attempted to win approval to build Jordan Cove. Many believed that if environmental groups could stop a golf course (Bandon Muni), they could certainly stop the export of LNG from Oregon - LNG being a fossil fuel, after all. Yet despite the environmental groups' best efforts, 2019 looks to be the year that Jordan Cove gets underway, with completion slated for 2024. So, how and why has this happened? Along the way, Veresen and Coos Bay residents got two needed breaks.
The first break came when Donald Trump won the election. Jordan Cove can't happen without the approval of the Federal Energy Regulatory Commission (FERC). In 2016, FERC turned down Veresen's application, arguing that Veresen had provided no evidence that the facility would be commercially viable. Now, two years later, Veresen has filed a third application with FERC, only this one has eliminated an associated power plant and adjusted 50 sections of Jordan Cove's gas supply pipeline to reduce environmental impact. So political winds have changed.
The second piece of good news came just months later when opponents of Jordan Cove put a measure on the ballot to ban transport of fossil fuels through Coos County, essentially killing Jordan Cove. Measure 6-162 failed by a vote of 76-24. John Burns, CEO of the Port of Coos Bays, says that the Sierra Club and other environmental groups "got a pretty good black eye" from the result of the ballot measure.
However, in spite of this strong local support for Jordan Cove, U.S. Sen. Jeff Merkley came out in December against the $10 billion project that promises to create 1,400 jobs. He did this in a letter to the Medford Mail Tribune. Merkley based his decision on his opposition to "large-scale fossil fuel projects." Klamath County commissioner Derrick DeGroot, Douglas County commissioner Tim Freeman and Coos County commissioner John Sweet immediately responded to Merkley in a joint op-ed in the same paper saying how "deeply disappointed" they were in Merkley for his opposition to Jordan Cove.
Word on the ground in Coos Bay is that Merkley took this position against Jordan Cove to burnish his national reputation as the progressive's progressive - in other words, to please Rachel Maddow and MSNBC viewers, not struggling Coos County residents. Presidential politics comes before growing poverty rates.
John Paul Williams, liberal environmentalist and director of the World Without Coal campaign, recently took to the pages of the Klamath Falls Herald and News to discuss just how wrong Merkley's thinking is. Wrote Williams:
"Merkley's worst error is ignoring the massive emissions of air pollution from Asian coal combustion. Coal pollution sickens and kills thousands of folks in Asia every year. Those emissions are so vast, that Oregonians are breathing in pollution, including toxic mercury, that was emitted thousands of miles away in Asia.
"Asian countries like China and India are seeking alternative fuels to reduce their air pollution. Oregon could play a part in cleaning up Asia's air by allowing shipments of cleaner burning liquefied natural gas to Asia, from the proposed Jordan Cove LNG terminal in Coos Bay.
"Coal emits almost ten times as much as pollution as natural gas. Operation of the Jordan Cove plant could replace as many as six coal fired power plants in Asia with cleaner burning gas fired plants."
Gov. Brown is neutral this election year on Jordan Cove. Though the project needs a number of state permits to go forward, the governor's spokesman, Bryan Hockaday, told reporters that approval of the project was ultimately up to federal regulators. Hockaday said, "Just as the state cannot green light this process, it cannot red light it either." That's potentially good news for the proponents of Jordan Cove and the citizens of Coos County.
Some observers though, still harbor concerns that her pre-election stance, which prevents Jordan Cove from becoming a campaign issue, could take a turn if Brown is reelected, given her heavy dependence on environmental donors.
John Burns spends most of his waking day trying to figure out how he can help speed the project along. "There are too many people in this area just standing by the road with nothing to do, with no hope, no opportunity. The opposition trying to impede it is ridiculous. The environment and free enterprise can coexist together."
"If Jordan Cove happens, in five years you won't recognize this area," said Dale Sause, president of Sause Brothers, a fourth generation Oregon ocean towing company. And that's a good thing.
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The Ostrich Syndrome
By Philip J. Romero
Our current governor's penchant for ignoring systemic problems is well known -- not only to possible challengers such as Rep. Knute Buehler, but to thoughtful insiders in her own party. To take two examples covered before in these pages, Oregon's high school graduation rate is in the cellar, a calamity likely to endure because of the other problem: the PERS tapeworm is gobbling state and school district budgets from the inside. Brown's "strategy" has been little beyond misdirection and denial. It deserves intense scrutiny in this year's campaign.
