Miller, Benjamin and North 17th Edition
“Is it possible to be too safe? Explain what you mean by “too safe?””
2. Please answer the following questionfrom Miller, Benjamin and North 17th Edition (page 10, number 6)

“Suppose, for simplicity, thatType I and Type II errors resulted in deaths only. Keeping in mind thattoo little caution produces Type I errors and too much caution produces Type IIerrors, what would be the best mix of Type I and Type II errors?”

136 CHAPTER TWENTY
In the last dozen years, California state revenues—mainly from
taxes—increased about 25 percent. Pension costs for that state’s public
employees, in contrast, increased by about 2,000 percent. No, that is not
a typo. Recall our example of Gary Clift above. When he retired from the
Department of Corrections & Rehabilitation, he was eligible to apply for
a disability “bonus” that would have added many thousands of dollars to
his pension every year. Gary had this option not because was disabled,
but because the state of California says that working for the Department
of Corrections is stressful—and so an employee might become disabled.
Gary didn’t put in for the disability bonus, but he was the only manager
at the prison where he worked that did not.
California’s problem is more widespread than simply the prisons,
however. In the 1960s, about 5 percent of retiring California state workers
received so-called public safety pensions. That meant the individuals had
been working in a “dangerous” job. Today, about 35 percent of retiring
state workers obtain this “public safety” retirement bonus, which was
intended originally just for firefighters and police officers. In addition,
California is the only state that uses the last year of an employee’s salary
to determine her or his long-term pension benefits, rather than averaging
over the salaries of the last several years of work. Because pay usually
rises over time, California’s method generates extra pension benefits—
and extra liabilities for taxpayers.
But there is more. Every year for decades, the legislature in
Sacramento has improved public pension benefits. Consider just one of
those passed in 1999. It was supposed to cost the state about $650 million
per year by 2010. It actually cost $3.1 billion in 2010 and $3.5 billion in
2011.
Okay, so how bad can it be—a few billion here and a few billion
there? Well, some studies have estimated that California has a $500
billion unfunded pension liability problem. And this problem cannot go
away by itself because the courts have consistently upheld government
employee pension benefits as untouchable contracts, except in a few rare
cases in which a local government declares bankruptcy. In one recent
year alone, over $3 billion of California state spending was diverted to
pension costs from other programs. The diversion of state spending to
fund pensions seems certain to do nothing but rise in the future.
A Closer Look at the “Garden State”
New Jersey, the self-described “garden state,” is starting to look wilted.
It, too, has been running billions of dollars of pension red ink per year.
By the latest estimates, the New Jersey employee pension fund is well