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How Much Will YOUR City Pay CalPERS in a Down Economy?

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When evaluating the financial challenges facing California’s state and local public employee pension funds, a compelling question to consider is just how much more will they demand from their clients in the next economic downturn?

It’s noteworthy that CalPERS still hasn’t issued their actuarial analyses for the period ending 6/30/2018, even though a year ago, the 6/30/2017 analyses were available. Could it be related to the fact that the DJIA index on 10/01/2018 was 26,447 and as of midday 10/01/2019 it sits at 26,599? Between 6/30/2018 and 6/30/2019, did CalPERS have a bad year? And what does that mean?

What is alarming in the case of CalPERS and other public sector pension funds is the relentless and steep rate increases they’re already demanding from their participating employers. Equally alarming is the legal and political power CalPERS wields to force payment of these rate increases even after municipal bankruptcies where other long-term debt obligations are diminished if not completely washed away.

Until California’s local governments have the legal means to reform pension benefits, rising pension contributions represent an immutable, potentially unmanageable financial burden on them.

San Marino’s Payments to CalPERS Will Nearly Double by 2025

The City of San Marino, a small Southern California town with barely 13,000 residents, nonetheless offers a typical case study on the impact growing pension costs have on public services and local taxes. Using CalPERS own records and official projections, the City of San Marino paid $3.0 million (not including employee contributions) to CalPERS in their fiscal year ended 6/30/2017. That was equal to 32% of the base salary payments made in that year. By 2025, the City of San Marino is projected to pay $5.1 million to CalPERS, equal to 46% of base pay.

Can the City of San Marino afford to pay an additional $2.1 million per year to CalPERS, on top of the $3.0 million per year they’re already paying? They probably can, but at the expense of either higher local taxes or reduced public services, or a combination of both. But the story doesn’t end there.

The primary reason required payments to CalPERS are nearly doubling over the next few years is because CalPERS was wrong in three critical estimates: how much their pension fund could earn, how much would be paid to retirees, and how much their client agencies had to pay to stay current or catch up. They could still be wrong.

Annual pension contributions are are split into two categories:

(1) How much future pension benefits were earned in the current year, and how much money must be set aside in this same year to earn interest and eventually be used to pay those benefits in the future? This is called the “normal contribution.”

(2) What is the present value of ALL outstanding future pension payments, earned in all prior years by all participants in the plan, active and retired, and by how much does that value, that liability, exceed the amount of money currently invested in the pension fund? That amount is the unfunded pension liability, and the amount set aside each year to eventually reduce that unfunded liability to zero is called the “unfunded contribution,” or, in plain English, the catch-up payment.

Both of these annual pension contributions depend on a key assumption: What rate-of-return will the pension fund earn each year, on average, over the next several decades? And it turns out the amount that has to be paid each year to keep a pension system fully funded is extremely sensitive to this assumption. The reason, for example, that CalPERS is doubling the amount their participating employers have to pay each year is largely because they are gradually lowering their assumed rate of return from 7.5% per year to 7.0% per year. But what if that isn’t enough?

If the Rate-of-Return CalPERS Earns Falls, Payments Could Rise Much Higher

It isn’t unreasonable to worry that going forward, the average rate of return CalPERS earns on their investments could fall below 7.0% per year. For about a decade, nearly every asset class available to investors has enjoyed rates of appreciation in excess of historical averages. Yet despite being at what may be the late stages of a prolonged bull market in equities, bonds, and real estate, the City of San Marino’s pension investments managed by CalPERS were only 74% funded. As of 6/30/2017 (still the most recent data CalPERS currently offers by agency), the City of San Marino faced an unfunded pension liability of $29 million.

As it is, using CalPERS own estimates, by 2025 the City of San Marino is already going to be making an unfunded contribution that is nearly twice their normal contribution. Another reason for this is because CalPERS is now requiring their participating agencies to pay off their unfunded pension liabilities in 20 years of even payments. Previously, in an attempt to minimize those payments, agencies had been using 30 year payoff terms with low payments in the early years.

