Category Archives: Budget

No State Bailout for Petersburg

petersburg_city_hallby James A. Bacon

The City of Petersburg is on its own. There appears to be no sentiment in either  the McAuliffe administration or the General Assembly for cutting the fiscally ailing city any slack. Even the city’s own representatives in the legislature aren’t pushing for any special treatment by the Commonwealth.

“There is a feeling that the state doesn’t want to reward poor public performance,” Secretary of Finance Richard D. “Ric” Brown told the Richmond Times-Dispatch in an article appearing today.

A bailout of Petersburg is out of the question, said Del. Steven Landes, R-Augusta, who is heading a subcommittee to study the problem fiscally stressed localities. “I’m not aware where the state has ever stepped in to provide a locality a bailout,” he said. “I don’t see that happening.”

The state requires localities to file Comprehensive Annual Financial Reports (CAFRs) each year with audited financial data. Landes said his committee will look into what the state can do to shorten its response time when a locality is heading toward a fiscal cliff. “We want to make sure that audit information is getting to the money committees and the administration, because we would much rather be kept abreast sooner rather than later.”

Bankruptcy is not an option either. Federal law allows financially distressed localities, public utilities and school districts to see the protection of Chapter 9 bankruptcy court, and more than 50 localities nationwide have sought it over the past seven years. But Chapter 9 refuge requires state approval, and Virginia law does not allow localities to file for bankruptcy.

Bacon’s bottom line: It is reassuring to see the state drawing a cordon around the badly managed city. Citizens have to clean up their own mess. A likely first step is to throw the bums out and replace them with more competent individuals. If the crisis impels a new leadership to re-think how core government services are provided, Petersburg could emerge better and stronger than before.

Moreover, Landes’ subcommittee can play a helpful role in spotting financial warning flags in other localities before they reach crisis dimensions. Citizen leaders of many small localities (and even some large ones) lack the knowledge to read the CAFRs with any discernment. One useful thing that the state can do is to monitor the CAFRs of all jurisdictions and let their elected officials know if their numbers are looking problematic.

This Is What a Fiscal Meltdown Looks Like, IV: The State Intercepts Your Aid

Melt down

Melt down

by James A. Bacon

The City of Petersburg’s fiscal meltdown is reaching a new crisis stage as an Oct. 1 deadline nears to make a $1.4 million payment to the Virginia Resources Authority (VRA), a state funding source for local infrastructure financing.

In remarks to the Richmond Times-Dispatch following a House of Delegates Appropriations Committee hearing yesterday, Secretary of Finance Richard D. “Ric” Brown said that the state might have to “intercept” state aid to Petersburg in order to meet principal and interest payments on VRA bonds backed by the moral authority of the state.

The General Assembly had convened the session to discuss how to build a firewall between Petersburg and the rest of the state. The city faces a $12 million budget deficit this year as well as estimated backlog of $19 million in unpaid bills.

“I just hope we are not heading down this road where we are digging the state into a hole,” said Del. R. Steven Landes, R-Augusta, chairman of a task force formed to study the impact of fiscally stressed localities on the state.

“We’ve got to figure out what change we need to make from a state’s perspective; we need to protect ourselves,” said Committee Chairman Chris Jones, R-Suffolk, as reported by the Richmond Times-Dispatch. “VRA debt can be an issue that can affect our bottom line. We cannot allow [a default] to occur. It’s very distressing when you see what has occurred, and hopefully [the city] will continue to try — in a very straightforward way — to deal with the issues.”

So far, Petersburg officials have yet to ask for state bail-outs. Secretary of Finance Richard D. “Ric” Brown and his office have lent considerable “technical assistance” in disentangling the city’s finances. But other than shaking loose some funds to help the city’s school system, the McAuliffe administration has taken no concrete measure to ease the city’s burden — and it likely would meet considerable resistance if it tried to do so.

City Council has been enacting draconian cuts to the budget in a desperate effort to stem the red ink. Whether it can find $1.4 million to pay the VRA is an open question. The state has a lot at stake.

Created by the General Assembly in 1984, the VRA has funded more than $7 billion in investment in 1,000 projects across the Commonwealth. According to the VRA website, this is how the program works:

VRA sells bonds and then loans the proceeds to local governments to finance eligible infrastructure projects. The borrowers’ interest rates are based on the rates that VRA obtains in the public bond market. Based in part on the use of the Commonwealth’s moral obligation, VRA’s high credit ratings typically result in interest rate savings for localities. This translates to reduced rates, taxes and user fees for borrowers’ constituents.

Come Oct. 1, if Petersburg fails to make its $1.4 million payment to VRA, absent state intervention, the authority will be unable to make the interest and principal on the bonds sold to investors on Petersburg’s behalf. Those bonds are backed by the “moral authority” of the state, which does not legally obligate the state to made good, as it would if the bonds were backed by the full faith and credit of the state. But a failure to back Petersburg’s payment would damage the state’s moral authority, thus undermining the entire premise of the VRA, harming other localities who might wish to borrow from it, and perhaps even calling into question the creditworthiness of other categories of bonds backed by the state’s moral authority.

Allowing a default on the VRA bonds is, in a word, unthinkable. But bailing out Petersburg would create a moral hazard. If the state bails out Petersburg once, then why not twice? If the state bails out Petersburg, then why not some other hard-pressed locality? Fiscal discipline could unravel.

Brown clearly understands the state’s quandary. Speaking to reporter Markus Schmidt after the hearing, the finance director said he might have to “take certain steps to intercept aid” from the state to Petersburg to make sure the payments are made. He acknowledged the hardship such an action would create: “In many cases for the city, that would make matters a lot worse for them.”