But while such failures of courage vitiate any politician's claims to be a leader, they are hardly unique to Kate Brown. There are more fundamental character flaws that pervade our government. Call it the Ostrich Syndrome.
This newly diagnosed disease is not simply an aversion to action. More deeply, it manifests as disinterest in new ideas. Ostrich Syndrome sufferers show little curiosity about solving key problems in their area of responsibility. They are locked into a boxer's clinch with their political antagonists, more interested in scoring points than achieving solutions.
This syndrome claims victims daily in Washington, D.C. Like killer bees, it has steadily moved west and north and now is endemic in Salem.
Health care is a case study. Despite numerous putative "solutions" to America's long-running health inflation crisis -- most recently the Affordable Care Act, which treated symptoms and ignored causes -- health spending continues to well outpace general inflation, and the health sector absorbs nearly one in five dollars in the overall economy. This saps family budgets, corporate competitiveness and precious tax dollars.
Here in Oregon, the state took advantage of the ACA to significantly expand its Medicaid rolls. Unfortunately, it wasted hundreds of millions on failed initiatives that left a massive budget hole. In budget crises our legislature falls back on well-worn scripts: Republicans characterize every deficit as purely a spending problem, and Democrats as purely a revenue problem. Since Oregon is a Deep Blue state, it isn't a surprise that the preferred solution, Measure 101, was to raise taxes, specifically on health providers and insurers.
Measure 101 is deeply flawed and unfair. (To conform to Federal ERISA law and exempt some powerful lobbies, it put a disproportionate tax burden on the self-employed and on small businesses.) On January 23, voters endorsed it -- not surprising when proponents outspent opponents by 20 to 1, and proponents mobilized their members to vote in a low turnout election. Otherwise the legislature would have needed to go back to the drawing board, because their pattern is to put all their hopes on a tax increase, with no Plan B.
This pattern is particularly galling because there are imaginative options available. One notable example has been presented here before: the Health Insurance Revenue Bonds, or HIRB, program. It is a state-based, not a D.C.-based approach. By pre-funding health expenditures, it stabilizes the funding of the health care benefit liabilities paid by government. Unlike the current approach, which is constantly in arrears from medical inflation, HIRB works best at high rates of inflation. It can make the chronic problem of health affordability as predictable as a utility bill.
Democrats should like HIRB because it assures coverage to populations whose access to health care is under continuing fiscal threat. Republicans should like it because it covers the state population without a tax increase. Instead, HIRB can generate savings to the state budget of three to five times the optimistic projections for Measure 101. Analyses show HIRB has no fiscal risk: the program can be cancelled at any point, with its pre-funding paid off. There is no deficit spending, no repeat of the customary can-kicking down the road.
So why isn't the HIRB program the law of the land in many states, most of all its home state of Oregon which faces a multi-billion dollar budget deficit, more than half due to health costs? It isn't for lack of effort to educate decision-makers. The co-chairs of the legislative fiscal committees and senior health policy staffers in several states have been fully briefed. After, at most, a few polite questions (and usually none), officials make no follow up, despite frequent offers to elaborate. This lack of curiosity has become depressingly normal.
Health policy is maddeningly complex, and many officials have little background in finance. Very few individuals combine the disparate skills sets -- health policy, insurance and finance -- required to immediately understand the HIRB approach. Sadly, they are unwilling to admit their ignorance and remedy it through education.
The Ostrich Syndrome occurs when an official shows no curiosity about options for solving a dominant problem that is at the core of their responsibilities. At least we should hope the key problem is incuriousness, because the only alternative is a much deeper character flaw.
State officials struggling to right their listing health care ship after repeated tsunamis from Washington are committing malpractice by ignoring bipartisan approaches that are far more creative than the ossified health policy battles they have fought in the past decade. Real leaders learn. They swallow their egos and learn about out of the box ideas such as HIRB. They promulgate or reject them on the merits, not because they won't admit they don't understand them.
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