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Welcome to Kansas, the bastion of how not to run a state, but claim things are just dandy.  I noted in a prior blog that Kansas has no reserves.  And apparently a $350 million deficit in 2016, a continuing trend for a number of years now.  And bigger deficits to come.  Kansas is the poster child of why cutting taxes a lot does not work.

How did they get here?  The state governor and legislature decided that cutting taxes spurs economic growth.  So if you cut a lot of taxes, you get lots of growth. They cite the Laffer curve, a  totally discredited economic tool drawn on the back of a napkin  by Arthur Laffer at a 1974 dinner to argue why Gerald Ford should not raise taxes.  On the face of it it makes no sense but that has not stopped supply side politicians from using it for nearly 40 years  to cut taxes.  The problem, it is wrong.

Cutting taxes does not spur enough economic growth to make up for the loss in taxes when you go down the Kansas role.  If you s cut them too much, it is really hard to raise them if you run short.  The result is that  economic growth in most of Kansas will be stunted for years due to the lack of investment in Kansans.  Now you would think that Kansans would be up in arms about the poor stewardship by elected officials. But no.  See if you get constant bad news, just stop reporting revenues and deficits.  No news is good news right?  Welcome to Kansas!

http://www.governing.com/topics/finance/gov-kansas-connecticut-budget-news.html


The troubling aspect of that is that Governing magazine reports that many state are likely to see less revenue in 2017 vs 2016.  Governing‘s analysis of projected 2017 budget data from the National Association of State Budget Officers shows shows states now have a median 4.9 percent of annual expenditures saved for the fiscal year, down from 5.1 percent the previous year.  Illinois, Nevada, New Jersey and North Dakota have no reserves as of 2017.  They add to Kansas, Oklahoma, Arkansas, and Montana who had no reserves last year.  And Alaska that is burning though theirs.  Economic and tax policies are to blame.  The Kansas solution to cut taxes to create economic growth has not worked.  The state continues to get farther behind and it is becoming harder to pretend all is well.  Having no reserves is a crazy bad idea.  It is hard to explain just how crazy bad this idea is – it means that if a negative economic issue occurs, these states are in huge trouble unless they start cutting education and other essential services.  The best way to get out of a budget hole is not cutting education – the one thing needed to dig out and attract new economic activity.  Clearly these officials did not learn from 2008-2011 when there reserves were depleted to address the economic downturn. That makes no sense and dooms their residents to a repeat of 2009/2010, only worse.

 


IMG_7385One of the issues I always include in rate studies is a comparison of water rates with other basic services.  Water always comes in at the bottom.  But that works when everyone has access and uses those services.  Several years ago a study indicated that cable tv was in 87-91 % of home.  At the time I was one of the missing percentage, so I thought it was interesting.  However, post the 2008 recession, and in certain communities, this may be a misplace comparison.  A recent study by Emmanuel Saez and Gabriel Zucman notes that the top 0.1% have assets that are worth the same as the bottom 90% of the population!  Yes, you read that correctly.  Occupy Wall Street had it wrong.  It’s not the 1% it is the 0.1%.  This is what things were like in the 1920s, just before the Great Depression.  The picture improved after the implementation of tax policies (the top tax rate until 1964 was 90% – yes you read that right – 90%).  Then the tax rate was slowly reduced to deal with inflation.  The picture continued to improve until supply side economics was introduced in the early 1980s when the disparity started to rise again (see their figure below), tripling since the late 1970s (you recall the idea was give wealthy people more money and they would invest it in jobs that would increase employment opportunities and good jobs for all, or something like that).  Supply side economics did not/does not work (jobs went overseas), and easy credit borrowing and education costs have contributed to the loss of asset value for the middle class as they strove to meet job skills requirements for better jobs.  In addition wages have stagnated or fallen while the 0.1% has seen their incomes rise.  The problem has been exacerbated since 2008 as they report no recovery in the wealth of the middle class and the poor.  So going back to my first observation – what gets cut from their budget, especially the poor and those of fixed pensions?  Food?  Medicine?  Health care?  My buddy Mario (86 year old), still works because he can’t pay his bills on social security.  And he does not live extravagantly.  So do they forego cable and cell phones?  If so the comparison to these costs in rate studies does not comport any longer.  It places at risk people more at risk.  And since, rural communities have a lower income and education rate than urban areas, how much more at risk are they?  This is sure to prove more interesting in the coming years.  Hopefully with some tools we are developing, these smaller communities can be helped toward financial and asset sustainability.  But it may require some tough decisions today.

