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On Taxes and Fees – Is starving Government the Answer?

October 6, 2015
Banking industry, borrowing for infrastructure, engineering, ethics, finance, Leadership, local government, management, Reserve Funding, reserves, Responsibility, Revenues, Risk, Road Repair, sanitary sewer, Uncategorized, Water Funding, What could possibly go wrong?
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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.

Reserves for Government

September 22, 2015
borrowing for infrastructure, economy, finance, politics, Reserve Funding, reserves, Revenues
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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!

Ability to pay?

April 28, 2015
finance, Leadership, management, Revenues, Water Funding, water sewer management
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So what does ability to pay really mean?  We hear this discussed by political pundits and local officials but few really understand what this means.  Likewise the “I’m on a fixed” budget argument pops up a lot, and it is hard to understand what this really means.

The ability to pay concept was developed many years ago by political scientists and economists looking at the allocation of costs to consumers for government services.  Property taxes are a logical place to start – higher value homes have more potential for loss, so their taxes were more (the percent was the same but because of their value the amount was higher).  For income taxes, those with higher incomes we deemed to have more disposable income and again more to lose, so the rates increased as income rose (we forget that until 1963 the highest income tax rate was 90%, and the economy was growing quickly!).  People with lower incomes had little disposable income because all their money went to food and housing.  Today the issue of affordability arises with water, sewer, taxes and storm water fees, as well as federal and state taxes.  The SRF and bonding agencies often look at 3.5% or 4.5% and the maximum water or water/wastewater cost as a percent of income, but few  utilities charge this much.  Few water and sewer utilities (combined) approach the cost for power per household, let along the cost of cable or cell phone use for all but the cheapest carriers.  Certainly water, sewer and storm water are essential service, but not so much cable, although there are those who will argue the point.  So somehow the ability to pay issue does not apply to private sector services, but does to essential services, especially when we all know we do not collect enough money to cover significant infrastructure needs on those public works systems?  That just does not make logical sense except in the political world.

Likewise the “fixed income” argument is often applied in tandem.  Fixed income is generally applied to retirees, but let’s not forget that 10% of those in poverty are retirees, but 18% of millionaires are over 65.  But don’t most people have a fixed income – their income is fixed by their employer.  They can change jobs but the argument that younger folks should change jobs if they want to earn more is like telling retirees to go back to work.  There is only so much we can do and only so much income to be earned because few control their income.

So on both counts, the ability to pay argument seems like an argument created to keep public service costs down and prevent the full cost application to many.  The squeaky wheel gets coddled, at the expense of society.  Somehow that is not fairness, and subjects us all to unnecessary risks.  The question is who is going to be the person/group to stand up and say enough?

An Answer: If the assumption of all economists, government officials and investors is that the population must increase exponentially, what does that suggest for our future?

October 29, 2014
Banking industry, funding, growth, infrastructure, Krugman, Leadership, management, peak oil, resource depletion, Revenues, sustainability, Uncategorized, water supplies
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“If the assumption of all economists, government officials and investors is that the population must increase exponentially, what does that suggest for our future?” was a question asked a few days back.  Did you ponder this at all?  I suggest we should and here is why.  An exponential growth rate assumes a certain percent increase every year.  That means the increase in population is greater the farther out you go.  That doesn’t really make sense except perhaps at one point in Las Vegas (but not anymore).  The economy cannot really expand at a rate greater than the expansion of the population because there is no one to buy the goods or increase the demand, which is why increasing the US population is going to be viewed favorably by all politicians regardless what they say today.  House values do not increase faster than population increase unless they are in a bubble, nor does the stock market really (inflation adjusted).  Your water sales will not increase faster than your system’s population increase for any extended period of time either, so an assumption of ever increasing water sales is likely to be an overestimation sooner as opposed to later.  And then what – you have to raise rates, and keep raising rates to keep up because your demands are too low?

And what if your growth stagnates, or goes backwards as many did in 2009/2010?  That was a severe problem for most entities, causing layoffs and higher prices, pay cuts and deferral of needed improvements, mostly because no one had reserves because people thought the good times would roll on forever.  Layoffs, price hikes, pay cuts and deferral of needed improvements do help society (of course if you had lots of reserves, you weathered the recession without a problem, but too many did not).  Keep in mind the repair, replacement, and maintenance needs, along with ongoing deterioration, do not diminish with time or lack of new customers.  We have relied on new people to add money to solve old as well as new problems for many years.  What is the contingency if growth stops?

