Category Archives: Finance

Cruz, “Liberty” and Teletubbies

AP CRUZ A USA VA By Peter Galuszka

Where’s the “Liberty” in Liberty University?

The Christian school founded by the controversial televangelist Jerry Falwell required students under threat of a $10 “fine” and other punishments to attend a “convocation” Monday where hard-right U.S. Sen. Ted Cruz announced his candidacy for president.

Thus, Liberty produced a throng of people, some 10,000 strong, to cheer on Cruz who wants to throttle Obamacare, gay marriage, abolish the Internal Revenue Service and blunt immigration reform.

Some students stood up to the school for forcing them to become political props. Some wore T-Shirts proclaiming their support of libertarian Rand Paul while others protested the university’s coercion. “I just think it’s unfair. I wouldn’t say it’s dishonest, but it’s approaching dishonesty,” Titus Folks, a Liberty student, told reporters.

University officials, including Jerry Falwell, the son of the late founder, claim they have the right as a private institution to require students to attend “convocations” when they say so. But it doesn’t give them the power to take away the political rights of individual students not to be human displays  in a big and perhaps false show.

There’s another odd issue here. While Liberty obviously supports hard right Tea Party types, the traditional Republican Party in the state is struggling financially.

Russ Moulton, a GOP activist who helped Dave Brat unseat House Majority Leader Eric Cantor in a primary last summer, has emailed party members begging them to come up with $30,000 to help the cash-strapped state party.

GOP party officials downplay the money problem, but it is abundantly clear that the struggles among Virginia Republicans are as stressed out as ever. Brat won in part because he cast himself as a Tea Party favorite painting Cantor as toady for big money interests. The upset drew national attention.

Liberty University has grown from a collection of mobile homes to a successful school, but it always has had the deal with the shadow of its founder. The Rev. Falwell gained notoriety over the years for putting segregationists on his television show and opposing gay rights, going so far as to claim that “Teletubbies,” a cartoon production for young children, covertly backed homosexual role models.

Years ago, the Richmond Times-Dispatch published a story showing that the Rev. Falwell took liberties in promoting the school he founded in 1971. Brochures touting the school pictured a downtown Lynchburg bank building with the bank’s logo airbrushed off. This gave the impression that Liberty was thriving with stately miniature skyscrapers for its campus.

Some observers have noted that Liberty might be an appropriate place for the outspoken Cruz to launch his campaign. The setting tends to blunt the fact that he’s the product of an Ivy League education – something that might not go down too well with Tea Party types – and that he was actually born in Canada, although there is no question about his U.S. citizenship and eligibility to run for question.

Hard-line conservatives have questioned the eligibility of Barack Obama to run for U.S. president although he is likewise qualified.

With Cruz in the ring and Liberty cheering him, it will make for an interesting campaign.

Carbon Cuts: Why PJM Has a Better Idea

pjm-region-1024x657By Peter Galuszka

Amidst all the gnashing of teeth in Virginia about complying with proposed federal carbon dioxide rules, there seems to be one very large part of the debate that’s missing.

Several recent analytical reports explore using regional, carbon marketplaces to help comply with proposed federal Clean Power Plan rules that would cut carbon emissions by 2030. They conclude that the carbon goals can be attained more cheaply and efficiently by using a regional approach.

The lead study is by the PJM Interconnection, a grid that involves all or parts of 13 states including most of Virginia. Its March 2 report states that “state by state compliance options – compared to regional compliance options – likely would result in higher compliance costs for most PJM states because there are fewer low-cost options available within state boundaries than across the entire region.”

The same conclusion was made by another report by the Washington-based consulting firm Analysis Group on March 16. It states: “PJM’s analysis of compliance options demonstrates that regional, market-based approaches can meet Clean Power Plan goals across PJM states at lowest cost, with retirements likely spread out over a number of years.”

PJM set off in its analysis by setting a price per ton of carbon dioxide emissions with an eye towards the entities being exchanged among PJM-member utilities in a new market. The PJM report shows that electricity generation varies greatly among members. Some are farther along with renewables while others are greatly reliant upon coal.