Income percent

 


My cousin  once asked me what I thought about deciding on who to vote for for President might be best done when evaluating how well your 401K or investments did.  Kind of an amusing thought.  In that vein the decisions might be very different than they were.  Clearly your 401k did with with Clinton.  The economy was flat for George W. Bush, and the end of his term was the Great Recession.  Reagan’s first term was flat.  We all know about George H.W. Bush.  Interesting thoughts.  Not so good.  So what about the last 8 years?   But is raises a more interesting issue.  So don’t get me wrong, this blog is not intended to lobby for any candidate (and Obama can’t run), but it is interesting to look at the last 8 years.  They have been difficult.   The economy responded slowly.  Wages did not rebound quickly.  But in comparison to 2008 are we better off?

The question has relevance for utilities because if our customers are better off, that gives us more latitude to do the things we need – build reserves (so we have funds for the next recession), repair/replace infrastructure (because unlike fine wine, it is not improving with age), improve technology (the 1990s are long gone), etc., all things that politicians have suppressed to comport with the challenges faced by constituents who have been un- or under-employed since 2008.

Economist Paul Krugman makes an interesting case in a recent op-ed in the New York times:  (http://krugman.blogs.nytimes.com/2016/01/13/yes-he-did/?module=BlogPost-Title&version=Blog%20Main&contentCollection=Opinion&action=Click&pgtype=Blogs&region=Body).  Basically he summarizes the figure below which shows that unemployment is back to pre-2008 levels, and income is back to that point.  Some income increase would have been good, but this basically tracks with the Bush and Reagan years for income growth – flat.  So the question now is in comparison to 2008 are we worse off that we were?  And if not, can we convince leaders to move forward to meet our needs?  Can we start funding some of the infrastructure backlog?  Can we modernize?  Can we create “smarter networks?”  Can we adjust incomes to prevent more losses of good employees?  Can we improve/update equipment?  All issues we should contemplate in the coming budget.

Krugman Income percent

 


Most states were doing pretty well before the 2008 recession hit, but that ended in 2009. Most states had to make extremely difficult cuts or raise taxes, which was politically unacceptable. Of course invested pension systems received a lot of attention as their value dropped and long term sufficiency deteriorated, which was fodder for many changes in pensions, albeit not how they were invested. The good news is a lot of them came back in the ensuing 5 years, but 2015 may be different. A number of states have reported low earnings in 2015 and whether this may be the start of another recession. The U.S. economy has averaged a recession every six years since WWII and it has been almost seven years since the last contraction. With China devaluing their currency, this may upset the economic engine. At present there are analysts on Wall Street who suggest that some stocks may be overvalued, just like in 1999. If so, that does not bode well states like Illinois, Kansas, New Jersey, Louisiana, Alaska and Pennsylvania that are dealing with significant imbalances between their expenses and incomes. Alaska has most of its revenue tied to oil, so when oil prices go down (good for most of us), it is a huge problem for Alaska that gives $2200 to every citizen in the state. An economic downturn portends poorly for the no tax, pro-business experiment in Kansas that has been unsuccessful in attracting the large influx of new businesses, or even expansion of current ones. California and next door Missouri, often chided by Kansas lawmakers as how not to do business, outperform Kansas.

Ultimately the issue that lawmakers must face at the state and as a result the local level is that tax rates may not be high enough to generate the funds needed to operate government and protect the states against economic down turns. There is a “sweet spot” where funds are enough, to deal with short and long term needs, but starving government come back to haunt these same policy makers when the economy dips.   It would be a difficult day for a state to declare bankruptcy because lawmakers refuse to raise taxes and fees.