Nobody knows what the future holds. The following chart shows how that might play out in the City of San Marino. Notice how at a 4% rate-of-return projection, in 2018-19 the City of San Marino would have had to pay CalPERS $10.1 million; at 3%, $11.8 million.

San Marino is a wealthy community. The median household income of $147,960 is more than twice the median for California of $67,739 (ref., figures for 2016). But with total municipal expenses of $26.2 million in the fiscal year ended 6/30/2017 (ref. San Marino CAFR, page 10), even San Marino’s budget can be stressed by pension expenses. CalPERS has projected the city’s pension contribution will rise to $5.1 million by 2025, which is 19 percent of total expenses.

At what point do these payments become too burdensome? What if investment returns settle down to an average of only 6 percent per year – can San Marino afford to pay CalPERS the resulting estimate of $7.0 million per year? What about at an even lower 5 percent return – can San Marino afford to pay CalPERS an estimated $8.5 million per year? And what about the employees? Will they start to pay more via payroll withholding? In 2017-18, employees only contributed $767,000 out of $3.8 million.

What about the rest of California?

How would a downturn affect all of California’s public employee pension systems, the agencies they serve, and the taxpayers who fund them? In a CPC analysis published in 2018, “How to Assess Impact of a Market Correction on Pension Payments,” the following excerpt provides an estimate:

“If there is a 15% drop in pension fund assets, and the new projected earnings percentage is lowered from 7.0% to 6.0%, the normal contribution will increase by $2.6 billion per year, and the unfunded contribution will increase by $19.9 billion. Total annual pension contributions will increase from the currently estimated $31.0 billion to $68.5 billion.”

That’s a lot of billions. And as already noted, a 15% drop in the value of invested assets and a reduction in the estimated average annual rate-of-return from 7.0% to 6.0% is by no means a worst case scenario.

To-date, meaningful pension reform has been thwarted by powerful special interests, most notably pension systems and public sector unions, but also many financial sector firms who profit from the status quo. Ongoing court challenges, along with growing public pressure on local elected officials, may eventually offer relief. For these reasons, raising taxes and cutting services in order to fund pensions may eventually become a false choice.

This article originally appeared on the website of the California Policy Center.

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CalPERS Annual Valuation Reports – main search page
CalPERS Annual Valuation Report – San Marino, Miscellaneous Employees
CalPERS Annual Valuation Report – San Marino, Miscellaneous, Second Tier
CalPERS Annual Valuation Report – San Marino, Miscellaneous Employees (PEPRA)
CalPERS Annual Valuation Report – San Marino, Safety Employees, Fire, Second Tier (PEPRA)
CalPERS Annual Valuation Report – San Marino, Safety Employees, Police (PEPRA)
CalPERS Annual Valuation Report – San Marino, Safety Employees, Fire, First Tier
CalPERS Annual Valuation Report – San Marino, Safety Employees, Fire, Second Tier
CalPERS Annual Valuation Report – San Marino, Safety Employees, Police
CalPERS Annual Valuation Report – San Marino, Safety Employees, Police, Second Tier

Moody’s Cross Sector Rating Methodology – Adjustments to US State and Local Government Reported Pension Data (version in effect 2018)

California Pension Tracker (Stanford Institute for Economic Policy Research – California Pension Tracker

Transparent California – main search page
Transparent California – salaries for San Marino, 2018
Transparent California – pensions for San Marino 2018

The State Controller’s Government Compensation in California – main search page
The State Controller’s Government Compensation in California – San Marino payroll, 2018
The State Controller’s Government Compensation in California – raw data downloads

California Policy Center – Resources for Pension Reformers (dozens of links)
California Policy Center – Will the California Supreme Court Reform the “California Rule?” (latest update)

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The post How Much Will YOUR City Pay CalPERS in a Down Economy? appeared first on CIV FI.