By exchanging carbon units, some coal plants might actually be kept in service longer while overall goals are still achieved. EnergyWire, an industry news service, quotes Michael Kormos, PJM’s executive vice president for operations, as saying that the market-based carbon exchange, somewhat counterintuitively, might keep coal plants running longer.

“With the renewables and nuclear coming in as basically carbon free, we’re actually able run those coal resources more because they are getting credit from renewables and the nuclear as zero carbon.”

In December, PJM had 183,694 megawatts of generation. Some 67,749 megawatts are from coal-fired units.

Kormos says that a number of coal-fired units are going to be retired in the 2015 to 2030 timeframe regardless of what happens with the Clean Power Plan, whose final rules will be prepared by the U.S. Environmental Protection Agency later this year. The retirements of older coal plants are expected to involve a minimum of 6,000 megawatts of power.

It is curious that very little of this report is being heard in the vigorous debate in Virginia about complying with the Clean Power Plan. What you hear is a bunch of humping and grumping from Dominion Virginia Power and its acolytes in the General Assembly, the State Corporation Commission and the media.

This is not a new concept. Carbon trading is active in Europe and has worked here to lessen acid rain.

It is amazing that one hears nothing about it these days. It is shouted down by alarmists who claim that Virginia ratepayers will be stuck with $6 billion in extra bills and that there’s an Obama-led  “War on Coal.” The New York Times has a front-pager this morning about how Kentucky’s Mitch McConnell is taking the rare step of actually leading the “War on Coal” propaganda campaign.

Also strange, if not bizarre, is that this approach is precisely market-based which so many commentators on the blog claim to worship. Where are they on the PJM idea? Has anyone asked Dominion, which is running the show in this debate?

Why Clean Energy Will Be Cheaper

Dominion's Cove Point

Dominion’s Cove Point

By Peter Galuszka

The Sturm und Drang to which utility executives, coal companies and politicians have subjected Virginians as they oppose President Barack Obama’s Clean Power Plan to reduce carbon emissions has always been a deliberate distraction from what’s really happening.

According to them and their confederates at the State Corporation Commission and the state Department of Environmental Quality, the clean air act which seeks to reduce carbon dioxide emissions by a certain date is a foolhardy, ill-intended bureaucratic effort to put coal out of business and slap ratepayers with bigger bills.

I had a moment of clarity when I read this morning’s Local Opinions page in The Washington Post  and a saw an article by Jon B. Wellinghoff. He is the immediate past chairman of the Federal Energy Regulatory Commission so he likely knows a little about energy.

His argument is that basic economics go against the electricity and coal industries’ arguments that reducing carbon will be too expensive. He cites a study by PJM, the large electricity grid of which Virginia is a part. “PJM announced this week that Virginia’s energy costs would be lower under the CPP than without it,?” he writes.

Why so? Wellinghoff says that utilities like Dominion are riding a nice low price natural gas bubble. Gas in the U.S. is going for $3 per million British Thermal Units. How long it will last is the crucial question.

Natural gas costs three times as much in Asia and Europe and (knock, knock) guess which companies are scrambling to get a new set of terminals so they can export it? Electric utilities like Dominion, that’s who.

Dominion is pressing ahead to convert its Cove Point liquefied natural gas plant on the Chesapeake Bay kin Maryland so that it can export gas to Japan and India. Dominion is also pushing a controversial $5 billion pipeline from West Virginia gas fracklands to the southeast. A spur of it would run to port areas in Hampton Roads but if you suggest that maybe Dominion plans to export gas from it, the public relations people get a mite testy.

Wellinghoff doesn’t specifically identify Dominion’s plans but he says there are 14 gas expert terminals underway.

For Virginia ratepayers, that means that a cheap, local commodity will become an expensive, global commodity. The United States will export a commodity and import price volatility.

Who will make money by exporting gas and messing up domestic prices?Dominion, that’s who.