So a growth scenario makes us feel better and more confident when we borrow funds.  But if growth does not stop, where is the water to come from?  What are the resources that will be used faster?  Where does the power come from to treat the water or cool the houses?  And the cooling water to cool those power plants?  Even renewable resources are limited – most metals and oil have likely passed their peaks as far as production and water does not always fall consistently.  We have overstressed aquifers and over allocated surface waters, especially in the west.  So while growth makes us feel good financially, we need answers to the growth scenario despite the fact that we may have more funding.  Many resources are not limitless, but an exponential growth pattern ignores this.  Locally growth maybe less of an issue, but society wise?  Maybe a societal problem, or maybe we get into extreme completion with each other.  Some how that doesn’t look like a solution either

A GRIM FISCAL FAIRY TALE

October 17, 2014
Banking industry, Congress, debt funding, Economic Bubbles, economy, finance, funding, income disparity, Insurance, Leadership, planning, politics, Responsibility, retirement, Revenues, Risk, sustainability, Uncategorized
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Once upon a time, people worked until they died.  But the longer people lived, the more infirmities impacted older people, and the concept of stopping work came into play.  So these folks labored all their lives, put some money away in a safe place, like a bank, where someone else would watch over an manage their money until they needed it.  Then one day, they found out that the banks have gambled and lost on real estate, and their money was gone.  There was no government to bail anyone out.  So the people had to try to go back to work, became beggars and destitute or died.  The government thought this was unfair to those older folks who had worked so hard, but through absolutely no fault of their own, had lost everything.  So the government decided that it would “tax” people a portion of their income, and put it into a retirement system.  People could retire at 65, and of course they were only expected to live another r3 or 4 years.  There were 16 people laying in for every person taking out.  And the government told the banks that they could not gamble with people’s hard earned savings, passed legislation and created an insurance pool to backstop losses by criminal or unethical activity.  All was good and the people were happy.

As time went on some things changed.  For one, people lived more than 3 or 4 years.  The population retirees increased, and the ratio dropped to 1:10 and then to 1:6 ration of retirees:workers, but the “tax” did not go up, but investments were made that increased the pool.  It was called good management.  The government also encouraged people to save money by deferring taxes, which they did, and the banks used it to make money.  All good as long as the investors gambled well.  They gambled so well, they were able to talk the government into undoing the anti-gambling rules from the past, so their pool to invest was twice as much.  And the markets grew and the portfolios grew and the people were happy.

And then it came to pass that the banks again gambled on real estates, and created complicated investment tools to hide the risk, but the risk was exposed and half the money was gone overnight.  And the retired were wondering about jobs again.  But there were no jobs.  And the employed now had fewer jobs.  So less people paid into the system.  And the people were sad.  And mad because they thought they were being protected from the gambling of the past.  They did not understand.

And the government could supply no answers because they had changed the rules and they knew the people would be unhappy, so the government felt there was no choice, so they borrowed money, and bailed out the banks.  And some people were happy.  And some people were concerned about all that debt.  And some people wondered why it was that history could repeat itself and put society at risk.  And some people asked why people who did bad things were not punished.

And none of these questions has been answered.  Good thing that these fairy tales don’t depict anything real right?

Financial Traps for local governments

October 13, 2014
Banking industry, debt funding, economy, finance, growth, Leadership, local government, management, politics, Revenues, sustainability, Uncategorized
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Some recent reading led me to the following items that seem to crop up when municipalities have fiscal problems that are not otherwise created by the economy or federal or state government decisions:

Assuming high returns of retained earnings (Orange County, CA)

  • Pension systems that are underfunded (Portland OR, and others)
  • Lack of appropriate financial advisors (many)
  • Assuming growth will be exponential
  • Failure to address deterioration of infrastructure (many)
  • Getting involved in complicated credit swaps and revenues tools involving borrowing (Detroit).
  • Declining use by customers that are economically stressed (many)

Food for thought… or caution.

Pyramid Schemes and Pension Plans

October 4, 2014
borrowing for infrastructure, debt funding, economy, innovation, Leadership, local government, planning, politics, Responsibility, Revenues, sanitary sewer, sustainability, Uncategorized, utilities, Water Funding
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A Ponzi scheme is an illegal program whereby investors are promised big return son investments in a short period of time, and where the underlying basis for this return is deliberately mis-stated.  We continually find people who perpetrate Ponzi schemes and when they are finally caught, they get put in jail.  For those unsure, a Ponzi scheme is defined as a scheme where the scheme operator says they will pay a high return to its investors from their original investment, but instead uses money from new capital paid to the operator by new investors rather than from profit earned by the operator.  Hence it is a flow through of money from people putting money in to people who are getting out.  To get returns on the investments for the earlier investors, the pool of new people must increase with time, so that there are always more people paying in that there were previously.  It that does not occur, then we have a problem.

What is a retirement system?  A retirement system is a form of deferred compensation used to attract and keep workers, by deferring a portion of their pay 10, 20 30 or 40 years from now.  It is part of the compensation to the employee.  With a retirement system, people pay into a program, where their money is invested.  A retirement system tends to rely on the fact that the number of people paying in increases exponentially so that the actual invested dollars are never touched, instead the new proceeds exceed the monies paid out.  For a pension, plan it assumes your invested dollars remain invested and profitable, and that the revenues from the new people in the system, exceed the monies paid to retirees.  What is the difference?  Well, the retirement system actually supposedly has assets while Ponzi scheme does not.  Otherwise, the systems work similarly – dollars paid in generally go out to others, and there is an assumption that the number or payees increases exponentially (a percentage every year).