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1 day ago
If it were private sector, the presidential candidates would be lining up to bash them in debates.
Princeton, NJ or NYC
21 hours ago
Instead, they'll line up to fight for higher taxes and demonize those who don't want to pay.
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Carbon capture idea

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Peter Diamandis shared this story.

A new algae bioreactor can suck as much carbon dioxide out of the atmosphere as roughly an acre of forest

Of course, we also are getting more forest land, as farms get more efficient and take up less land.

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14 days ago
I looked at Hypergiant's board. It starts with Bill Nye the science guy. It is long on VC and military, short on actual scientists. Skeptical.
Princeton, NJ or NYC
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A thought experiment on living standards

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Russ Roberts’ latest video.

He asks how willing you would be to take your income today back to 1973 and buy the goods and services available back then at those 1973 prices, or whether you would prefer to stay in the present.

That is, suppose you were offered a time machine in which you could take your current income and use it to choose from a 1973 market basket. Would you get into that time machine?

The official statistics used to calculate inflation and “today’s real income in 1973 dollars” would say that it’s obvious you should get into the time machine. You’ll be so much richer, buying a new car for less than $5000 and buying gas for less than 60 cents a gallon.

But a lot of people would think twice about getting into that time machine. No Internet, that 1973 car won’t be roadworthy very long, when you go Israeli dancing you’ll be stuck doing the boring oldies (for some reason, Russ doesn’t mention that last example), etc.

The bottom line is that the official statistics probably vastly over-estimate the satisfaction you would get out of getting into that time machine. Russ argues that this means that the official statistics under-estimate the gains in satisfaction that have taken place from 1973 to today.

Another way to run the thought experiment might be to take 1973 income and apply it to today’s goods and services. Suppose that you are in the 65th percentile in the income distribution today. Go back and find the 65th percentile in 1973, in 1973 dollars. Now, give yourself that amount, which might be $25,000 (I am totally making that up). Would you rather have that income today, or would you jump into the time machine to take it back to 1973?

Suppose that with an income of $25,000 you would jump into the time machine, because today’s rents and cost of other basics make that $25,000 look puny. You’ll do without the Internet, the more durable car, and the more exciting dances, thank you very much.

Now ask, how much more than that $25,000 would you need in order to talk you out of getting into the time machine? Suppose you would be content with $50,000. In that case, your subjective cost of living has gone up 100 percent, because you asked for an additional $25,000. But the official statistics seem to say that the cost of living has gone up 500 percent, implying that you would require $125,000 to talk you out of jumping into the time machine. That is a big difference. The official statistics are probably heavily biased to overstate the rise in the cost of living (which means that they understate the improvement in living standards) by a substantial amount.

I know what you’re thinking: these thought experiments are ridiculous. We can’t really use them to measure living standards. But the official statistics, and the claims people make about stagnation or growth based on those statistics, amount to thought experiments.

Thought experiments are all we have. It’s just that some of them are blessed with “official” status. And they are probably way off.

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20 days ago
Now ask, how much more than that $25,000 would you need in order to talk you out of getting into the time machine? Suppose you would be content with $50,000. In that case, your subjective cost of living has gone up 100 percent, because you asked for an additional $25,000. But the official statistics seem to say that the cost of living has gone up 500 percent, implying that you would require $125,000 to talk you out of jumping into the time machine.
Princeton, NJ or NYC
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"Is an M.B.A. Still Worth It?"

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Andy Kessler sharply exclaims "No!"

I’ve dug into the curricula at dozens of M.B.A. programs, from Booth to Kellogg to Fuqua. They’re all more or less the same: The first year has introductory courses in finance, accounting, managerial skills—my eyes are getting droopy, too—along with modeling and organizational behavior, each no doubt chock full of case studies that are probably no longer relevant. And virtually every program now has a mandatory ethics class, which awkwardly suggests that students had no ethics coming in. . . . 

Any halfway-on-the-ball undergrad could construct a virtual M.B.A. himself by taking a finance course and some in marketing and psychology, plus any course that teaches how to use spreadsheets. Then get buzzword-compliant and, voilà, an M.B.A. in a box.