It’s import to remember that the low price gas bubble will pop someday. Therefore, the state needs to stop whining about going to renewables and start applying them. Utilities need to make it easier for homes and business to deploy solar panels and sell extra juice back tot he grid. The U.S. uses 40 percent of the power it generates because of inefficient grids. Virginia is No. 35 in terms of state energy efficiency. Where are efforts to improve this?

Virginia’s disappearing coal industry has been complaining for years that government regulation is driving it out of business. The truth is that coal seams are becoming too uneconomic to mine. Gas is eating its lunch. I went to a Platt’s coal conference a couple of years ago In Florida where I learned that gas would have to jump to something like $8 per million BTU to make Virginia coal profitable again.

That might happen is gas prices rise as Wellinghoff predicts. But he is right that the cadre of utilities are barking up the wrong tree.

Turning 62: Take the Social Security and Run?

retirement

Not me!

by James A. Bacon

I turn 62 years old today, and one of the few perks of advancing age is the prospect of collecting Social Security. I, like thousands of other Baby Boomers who turn 62 every day, face the decision whether to start pocketing Social Security now, wait until full retirement at 66 or delay taking benefits even longer in the expectation of bigger checks down the road.

The conventional wisdom is that it makes sense to wait to 66, or even older if you can, because each year you delay, your SS benefits increase by roughly 8% to compensate for the actuarial reality that you’ll have one year less to collect before you die. If you’re in good health and expect to live longer than average life expectancy for male 62-year-olds — 83.8 years — delaying retirement is an especially good idea.

But what if you don’t have faith in the system to deliver on its promises, as I do not? What if you share the widely held belief that, barring heroic action by Congress, that the Social Security Trust Fund will run out by 2030? If the trust fund runs dry, the system can pay out no more than it brings in through payroll taxes, or about 75% of current promised levels.? Should we adopt the attitude of take the money and run? Get what’s yours while you can?

It’s a big decision, so I punched some numbers into a spreadsheet to see how the Retire-at-62 scenario compares to the Retire-at-66 scenario. (The numbers below are rough estimates only, not official Social Security Administration estimates.)

SS_payout2
This chart compares the cumulative payout under a Retire-at-66 scenario receiving $2,000 per month or $24,000 per year compared to a Retire-at-62 scenario of $1,500 per month or $18,000 per year.

Waiting until 66 means no Social Security income for the first four years. During that period, you’d end up a cumulative $72,000 in the hole. But then, beginning at 66, your annual payout would be roughly $6,000 per  year higher. You’d whittle away at that $72,000 hole until, at age 77, you broke even. After that, you’d be ahead of the game by increasingly large margins each  year.

Then comes Boomergeddon. Around 2030 — the left vertical line — the trust fund runs out of money and Uncle Sam reduces the payout to what it brings in through payroll taxes, or about 25%. (The actual number would vary, depending upon economic and employment conditions.) In one sense, you’re screwed — you’re getting less than promised. But you’d be screwed if you retired early, too. You’d still be ahead of the game compared to retiring at 62 — just by a smaller margin, ahead by only $4,500 per year instead of $6,000 per year.

If you live until 83.8, your life expectancy at 62 years old today — the right vertical line — you’d still be ahead. If you’re healthier and more long-lived than average and live past 83.8 — and half of all males do — then the cumulative payout surpasses the early retirement scenario by an increasingly large margin.

This calculation does not take into account inflation, but that’s a non-factor because the Social Security program adjusts the payout each year to reflect the higher cost of living. Neither does it take into account the time value of money. A dollar earned in 2015 is much more valuable than one earned in 2030. That’s especially true if you actually save your money and earn a return on your investment. But most people (including me) don’t anticipate saving money during retirement; they anticipate spending down some or all of their savings. They view Social Security payments as income to be spent. Thus, the time value of money really has no application here.