Your grandma always told you to save money for a rainy day.  She wasn’t really talking about rainy days, but days when you had less or no income.  The press talks about the huge percentage of Americans that have little or no savings, and how compared to other countries, we are at a disadvantage during economic times.  A huge problem is that the same argument can be translated to governments, which must provide services, and often more services during economic downturns.  But if they have no savings, how are they to accomplish this?  They do not want to raise taxes and fees in down situations, so won’t the loss of services just make things worse?

A recent PEW reports suggests that states “had about half the reserves necessary to address budget gaps during the first year of the Great Recession.  The 50 states had about $60 billion set aside in the summer of 2008, but in fiscal 2009, budget gaps across the country totaled $117 billion, about twice what states had in reserve. The budget gaps continued to grow in 2010 and many states struggled with shortfalls for years afterward.  Bad news, but the news really does not improve.  They report that 37 states have legal caps that prevent them from saving enough to weather recessions or even enough to substantially offset revenue losses, and most of those are based on some percentage of the prior year’s revenues.  Why?  Short-term views?  Most governments figure on keeping enough cash on hand to pay bills during tax seasons. That accounts for 60-90 days of funds.  Far too little for dealing with economic impacts.  Far too few state governments recognize the importance of saving, figuring that cutting taxes during time of plenty and giving back to taxpayers is a better use of funds.  Then it is someone else’s issue when the next economic hiccup occurs – and it will.  Unless you raise your cap now as Minnesota and Virginia have recently done.

But the issue is not just a state issue.  It is a local and a utility issue as well.  Local governments are closer to the ground, have less leeway in their budgets and often have far too little funding as a result of resistance to raising property taxes, user fees and over-dependence on state shared sales tax, which often drops precipitously during a recession.  Same goes for sin and gas tax dependence.  When people slow smoking, or as oil prices drop, so do revenues.  Ask Alaska, Louisiana, Kansas, Texas, North Dakota and others that are oil rich states about their budget this past year.  The legislatures were begging Grover Norquist to let them out of their no tax increase pledges.  He said no of course, because he doesn’t want government to function properly.  So those legislators were stuck in the either “do the right thing” or “get whacked by Grover in the next election” conundrum.  You know what they did because they want to get re-elected  That doesn’t help the citizens of those states.  Standard & Poor’s revised its outlook on Alaska’s general obligation and appropriation-backed debt from stable to negative. That will cost them in the future. St. Louis, Moody’s downgraded the city’s credit rating one step to A1, citing “the city’s weak socioeconomic profile; reliance on earnings taxes which are due for voter reauthorization in 2016.”  Diversity in industry and taxes is beneficial.  Too often this gets lost in the desire to do more with less, but doing more means you need more funding!  And you need to collect those savings as grandma counselled!


In my last blog I outlined the 10 states with the greatest losses since 2006.  Florida was not among them, yet given our legislature’s on-going discussion and hand-wringing with the state run Citizen’s insurance, you would  think we have a major ongoing crisis with insurance here.  Maybe we do, but I will provide some facts.  Citizens,averaged between 1 and 1.5 million policies over the last 8 years.  according the the South Florida SunSentinel, the average person pays $2500 per year for windstorm coverage.  Somehow I think I want that bill because my insurance is about $6000 through my private insurer and when I had Citizens it was $5700/yr.  But I digress.

Let’s assume there is 1.2 million policies over that time paying the #2500/yr. That totals.$3 billion a year in premiums.  That means Citizens should have reserves of $24 billion because they have not paid-out since 2006.  They have $11 billion according to the SunSentinel sources.  So wher eis the rest of the money?  We can assume there are operating expenses.  They pay their executives very well for a government organization.  I am sure they pay the agents as well.  I asked a couple friends in the industry and they indicate that for private companies, about half your premium goes the the agent who writes the policy.  That’s only Citizens.

Let’s assume there are conservatively another 8 million policies in Florida and since many of those are inland, let’s day they average $1500/yr.  If you have it for less, check out your policy!.  That means there is another $12 billion collected each year for a total of $15 billion per year.

Now let’s look at storms.  According to Malmstadt, et al 2010, the ten largest storms 1900–2007, corrected for 2005 dollars are as follows:.

