Category Archives: Budget

This Is What a Fiscal Meltdown Looks Like, III: Eating the Seed Corn

petersburg_visitor_center

Petersburg Visitor Center

Poor Petersburg. Financial consultants are advising City Council to save $300,000 this year and $400,000 next year by shutting down three museums and two tourism centers as part of a draconian plan to slash a projected $12 million budget deficit and work down a $19 million backlog in unpaid bills. (Read the details in the Richmond Times-Dispatch.)

City Council has not voted on the measure, but it has little choice in the matter. Its budget predicament is so catastrophic that it has no choice but to suspend all but the most essential services. That means the city is undermining its own economy. Fewer tourist destinations = fewer tourists = less business and tax revenue.

Sad, really sad. Let Petersburg be an object lesson to all. Never, never, never let your city or county to get into the same situation.

— JAB

Good News and Bad News for Virginia’s Finances

by Tim Wise

First, the bad news. The Richmond Times-Dispatch’s Michael Martz reported Thursday that “Gov. Terry McAuliffe will announce a shortfall of roughly $1.5 billion in the two-year state budget to the General Assembly money committees on Friday.” Martz explains:

“The governor will reduce anticipated revenues by about $850 million in the current fiscal year in response to a shortfall of almost $270 million in the year that ended June 30 and increasing pessimism about growth in income and sales tax collections. He will reduce projected revenues in the second year by about $630 million.

The revised forecast, required under state law because last year’s shortfall exceeded 1 percent of major state revenues, substantially reduces projected growth rates for both withholding and non-withholding income taxes, as well as sales tax revenues, the source said.

“The size of the projected shortfall comes almost two weeks after McAuliffe consulted with state political and business leaders in a meeting that one legislator called “cautiously pessimistic” about Virginia’s economy, especially with the possibility of potential cuts in federal spending under budget sequestration in the budget’s second year.

“In the last fiscal year, total state general fund revenues grew about 1.7 percent, lagging well behind the forecast of 3.2 percent growth.”

The Washington Post story by Laura Vozzella and Greg Schneider notes, “The (budget) shortfall would be among the biggest in state history. The worst was in 2010, when the General Assembly had to confront a $4.5 billion hole.”

The good news comes from George Mason University’s Mercatus Center, which recently released its 2016 edition of “Ranking the States by Fiscal Condition.” Separate files are available for the entire report, map, research summary, and dataset. The state fiscal rankings were prepared by Eileen Norcross, a senior research fellow and director for the State and Local Policy Project at the Mercatus Center, and Olivia Gonzalez, a research assistant for the State and Local Policy Project.

We growled about the 2015 edition here, noting that “Virginia ranks #21 in Norcross’ ranking of state fiscal conditions, just ahead of Colorado, Washington and Kansas, and just behind New Hampshire and Texas. Virginia ranked from 5th to 30th in the various categories used to compile the overall #21 ranking. These include:

• Cash solvency — 30th
• Budget solvency — 29th
• Long-run solvency — 27th
• Service-level solvency — 5th
• Trust fund solvency — 15th

But in 2016 ranking, Virginia improved by two places relative to the other states, moving up to #19. Before writing about Virginia, however, here’s the background on the fiscal rankings.

“A new study for the Mercatus Center at George Mason University ranks each US state’s financial health based on short- and long-term debt and other key fiscal obligations, such as unfunded pen¬sions and healthcare benefits. This 2016 edition updates the version the Mercatus Center published in 2015. Using the approach pioneered in 2015, the 2016 edition presents information from each state’s audited financial report in an easily accessible format, this time including Puerto Rico to provide a benchmark of poor fiscal performance.

“Growing long-term obligations for pensions and healthcare benefits continue to strain the finances of state governments, highlighting the fact that state policymakers must be vigilant to consider both the short-term and the long-term consequences of their decisions. Understanding how each state is performing in regard to a variety of fiscal indicators can help policymakers as they consider the consequences of policy decisions.

“The study also highlights some of the limits of the financial data reported by state governments. States release these data years after they are most relevant, and because the information is highly aggregated, analysts and the public have difficulty discerning the true fiscal position of any state.”

Now to Virginia. The state’s overall ranking increased two positions to #19. Here is Virginia’s narrative summary: Continue reading

Follow the Money, If You Can

sara_carterby Sara Carter

With all the negative headlines about local government budgets these days, many people would like to know how to tell if their locality is fiscally well managed or headed for trouble. Are there indicators that can tip us off that finances are deteriorating before the situation spins out of control?

Local budgets can be deciphered, but only if you have a tremendous amount of time and energy. Unfortunately, few citizens do. Even more unfortunately, not all elected officials do either.