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22 days ago
yup. All about the networking and signaling.
Princeton, NJ or NYC
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World’s Longest Running Scam: The Academy

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The first Academy

Sometimes, I feel as though my profession is a giant scam. I don’t mean that we’re not doing anything of value. I mean that what people think we’re doing, which explains why they pay us so much, is not what we’re actually doing. And when I reflect on that, sometimes, I wonder how long it will take for the world to catch on, and then stop giving us tons of money, at which point most of us will have to find real jobs. That might be good for society, but I hope it doesn’t happen before I’ve retired.

What they think we’re doing

I gather that what most people think the academy is doing is mainly

(i) teaching students valuable skills and information that they need in order to get by in life, to do their jobs, and/or to be good citizens; plus, to a lesser extent,

(ii) doing research that produces new knowledge of value to society.

This sounds pretty good. And this impression is supported by academics and other intellectuals. Since society’s intellectuals generally like the academy, we use our intellectual skills to come up with clever, smart-sounding propaganda about how awesome education is. Like this slogan: “Think education is expensive? Try ignorance.” This causes most of society to think that education must be really great, since the experts all seem to think so.

*Exceptions: Jason Brennan’s Cracks in the Ivory Tower; Bryan Caplan’s The Case Against Education. These academics bite the hand that feeds them.

We generally decide to overlook evidence against our preferred narrative. Since the only people likely to be able to marshal that evidence are other academics, who share the same bias, we’re usually safe.

Aside: Here’s something we like to do in philosophy: we cite statistics about the earnings of philosophy majors, post-graduation — which turn out to be pretty good, compared to most majors. We then either state, or leave it as implied, that philosophy improves your earnings potential. Ironically, philosophy should teach you to be critical of that sort of reasoning. (Ever hear about a little distinction between “treatment effects” and “selection effects”? I guess maybe that’s more of a sciencey topic, so philosophers wouldn’t get it.)

Costs are out of control

Anyway, I think the above (functions (i) and (ii)) explain part of why society funnels so much money to academia.

Students and their parents pay a lot of money, of course, because they think, correctly, that a college degree increases your earnings potential. They also incorrectly think this works by college teaching you important skills.

Even more clearly, the government funnels money to higher education, with the support of the public, because they believe the academy is doing lots of (i) and (ii). When they finally figure out that that’s not true, what will happen to the academy?

What we’re actually doing

Here’s what we’re really doing.

a. Administering a really long, really expensive IQ and personality test. The people who graduate from a “good” school thereby display their intelligence, perseverence, and willingness to follow tedious instructions from others without complaint — all valuable traits in the workplace. For the most part, we don’t give people these traits; we simply screen out people who lack them.

b. Producing prestige. Harvard doesn’t do a better job of teaching people than other schools; it just has more prestige. That’s why people are willing to pay them more than other schools. The economic function of academic research is to produce prestige for the researcher’s school — that is “the economic function” in the sense that that explains why there is money available to pay for it.

c. Indoctrinating students. Many academics are utterly shameless about injecting their personal ideology anywhere they can. Many of these, by the way, would also insist, with no sense of irony, that they support critical thinking, openness to competing points of view, etc. It’s just that such openness of course only applies to legitimate, serious ideas — and they simply can’t perceive anything that challenges the main points of their ideology as a legitimate, serious idea.

An irrational person

d. Attacking rationality. Some academics (I don’t know how many — presumably not many among philosophers, but the postmodernists) actively attempt to undermine rational thought. They will do such things as attacking rationality, attacking objectivity, and simply modeling non-rational discourse. This is the opposite of education.

e. Playing intellectual games with each other. This is most of what our research is. It’s not literally a game, but a game is the best metaphor: a mostly harmless diversion, whose main purpose is to entertain those participating. Like a bunch of eggheads sitting around playing a giant, collective chess game (only there is no defined endpoint). The people who are good at it attract attention and admiration from the other players. The most exciting players make surprising moves that turn out to be defensible — you know, like a dramatic queen sacrifice. And that’s how they build up the currency of the academic world, prestige. If you accumulate enough of it, other teams may try to hire you, with a big salary bonus.