Rank   Storm                         Year        Loss($bn)

1 Great Miami                        1926       129.0

2 Andrew                               1992        52.3

3 Storm                                  1944       35.6

4 Lake Okeechobee               1928       31.8

5 Donna                                1960       28.9

6 Wilma                                  2005       20.6

7 Charlie                                2004        16.3

8 Ivan                                     2004        15.5

9 Storm # 2                            1949        13.5

10 Storm # 4                          1947       11.6

So for all bu the top 9 storms in a 107 year history,the annual receipts exceed the losses for a storm.   The total over the period is $450 billion (adjusted to 2005 dollars)  That means an average of $4 billion per year.  So what is the issue?  Sure a big storm could wipe out the trust fund, but that is what Lloyd;’son London, re-insurers and the ability to borrow funds is all about.

I suggest that the fuzz is really about is this.  Most people do not understand the concept of an insurance pool.  That includes many public officials.  The idea of insurance is to pool resources is to collect huge sums of money so that if something bad occurs, there is the ability to compensate people for their losses.  Insurance is a good thing but individually we hope it is never us that needs to be compensated because that means something bad happened.  But we expect our premiums to pay into that pool, build large pools of money, and have money when you need it. The more people that pay in, the more the  risk is split and lower the likelihood that any individual suffers a loss.  Hence the lower risk should lower premiums.  And people who live in high risk area should pay more than those who don’t.  Flood plains, dry forests, coastal areas, high wind areas, tornado alley, etc are all high risk.  Florida is one, but clearly there are many others,

So Citizens has a pile of money. Most private insurance companies should also, although their money is invested and they expect most of that will not be paid out.  I suspect the concern is a fear that the pile of cash will create a public furor, but that shows a lack of communication and education.  Cash is good.  Lots of it is better.  It’s like running surpluses in government or in your personal savings account. The idea is to have money when you need it.  Running at a point where you never have surpluses guarantees you will have deficits that require cuts in services,and possibly losses of jobs when the economy tanks again.   For insurance, those losses occur when big event hit.  Fortunately those are infrequent, but they have and will happen.  We need the cash pools on hand to protect our citizens just in case.    In the meantime we need some leadership and education of the public.


The good news is that for many local governments, property values are up and so is the economy, especially in urban areas.  However that does not mean that the budget approval difficulties of 2009-2012 have passed or been resolved.  In fact the arguments may continue despite improvements in financial position.  Why?  There are a number of policies that were implemented in the recession years that were especially difficult for utilities:

  1. Borrowed or transferred water and sewer monies to avoid raising taxes against falling property values (note that raising taxes on falling values would have yielded a zero sum game, but raising taxes commensurate might have “un”elected a few people
  2. Failing to have long-term financial plan and even fewer have multiyear budgets.  Included are automatic rate adjustments that some are questioning or deferring now, despite having been approved several years ago
  3. Bad investments – public or private.  In either case, if the revenues are not realized, the local entity gains no benefit.  This can include public private infrastructure investments, privatization or investing cash.  Scenarios need to be created to figure out what happens when things don’t go as planned.
  4. Failing to save for a rainy day before the crash.  Our grandparents knew we need to save for a rainy day.  We talk about the lowered level of savings among Americans and the potential issues that could arise if economic difficulties occur.  So exactly why do our elected leaders think it is a great idea not to collect monies in good times for a rainy day?  Other than politics that is?

 

We have identified four errors in public policy at the local level.  The questions for the 2015 budget are:

 

  1. Can we repay those funds we “borrowed” from during the down years?
  2. Can we keep the total revenues increasing (may not mean a tax increase, but certainly not a rollback)?
  3. Can we develop realistic scenarios for public investments.  Nothing worse than stranded infrastructure like that $6milion parking garage that grossed under $100 in the last 6 months because no one uses it because there is not business need for it.
  4. Can we develop reserve policies that allow local governments and especially utilities to create and maintain repair and replacement funds, reserves, and “savings” for the next rainy day.  It’s coming.  At some point.
  5. Can we develop a 5 year plan of where the community vision is?

I think this would be a start for a lot of us.