Frequently, people will point to a city or county’s Comprehensive Annual Financial Report (CAFR) as a source of information. The CAFR, the product of a locality’s annual required audit, does provide insight into a locality’s financial performance. It tells whether the locality is practicing good financial standards, and it gives valuable data about how much money a locality has and where it is going.

A good outside auditor is a valuable resource to a county’s staff and board of supervisors. Auditors review all the elements required to close out the books for a given year but also provide insight into how finances are trending over time. They act as consultants for staff regarding best practices, and offer suggestions on what could be done better. For rural localities, the auditor’s consulting insights can be even more important than the CAFR itself. The presentation of the annual audit is an opportunity to have one of the most informative discussions of the year. Unfortunately, in too many localities, the CAFR is never presented in public, or presented with no public discussion. That is a lost opportunity.

The CAFR provides only part of what citizens need to know. Another source on your community’s financial well being is its bond rating. Here is the thing, though: Most small communities aren’t even rated. They can follow the best practices of AAA localities, but they won’t get a rating from the big guys.

So, if you want to know whether your community is attractive to lenders, you could listen to the financial analysts who give presentations regarding options for refunding or taking out more debt. Bear in mind, however, that the job of these analysts is to find ways to do these things. So, in order to gain perspective as to whether or not your community is doing well, you should to compare these presentations to those of similar-sized jurisdictions.

There is no one correct answer for how much debt is too much. It depends. How much growth is occurring in the tax base? Will the increase in the base cover a higher debt burden? What is the overall state of the county’s facilities? If you have a high debt load but all new facilities, the maintenance costs will balance out with the debt costs. On the other hand, if you have a relatively high debt burden, and your facilities also have relatively high maintenance costs, you are going to have a nightmare.

Several measures give an idea of how the debt looks. One was highlighted here on Bacon’s Rebellion last week: debt as a percentage of the property tax base. Another is debt as a percentage of the total budget. Yet another is the cost of debt service as a percentage of the locality’s budget, and what percentage of the debt that will be paid off in ten years. Again, none of these are particularly useful without understanding the local conditions and the political will of the community.

Citizens tend to pay attention to only one indicator of fiscal health: the tax rate. If a locality has a “reasonable” rate, and is not raising taxes in a particular year, chances are that citizens will be happy with the locality’s overall situation, even if all other items are a mess. In a year when the rate is being raised, citizens will vociferously complain, even if the reasons for the increase are sound, and the financial practices are all correct.

Now, where the real indicators of financial health can be found is in the county budget. Where is money being spent? How is it being spent? Even those questions require a tremendous amount of knowledge of local conditions.

For example, in Appomattox County, we own a large number of buildings and facilities. There are four schools, an old school used for a variety of purposes, an old courthouse, four voting precincts, two community buildings, a county administration building, a court building, a school board building, a school maintenance shop, and four other buildings housing various departments that serve the public. There are also seven places to take trash, an old landfill, a community park, and an industrial park. The money that is spent to heat, cool and maintain these buildings and facilities is spread throughout the line-item budget. Every facility has a constituency that would like to see it maintained, and likely improved. But there is no real constituency for the fiscal hard choices of eliminating some of these facilities or considering consolidation.

That is the level of complexity in a locality of 15,000 people for just one budget consideration. Then consider other basic services and state mandated programs like the Child Services Act (CSA, previously the Comprehensive Services Act) or storm water. Adding another layer of complexity is assessing how thoughtfully and efficiently your locality is spending money. This may be the most tedious and challenging part of the equation, but it is also the one most likely to be ignored. Both citizens and elected bodies tend to focus on whether the budget balances and whether a tax rate increase will occur.

Really, given the complicated nature of public finance and the competing pulls on local elected bodies, it is a credit to professional staff and auditors that more localities don’t have serious issues. The real challenge for citizens is this: Don’t wait for your locality’s fiscal problems to explode. You’ll have plenty of warning… if you are paying attention.

Sara Carter serves on the Appomattox County Board of Supervisors.

Virginia Retirement System — Trouble Ahead

Last week as I was watching the business channel, I was very interested in the comments of AIG’s head of investments about the effects of low interest rates on his firm. For those involved in life insurance and other long-term products, today’s historically low interest rates pose a significant problem. With negative rates on investment-grade bonds, insurers have no choice but to raise prices to the consumer or leave markets where bond yields are not high enough to support interest-sensitive products.

This morning’s Richmond Times Dispatch brought the issue a little closer to home. House Speaker William J. Howell wants to shift from the current structure to a self-managed system. In other words, employees would manage their own retirements and, as is the case with 403b plans or IRAs, would take their accounts with them when they shift jobs. (As a retired teacher, I receive a small pension from the Virginia Retirement System.)