Most of the research is written solely for the other researchers and will never be read by and never make any difference to anyone else. (In fact, most will barely be read even by other researchers.) If you tried to describe it to someone outside the game, even someone with lots of intellectual interests, they would generally find it pointless. Like, someone taking a year off of teaching so he can study the attitudes of 16th-century Spaniards toward plants on the Iberian Peninsula.

Now, of course there is much research that is really interesting and important. E.g., some people are trying to cure cancer, or . . . reveal the injustices in the American legal system. But I think that is a small minority of all research.

When will this house of cards collapse?

This is a great scam we’ve managed to pull on the rest of society, but I don’t know how long we can keep it up. Surely the secret is going to get out, and the country is going to stop pouring money into our industry? On the other hand, it’s been going on for a long time, so maybe it’s stable for the next few centuries?

(Aside: Here is a story about how small colleges are closing down, and maybe 1/4 will close in the next 20 years:
I can’t vouch for the story, though; it may just be typical media alarmism.)

I guess people think that they have to pay me a bunch of money because I have arcane knowledge that I am only willing to impart if they give me a bunch of money and job security and lots of time to sit around reading and writing. I’m just waiting for society to figure out that I don’t have any such knowledge or skills. Everything I know that I might teach in a class is publicly available knowledge. All or most of it you can get for free if you have an internet connection or a library card.

I guess maybe there is a little educational bonus from being able to talk to me in person … but in truth, very few students ever actually avail themselves of that opportunity. They don’t actually want the benefit that’s costing them all this extra money.

Now, of course we know why students are attending college rather than just learning on the internet. They want the prestige, not the knowledge. They want to signal intelligence, perseverence, and conformity. So perhaps I have no cause for concern. It doesn’t matter that I don’t actually have any secret knowledge.

But I still worry that some tech entrepreneur is going to figure out how to produce the same product (once they recognize what the product actually is) at much lower cost — like, orders of magnitude lower. Maybe there will be a lengthy course of study you can complete, doing work that is entirely computer graded so that no professors have to be hired, and the company will just certify that you completed it with some level of intellectual performance. I don’t understand why something like this hasn’t replaced almost all college education.

Inviting the collapse

I don’t know whether or when universities will go the way of newspapers. But if it is going to happen, I think it will be helped along by practices (c) and (d) above, indoctrination and attacking rationality. I suspect that we’re shooting ourselves in the foot with this.

I don’t think the indoctrination works very well. I think most students just learn what the professor wants to hear, then forget it as soon as the class is over. But I think it does succeed in pissing off the segment of society that disagrees with the ideology. Which, as a matter of fact, is at least half the country. When we lament the anti-intellectual trend in conservatism, we should look at the way intellectuals have been dismissing conservative ideas and shamelessly propagandizing for left-wing ideology. Of course conservatives would become anti-intellectual. How long will it be before Republicans introduce legislation to shut down government support for education?

A fraud who succeeded for a while by being an irrational ideologue

I suspect that (c) and (d) are also undermining the prestige-generating power of the academy. Because they create the impression that one can succeed academically simply by toeing an ideological line – and one can fail simply by refusing to do so. And that is not what employers are trying to select for. They’re looking for smart, hard-working, persistent people – not mere ideologues. If academics go too far, we’re going to undermine the economic value of college degrees – at which point, we’re through.

Now, those who know me know that I have no problem with advocacy teaching. What I have a problem with is unfair or unreasonable advocacy. I think it’s fine to say, “I think this conservative (/liberal) idea is mistaken. Let me tell you why …” followed by some logical arguments and evidence. But that should be after you have presented the idea as faithfully as possible, explaining fairly what its proponents would say in its favor. This will normally involve reading texts that advance that idea clearly and strongly. The professor should then try to model careful, reasoned discourse on the topic, weighing the reasons on both sides.