Don’t Short-Change Our Troopers

state_policeby James A. Bacon

The Virginia State Police face a severe manpower shortage: Veteran police are resigning faster than recruits can be trained. In the first nine months of this year, reports the Richmond Times-Dispatch, 103 sworn employees and 76 civilian employees have left the department. Meanwhile, applications to join the state police have fallen 49% since February.

Excluding police in training, the department is 220 troopers short. In the Richmond area, state police have lost 11 troopers from the 40-trooper allotment for Area 8. Staffing frequently dips below the “safe and acceptable minimum” of 18 troopers needed for each 24-hour period, according to a memo written by Col. W. Steven Flaherty, state police superintendent.

Applications for law enforcement are trending downward nationally, said Flaherty, but the problem is accentuated in Virginia by noncompetitive starting salaries.

“Our troopers are taking up collections for other troopers who cannot afford to buy their own lunch,” one commander wrote to another state police official in an email. “They are risking their lives every day and cannot afford to eat. What does that say?”

Since 2006, reports the T-D, the state police have experienced a $94.2 million reduction in General Fund budget resources. Additional cuts under consideration would hack out another $13.1 million.

Bacon’s bottom line: While reading this article this morning, a story appeared on the television news about an inexplicable and horrifying police shooting of an unarmed black man in Oklahoma who appeared not to be threatening or resisting in any way. Now, I can sympathize with how difficult it is to be a police officer never knowing if the subject of a stop will resist violently. Nationally, the number of police shootings is up markedly this year. But the juxtaposition of the two stories tells me that we need more than ever to hire the highest-caliber police officers who can exercise good judgment and maintain their cool in tense, ambiguous situations. And we don’t accomplish that aim by neglecting pay raises and slashing departmental budgets year after year.

Budget makers face hard choices in allocating scarce resources. I do not envy their job. But law enforcement is a core function of government. If the state police budget is to be cut, then the department’s mission must be redefined to align it with the resources available. Stressing troopers by stretching the force too thin cannot possibly end well.

No Magic Bullets, Just Hard Work

goochland_county_courthouse

Goochland County Courthouse

by S.E. Warwick

The fiscal perils of Petersburg are not unique. Five years ago Goochland County was in similar disarray. Then ten citizens, serving on a newly elected board of supervisors and school board, stepped forward to transform the county government from a dysfunctional mess into a model for the region. The turn-around, a great untold story, shows what everyday people can accomplish when they put their minds to it.

In late 2008 irregularities appeared in the Goochland Department of Public Utilities. Checks found stuffed in drawers and a safe, rather than deposited in the proper accounts, raised the first red flag. Utility billing was erratic at best.  In a public utility system with fewer than 3,000 customers, water meter records were unreliable. Forensic accountants called in to audit departmental records found widespread irregularities but no behavior that rose to the level of criminal. The director of public utilities departed.

The county administrator “retired” suddenly following a ham-fisted attempt to gag county employees. An interim county administrator recommended that a new auditor be retained to complete the FY 2009 Comprehensive Annual Financial Report, which uncovered 40 material restatements. The accounting firm used by Goochland for more than a decade was found to have closed the county books then audited its own work.  Internal accounting controls were few and not well observed. The actual general fund balance turned out to be half of its assumed value.

The school board refused to present budgets based on available revenue and demanded that the supervisors raise taxes.

Then the county treasurer was caught embezzling public funds, which brought more official scrutiny of Goochland’s fiscal matters.

Citizens were increasingly outraged as good old boys, in power for decades, used the “whistle past the graveyard” approach to the growing problems faced by the county.

In November, 2011, voters elected an entirely new school board and four new supervisors. They campaigned together listening to the concerns and complaints of the citizens, and had common goals—make Goochland government work for its people and restore public trust.

Even before taking office, the “new broom” as many called the new team, crafted strategies to reverse years of lackadaisical government. Relations between the supervisors and school board became collaborative instead of contentious. Budgets were trimmed with surgical precision to address falling tax revenues and cut out dead wood.  Some functions were consolidated, others eliminated.  The tax rate held steady at 53 cents per $100 of valuation because the supervisors believed that government must live within its means, and higher taxes would discourage badly needed economic development.

The world did not end.

Core services got priority. The budget process added a look-ahead provision to anticipate and plan for extraordinary costs. Public meetings were live-streamed using a free service.

Massive debt was restructured to a manageable level. A policy to limit debt service to a small percentage of the annual budget was adopted.  Financial professionals were added to the county staff.  Goochland County earned a AAA Standard & Poor’s Bond Rating in 2015 and now regularly receives accolades for its budgets. Schools rank at or near the top in the area. Economic development, which was dead in the water under the old guard, is, thanks to a new attitude and streamlined procedures, picking up.

A skilled county administrator, working in concert with the supervisors, transformed local government from a collection of fiefdoms that often worked at cross purposes, into a team whose primary goal is to provide excellent and efficient service to citizens.  Citizens are encouraged to “grade” interactions with county government.

Why did the “new broom” team do it? Certainly not for the modest salary, nor for personal gain. They could easily have turned a deaf ear to the county’s problems and enjoyed their lives. In the best traditions of citizen leaders, Goochland’s supervisors and school board pledged their time and talents to reform local government.  They rolled up their sleeves to ask hard questions and seek remedies for insoluble situations. They have high personal standards and understand that they answer to the citizens and are accountable for their actions.

In Goochland, the right people stepped forward when voters were looking for people to fix a badly broken organization.  These citizen leaders spent untold hours looking for ways to do things smarter, better, cheaper. Good government, they contend, is common sense in action. They have been in office for five years and are not done yet. No magic bullets here, just hard work and commitment to the citizens who put them in office.

S.E. Warwick, a Goochland resident, publishes the “Goochland on My Mind” blog. For years, she has been the only journalist regularly covering Goochland board of supervisor meetings.

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.