It is unclear from the article how, under Howell’s proposal, the employee would fund this. Would employees receive a stipend equal to the amount that school districts currently contribute on their behalf to VRS? Or would they be totally on their own? If the latter, the state would be shifting not only market risk but the actual cost to teachers and its other employees.

Teaching has always been a relatively low wage profession. One of the unspoken deals always was, “You work for a low wage now and we will help you out in your later years.” The article leads me to conclude that Howell wants to destroy that bargain. Sure, we all want to be on our own, but attracting skilled folks to the teaching profession, which has seen a decline in real wages since the Great Recession, will be even more difficult. Funding their own retirement is a risk that few will be able to afford.

— Les Schreiber

Harder Than It Looks

When Bacon's Rebellion caught up with Sara Carter, Appomattox County supervisor, she was driving this snappy yellow two-seater. She insists that she normally drives a "mom" car, but when she, her husband and kids start playing musical chairs with cars, she sometimes ends up with her husband's "midlife-crisis car."

When Bacon’s Rebellion caught up with Sara Carter, Appomattox County supervisor, she was driving this snappy yellow two-seater. She insists that she normally drives a “mom” car, but when she, her husband and her teenage children start playing musical chairs with cars, she sometimes ends up with her husband’s “midlife-crisis car.”

by James A. Bacon

Elected to the Appomattox County Board of Supervisors in 2013, Sara Carter enjoyed an edge over other newby supervisors when it came to learning the intricacies of local government — she also was serving as planning director for  Cumberland County not far away. An “exemplary” certification program provided by the Virginia Association of Counties (VACO) on open government and other legal aspects of the job was helpful. But when it came to deciphering government finances, she was largely on her own.

Carter and I chatted early this morning at a Sugar Shack (obscenely delicious doughnuts guaranteed to cut short your life expectancy) while she was in Chesterfield County for a VACO conference. She reached into a tote bag and pulled out two hefty documents, one a line-item budget, the other a copy of the Comprehensive Annual Financial Report. No one offers certifications for reading documents such as these that would make even a CPA’s eyes glaze over.

Our discussion was prompted by the travails of Petersburg City Council, which got blindsided by a massive backlog of unpaid bills and a budget deficit equivalent to roughly 20% of the budget. While steering clear of comment upon Petersburg’s woes or the performance of its council members, Carter emphasized the challenges of councilmen and supervisors of small towns and rural jurisdictions in Virginia.

For starters, the subject matter is forbiddingly complex, encompassing a wide array of disciplines — even for a College of William & Mary grad like Carter. It can take years for a novice to master the nuances  of everything from school funding, public works, water & sewer, public safety, and transportation, land use and community development.

VACO’s programs focus mainly on public policy issues and on keeping newbies from violating open-government laws, such as unwittingly discussing in private communications or chance encounters subjects that should be limited to a public forum. Those topics are important, Carter says, but newcomers need help on other subjects, too.

Second, part-time public officials have a limited amount of time to dedicate to understanding the numbers. Most members of the Appomattox board work for a living. She, too, has a full-time job, not to mention a marriage, three children and a small pig farm to occupy her attention. And when she is on the job, her time is often consumed by “micro” issues that get people stoked up but have minimal budgetary impact. “I can’t tell you how much time I’ve spent on the animal shelter,” she says. “Animal people are crazy!”

To understand local finances, elected officials typically rely upon presentations by city or county staff. The quality of staff varies widely in smaller localities. (She’s quick to sing the praises of Appomattox’s county manager.) Competent, ambitious managers often move to larger jurisdictions that pay better. “You have board members who don’t understand finance. They listen to staff – and the staff is often overwhelmed, too.”

Another source of advice comes from outside financial advisers such as Davenport & Co., a Richmond-based investment banking firm. While Davenport’s representatives are professional – she does not question their integrity – they do have a subtle bias. They make money by selling bonds, Carter observes. They don’t make policy recommendations on whether or not to sell bonds. But, she adds, “their job is to sell a product.”

When she joined the Appomattox board, the county enjoyed sound finances and low indebtedness, and it had the capacity to issue new bonds, Carter says. What the books did not say, she adds, is that important public buildings suffered from a major maintenance backlog. The balance sheet did not necessarily reflect the true condition of the county’s assets – a level of detail that investment bankers from Richmond might not be familiar with.

A third challenge is citizen indifference. Only one issue is guaranteed to pack the supervisor chambers – a proposed tax increase. Many are the meetings where no more than one or two citizens show up. Supervisors get punished for taking a highly visible action like raising the property tax, but no one notices if they take budgetary short-cuts that undermine the county’s fiscal health.