As you are aware, I have several hobbies and interest, and economics is one of them.  Economics has theorists from many different viewpoints, and the commonality among them is that there is no “school of thought” that explains everything.  So new schools get developed to explain the current events, or old ones that were discredits are resuscitated, but unfortunately we too often neglect the past, or at least the examples of the past.  Too often the obvious gets ignored.  For example, we cave money because we know there will be ups and downs.  Individual do it, so why don’t governments?  We know that we will pay for a product we need.  Demand drives the price.  If more people want it, the price goes up.  Been that way for…. ever maybe?  So in my recent reading I came across several musing that keep getting talked about by political pundits, but may be they are not what they appear to be.  So let’s take a look at a couple of these that might just affect us….

 

Is supply side economics is a myth developed by corporate economists to argue for lower taxes.  The concept is to give tax breaks to encourage manufacturers and businesses to produce more product which will reduce costs.  You know this is patently false.  Try selling your reclaimed water at a discount (or give it away) when it is raining.  Demand drives the economy, not supply.  Every economics student learns this in economics 101.  The supply side economics school developed as a means to explain stagflation in the 1970s. The idea what to give tax cuts to those who invested, so they would invest more to make new products, which would trickle down to the rest of us.  Still doesn’t work.  Why?  What they ignored was that the US industrial sector had saturated the US economy with goods and could not grow without new sectors to sell to.  Hence the push on Nixon to open up China to foreign trade and investment.  But opening foreign markets was great, except they could not afford our products.  So we had to make the products there, increase local wages so they could buy the products, and still shipped products back at a cheaper cost that to build them in America.  The idea is not new – recall Henry Ford set up the assembly line to cuts costs to allow him to increase wages so his workers could buy his cars.  The obvious question is when we saturate China, then what?  Africa?  Then what?  The economy cannot grow faster than the increase in population.  So why does supply side economics keep getting traction?  Did we mention those tax cuts….

 

To the big fashion in Germany and the EU is austerity.  Austerity is an economic idea that never seems to die despite very limited success and many, many failures.  It sounds great – cut costs and balance the budget while cutting revenues (income).  Ok, so let’s see how that works in your household – you quit your middle class job and take a minimum wage job.  You cut your expenses.  Except you can’t sell your house without a loss (and you do not have the cash to make up the difference) and you need your car to get to your new job.  But austerity says that if you eat rice, beans, cereal and Ramen noodles, you will soon be far better off than you are now.  No one will suffer.   Do you believe it?  Do you wonder why the Greeks and Irish are not doing so well today and why people are restless?  They used to devalue their currency, but the Euro prevents this.  They do not have away out.  Meanwhile Iceland devalued currency, let the banks fail, took over the bank assets, and are doing much better.  Austerity was not the option…. Just saying…  And who suffers the most?  Not the high income folks.

 

Tax cuts stimulate the economy.  Sounds great.  But, from 1944 to 1963, the income tax rate on the highest earning bracket in 1960 was 90% over $200,000.  Yes 90%!   The economy was great.  The middle class was born.  House ownerships jumped.  Education was up.  The economy in the 1970s stagnated after we cut tax rates.  We cut the income tax rate in the 1980s, but raised other taxes, and things improved, but then declined.  The economy improved after the Bush tax hike in 1991. It did not improve after the Bush tax cuts in 2001.  Interesting in their book Presimetrics, Mike Kimel and Mike Kanell noted that higher taxes seem to correlate with a better economy.  Is it because investors can’t sell stock so easily when they made a profit so corporations can count of investments longer?  Or is it that the increase in revenues allows the federal government to invest in more research and development that further stimulates the economy?  Did we mention the tax cuts favor the wealthy?

 

The moral of the story is that utility managers cannot ignore the economic realities around them.  We cannot be trapped by the musings of people who have hidden agendas, which means that our understanding of the way things are must extend beyond the utility itself.  The economy, economics, monetary policy, tax policy, demographics and change are areas that utility managers need to be current on.  Engineers and managers often understand these issues easily (most are mathematical) but we tend to focus only in out areas.  We need to become educated.  Recall the earlier blog where I noted the city manager who realized later that the reason elected officials tended to bad alternatives was they were being lobbied to approve the poorer options because their clients could make money from it.  You know many ideas that will be lobbied to elected officials and business people in the future.  You need to become educated on these ideas and how they affect your utility.  You know that rates that are too low will not increase revenues.  You know you need to expand sales when possible, perhaps serving new areas, and making the investments for same.  You know that not spending money will only increase the risk of failure in the system.  You know that not increasing pay will disenfranchise employees.  Prepare for these assaults so you can lead your utility down the proper path. 