So what happens to a pension plan when the number of employees decreases from 6.7 million to 4.4 million over 40 years?  Would you expect there to be a pension plan problem?  And if so why?  And who is at fault?  That is exactly what has happened to federal government employees since 1967.  And many states have seen reductions in the last 20 years as well.  So it is any wonder why these pension systems might be at risk?  The push to privatize services ensures that the basic assumption that the number of payees in a pension plan increases exponentially will be violated, which makes the pension plan vulnerable.  And ho is at fault.  I would suggest the people pushing privatization, who look only at short term consequences as opposed to long-term impacts.  Perhaps this needs to be part of any such discussion going forward.  Just a thought…

Post Recession Good News

September 29, 2014
finance, funding, Leadership, local government, management, planning, politics, Responsibility, Revenues, sanitary sewer, Uncategorized, utilities, Water Funding
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The National League of Cities reports that nearly ¾ of municipalities are better off in2013 than they were in 2012.  In Broward County, over half the cities actually have more revenue in 2013 than they did in 2006.  Property values are up in 72% of Counties, and real estate activity was high in 2012 and 2013, although it has slowed in 2014.   Nearly 60% of the municipalities were not projected deferral of capital improvements, although 1/3 expect to reduce maintenance and 40% to defer capital.  The biggest challenge cities identified was street condition (23%, followed by sewer, stormwater and water although these were all under 16% which is a bit disappointing given the condition of much of this infrastructure).  Money remained their biggest challenge.  Total local government budgets are $3 trillion, and the bond market Is a robust $3.7 trillion.  New construction for local water, sewer and stormwater infrastructure is expected to reach $750 billion in 2014, with 3.2 and 4.8 billion respectively for water and sanitary sewer.

Pensions are the biggest liability and one that is critical for many local entities with their own pension plans (like Detroit).  Many others have or will migrate to a state plan, or were already part of a state plan.  Having a large pool off employees decreases risk to the pension plan and increased revenues (and future outlays).  Pension plans or Ponzi schemes?  Now that is the question….

Responsibility, Failure and the Lack of Funds

September 20, 2014
borrowing for infrastructure, Climate, communciations, Congress, debt funding, Economic Bubbles, economy, funding, growth, infrastructure, innovation, JObs, Leadership, local government, planning, politics, Responsibility, Revenues, Risk, Uncategorized, Water Funding, water sewer management
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Public water and sewer systems have the responsibility to protect the health, safety and welfare of the public they serve, just as engineers do.  This is includes not just complying with regulatory mandates (they are minimum standards), but enacting such precautions as are needed to address things not included in the regs.  Unfortunately we continue to pay too much attention on regulatory compliance and evaluate the condition of the system using unaccounted for water losses or leaks fixed in the system as a measure of condition.  That may be an incorrect assumption.  The problem is that unless we understand how the system operates, including how it deteriorates with time, the data from the past may well be at odds with the reality of the future.  For example, that leak in your roof can be a simple irritation for a long time if you ignore it.  But ignoring it creates considerable potential for damage, including roof failure if too much of the structure underneath is damaged.  With a water system, pipes will provide good service for many years will minimal indication of deterioration.  Then things will happen, but there is little data to indicate a pattern.  But like your roof leak, the damage has been done and the leaks are an indication of the potential for failure.  Bacteria, color, pressure problems and flow volumes are all indicators of potential problems, but long-term tracking is needed to determine develop statistical tools that can help with identifying end of life events.  Basic tools like graphs will not help here.

Construction to repair and replace local water, sewer and stormwater infrastructure is expected to reach $3.2 and $4.8 billion respectively for water and sanitary sewer. The federal SRF programs are only $1.7 Billion in SRF loans, 24% below 2012 and well below the levels identified by the federal government to sustain infrastructure condition.  The only reason for the decrease seems to be a demand by Congress to reduce budgets, especially EPA’s budget where this money resides.  But the 2008 recession and its lingering effects to date have deferred a significant amount of infrastructure investments, and the forecast does not rectify the past deficits, and likely does not address the current needs either.  Few water and sewer systems are flush with funds to update infrastructure and borrowing has become a difficult sell for many public officials.  Lake Worth, FL just had a $60 million bond issue for infrastructure redevelopment defeated by voters two weeks ago.  The officials know they need this infrastructure, but the public is unconvinced because few serious problems have occurred.  We have to get the public past this view so we can improve reliability and public safety.  Those are the arguments we need to demonstrate.  The question is how.

 

Risk of Losses for Property In Florida

September 8, 2014
Banking industry, Education, innovation, Insurance, JObs, Leadership, politics, Reserve Funding, reserves, Revenues, Surpluses, sustainability, Uncategorized
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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.