Most people don’t pay attention to the nitty gritty issues of local government until things fall apart, Carter says. “Then they want to know, what went wrong?”

This Is What a Fiscal Meltdown Looks Like, II

Looks like you'll have to repair it yourself, boys.

Looks like you’ll have to repair it yourself, boys.

by James A. Bacon

The fiscal chickens are coming home to roost in Petersburg, which has racked up some $19 million in unpaid bills and is on track to run a $12 million deficit this year. The city is learning what happens when vendors are scared of not getting paid.

Yesterday, we heard that Central Virginia’s regional waste management authority was threatening to suspend the city’s garbage pickup and recycling services due to $632,000 in unpaid bills. Today we read that one vendor has repossessed $390,000 worth of new firefighter breathing apparatuses, while another, owed about $1 million, has terminated a contract to service police cars, fire trucks and other city vehicles.

First Vehicle Services Inc., a national vendor, claims to be owed $1.1 million, according to the Richmond Times-Dispatch. The city asserts that it owes only $844,000. The contract was terminated in April at the city’s request, city officials say, to move all repairs in-house as a budget efficiency.

Meanwhile, Richmond-based Fire Protection Equipment Co. repossessed 53 new breathing apparatuses purchased through a Federal Emergency Management Agency grant. Under the grant, FEMA would pay 90% of the $568,000 tab while the city paid 10%.

According to Deputy Fire Chief Brian Sturdivant, the FEMA funds arrived in two payments, but he doesn’t know what happened to the money:  “That’s a question for the city manager. We have followed the requirements of the grant, but once the paperwork leaves the fire department, it heads straight to City Hall.”

The new breathing apparatus replaced older equipment that was suffering wear and tear. Last month, older equipment failed for two firefighters, one of whom had to be treated for smoke inhalation.

Meanwhile, the fire department has suspended annual physicals for its firefighters due to an unpaid balance with its contracted physician.

Bacon’s bottom line: Now that vendors understand Petersburg’s perilous fiscal condition, they’re stampeding toward the exits. As they try to limit their exposure, one piece of bad news feeds the next. It’s ugly, and it’s terrifying, and it’s putting Petersburg citizens and employees at risk. But this is what happens when a local government experiences a financial meltdown.

Hopefully, Petersburg will serve as a sobering example for others. Virginians need to move beyond the gawking-at-the-fiscal-car-wreck phase and start asking serious questions. Is Petersburg a one-off situation, or is it suffering from systemic challenges that potentially threaten other Virginia localities? If other localities are in earlier stages of financial collapse, is their predicament due to managerial ineptitude, flawed policies, or structural issues beyond their ability to control? What can be done to ensure that similar meltdowns don’t happen to anyone else?

This Is What a Fiscal Meltdown Looks Like

And you thought the dead-baby-in-a-Petersburg-garbage-truck story was bad! Photo credit: WTVR

And you thought the dead-baby-in-a-Petersburg-garbage-truck story was bad!  Photo credit: WTVR

by James A. Bacon

Here’s what happens when you run a city government like Petersburg into the ground: The regional waste management authority is threatening to suspend its trash removal and recycling services unless the city commits to a plan to repay the $632,000 it owes.

City residents and businesses have been paying their monthly fees to the city, but the city has fallen way behind in its remittances to the Central Virginia Waste Management Authority (CVWMA], which in turn contracts with a local vendor, Petersburg-based Container First Services.

“We have been paying that vendor and without receiving compensation from Petersburg, we won’t be able to sustain [the service] too much longer,” CVWMA Executive Director Kim Hynes, told the Richmond Times-Dispatch.

The unpaid bills are not trivial. CVWMA, which provides waste management services to 13 localities in Central Virginia, generated $13.4 million in operating revenues in Fiscal 2015, according to its 2015 comprehensive financial annual report.  Petersburg’s unpaid bills far outweighs the $48,000 operating surplus the authority generated that year and the $501,000 cash it reported on its balance sheet.

Years of fiscal mismanagement came to a head this summer. A recent state audit of Petersburg’s finances revealed that the city is facing a $12 million budget gap in the current fiscal year while also dealing with $19 million in unpaid bills.

Bacon’s bottom line: The cost of Petersburg’s fiscal ineptitude is not limited to Petersburg. The inability to pay $632,000 in back bills puts the waste authority in an untenable situation. Either it stops providing garbage and recycle pickup for the city, which creates a potential health hazard for Petersburg citizens who have dutifully paid their bills, or the authority puts its own finances in jeopardy. Petersburg’s inability to pay its bills could potentially force the other jurisdictions of the Richmond region to step in to support the authority financially.

The moral of the story: When local governments are tied together through various regional compacts, a financial meltdown of one locality can shock waves to its neighbors.