Last week was one heckuva week for societal problems related to race relations.  Seems like someone turned over a rock and the 1950s crawled out.  We started with Cliven Bundy, the Nevada rancher who has been using federal property (read our land) for grazing his cattle for 20 years without paying for it, said after the armed confrontation with federal officials, that “I wonder if Negros weren’t better off as slaves.”  But he says he is not a racist, but wow.  That’s right up there with Rush Limbaugh’s comments about Native Americans in his book 15 years ago. 

 Then we had newspaper columnist and right-wing wonk, Thomas Sowell, who is black, saying in a recent column that “you are poor because you don’t work.”  And it is your fault you don’t work.  In “higher income families, people work.”  So using that line of racist nonsense, given that minorities are disproportionately un- or under-employed, does Mr. Sowell really believe that it is really the choice of all of these people not to work?!  Could there be any other causal links like the lack of education, decaying infrastructure or the lack of local opportunities in their community that might just come into play? That’s like saying Detroit’s problem is not the lack of job opportunities, but the fact that no one wants to work in Detroit.  I think not.

The we have Donald Sterling, the owner of the Los Angeles Clippers NBA team, who was taped making racists comments, then received a lifetime ban and multi-million dollar fine for his comments about minorities, and then, instead of apologizing, states that he wishes he’d just paid the woman who taped him off.  Huh?   Of course it is not the first time for Mr. Sterling who lost a case several years ago over his practices of renting property in LA, so I guess we should have expected it.

Of course there are those who argue these folks were simply misunderstood.  Maybe Mr. Sowell was just pandering to his fan base, but what does that say about his fan base that he can write a column that purports that “you are poor because you don’t work” because you don’t want to work and no one says anything?  He clearly appears to be besmirching the inner city minority population, but as I noted in a prior blog, rural America is significantly worse off economically than urban America.  Rural America is where health care suffers, the lack of health insurance is pervasive, income are lower and unemployment higher.  There are poor across all races, and in all settings.  And given his fan base is includes a lot of poor, white, rural people who aren’t making a lot of money or who can’t find jobs, he’s talking about you!

The Bundy comments stem from his standoff with federal officials over many years of not paying for grazing (like the rest of us could get away with that!).  He and those that came armed to his defense are more indicative of a larger, far-right, anti-government sentiment around the country that has persisted for years.  The west has a number of these groups (recall Ruby Ridge, Waco, Black Hawk helicopter-ists, etc.) that are basically anarchists that disagree with America as it is today.    All white.  But of course as we have seen in the Sudan, Rwanda, the middle east and throughout history, hate can come from all races and religions. All harboring hatred of others not like them.  Understanding why is more difficult, but the commonality seems to be that they all have the perception that the others are somehow treated differently, which allows them to move up the economic ladder faster or allows them to “game the system.”  The perception, which may be completely false, persists because it somehow justifies the actions of these people.

So given the comments of the past week, are we back in the 1950s?  Or 1870s?  How are we here in 2014?  Prejudice and hate were not wiped away magically by civil rights legislation, integration, communication and education alone, but really, does this type of attitude have a place in today’s world? If so why?  Hate has created trouble in the world for thousands of years.  Hate is a problem because hate is a means to distract people from real problems or to force your problems on others.  But in truth, psychologists will tell you that in most cases, the Haters tend to hate themselves, which is something we all need to remember.  Hate is developed because you cannot control a situation or someone else gets something you want.  Therefore it is that someone else’s fault, not yours.  It is easier when race, sex, sexual orientation, religion or other factors represent the “somebody else,” but the reality is haters hate themselves first, then project their hate onto others.  They need help. Professional help. Counseling.  Many of them. Even whole societies. They need to go get help for themselves and the rest of us. 

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