Obviously, it is unacceptable to attempt to intimidate or punish people for believing a controversial idea. Finally, it is of course inappropriate to inject ideological points into a class to which they are not relevant. For instance, a professor should not inject his opinions about the current President, unless the class topic somehow really calls for discussion of that.

It would be great if professors were to acquire a reputation for being fairminded, objective reasoners, people who try to understand your point of view before helping you improve your own understanding. Maybe this would cause the rest of society to keep us around a little longer. Unfortunately, that is far from the way we are actually seen.

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38 days ago
I loved college. This is so depressing.
Princeton, NJ or NYC
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"In the weeks I spent listening to Malcolm Gladwell’s podcast, I learned that lobsters have serotonin, that Elvis Presley suffered from parapraxis and that Mr. Gladwell adheres to a firm life rule that he drink only five liquids: water, tea, red wine, espresso and milk."

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That's a fine first sentence. The article is "With ‘Talking to Strangers,’ Malcolm Gladwell Goes Dark/Read by millions — but savaged by critics — the author has a new book on police violence, campus rape and other bleak terrain" by Amy Chozick (in the NYT).

At 55, in clear-framed spectacles and a head of curls, Mr. Gladwell still has the spindly, featherweight look of someone who can break a five-minute mile on a casual weekend run. He lives in a two-story townhouse apartment in the West Village, brimming with books, vintage furniture and a set of eclectic paintings of the Ethiopian Army. We sat at a heavy wooden table as 90-degree August soup poured through the open windows....

Books take years to complete, but thanks to [podcasting], Mr. Gladwell’s typical reader — whom he has described as “a 45-year-old guy with three kids who’s an engineer at some company outside of Atlanta” — can partake in a virtuous cycle of Gladwell programming. The podcast teases interest in a souped-up “Talking to Strangers” audiobook, which builds an audience for more speeches, which stokes advertisers for the podcasts....
August souped-up?

It was a simple writing error to re-use the word "soup" there, and it amuses me, especially since neither use is about actual soup. "Soup" is conventionally used to refer to air that seems thick, mostly for fog, where the traditional expression is "pea soup fog." The OED traces that metaphor back to 1849, to an entry in a journal by Herman Melville: "Upon sallying out this morning encountered the oldfashioned pea soup London fog." That makes it sound as though people had been saying "pea soup fog" for a long time.

And what about the soup in "souped up"? The OED doesn't go into any detail here, but I think it's just an analogy to feeding human beings with the hearty, humble food provided to hungry poor people. The oldest uses are not about adding fuel, but tinkering with the mechanical works, readjusting the engines — of airplanes and cars... and jitneys:
Here come a flat-top, he was moving up with me
Then come waving goodbye in a little old souped-up jitney
I put my foot in my tank and I began to roll
Moaning siren, 'twas a state patrol
So I let out my wings and then I blew my horn
Bye-bye New Jersey, I've become airborne
No, that one wasn't in the OED. That's just what plays in my head. Chuck Berry. Wonder if he had parapraxis... or if I do... What is parapraxis?!
Parapraxis, the clinical terminology for “Freudian slips,” as the episode explains, means abnormal acts in speech, memory, or physicality....

Gladwell focuses on the parapraxis that seemed to occur during performances in the late 60s and early 70s of Elvis’s song “Are You Lonesome Tonight?,” which contains a minute-long spoken-word section aimed at a long-lost lover. Though Elvis performed the song many times, he consistently tripped over the interlude. His final sweat-soaked performance of the song is iconic for all the wrong reasons: the words are almost all gone . . . replaced instead by maniacal, uncontrollable laughter.

The spectacle is hard to explain....
Or easy to explain:

And so, as you sally out this morning, souped up on espresso or tea or milk, have some laughs, have some lobsters, and good luck with your parapraxis.
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44 days ago
I've heard of "souped up" with cars/engines, etc.
Princeton, NJ or NYC
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