What if, as I argued in my book “Boomergeddon,” Uncle Sam changes the payout in a Boomergeddon scenario to make Social Security even more of an income-redistribution engine than it already is? People living on the margin, say $1,000 a month, live a marginal existence as it is; they would truly suffer if their payments were cut when the trust fund is exhausted. There is a high degree of probability that politicians would give low-income households smaller cuts and take the balance out of the hides of higher-income households. But that still doesn’t change the bottom line that most middle-class Americans would be better off retiring at 66 — they would be better off by a smaller margin. Anyone with a lick of sense would anticipate the possibility of changes to the payout formulas and adjust their lifestyles accordingly, but the prospect of Boomergeddon shouldn’t change the decision when to retire.

The critical variable influencing your retirement-age decision is your health. If you have diabetes, untreated hypertension, a high risk of cancer or other health threats, you have worse odds of making it to 83.8 years old. Even then, you’re not necessarily well advised to take the money and run. The break-even year is 77. If you live older than 77, you’d still come out ahead delaying your retirement.

For many people, the discussion is purely academic. If you’re working a full-time salaried job, it probably makes sense to continue working, generating income and letting your Social Security retirement benefits gain value. But there are plenty of sixty-plus people who have lost their jobs, find themselves working part-time or have fluctuating free-lance incomes for whom that Social Security income might look pretty good. Those would be well advised to think carefully before making the leap.

Boomergeddon Watch: Debt Visible and Invisible

debt_ratios2by James A. Bacon

Now that the United States has driven down its annual budget deficit to less than $500 billion a year, there is a widespread temptation to think that we’re out of the fiscal woods. By some fiscal measures, actually, we are performing better than a lot of other countries. I found this McKinsey & Company report to provide a fascinating perspective. Since the Global Financial Crisis of 2007,  the U.S. has added less to its total debt (household, business and government combined) as a ratio of its economy than any developed country but Germany and Norway.

Our relative prudence reflects two main countervailing trends: public profligacy and private thrift. American households have shed much of their debt, either through restrained spending or through bankruptcies, foreclosures and write-offs. But public spending has surged. In effect, we have shifted the risk of over- indebtedness from private balance sheets to public balance sheets. We are at less risk of a consumer-driven recession than we would have been otherwise, but at greater risk of a more systemic, Boomergeddon-style meltdown.

And it’s not as if we’re immune to excess indebtedness in other countries. We’re part of a global economy. If other countries go bust and spending collapses, our exports suffer and our growth slows (as happened this past quarter). If other governments start defaulting on debts, the shock is transmitted through banks and bond markets in unpredictable ways. If economic instability leads to political instability in a key global player like China, we could experience disruptions to supply chains.

Debt is a wonderful thing when the economy is growing and everyone can make their interest and principle payments. It’s a wretched, nausea-inducing thing when the economy tanks. One way to protect ourselves is to make sure we know how much debt is out there, and where it is. Government-issued bonds are a matter of public record and highly visible. But there’s a lot of debt stashed away in economic development authorities, colleges and universities, and other quasi-governmental institutions that we pay less attention to.

Meanwhile, according to Governing magazine, municipalities are increasingly turning to bank debt, which is less transparent. According Governing‘s Liz Farmer, localities are required to report bank loans in their annual financial reports, but such information often doesn’t surface until a year after the fact. And bank borrowing is soaring.

Over the past five years, banks have nearly doubled their municipal holdings to $425 billion in securities and loans, up from $225 billion at the end of 2009, according to a Moody’s report. The practice is becoming so prevalent that muni analysts indicate it’s contributed to the slower pace of new bond issuance over the same period.

The [Municipal Securities Rulemaking Board], which is charged with protecting investors, municipalities and the public interest by promoting a fair and efficient municipal market, can’t do its job it if doesn’t have all the data. …. The terms of these loans can directly affect bondholders. … For example, some loan deals require that a bank loan be paid back first in the event that a government can’t pay all its bills on time. That means that future bondholders’ investments could be less protected than they realized.

Is anyone keeping track of this data for localities in Virginia? Do we have the faintest clue how much debt is backed directly or indirectly by local governments? Are our finances as conservative as we think they are?

Am I the only one who’s worried?

The Strange Story of Health Diagnostic Laboratory

HDL's Mallory before her fall.

HDL’s Mallory before her fall.

By Peter Galuszka

The biggest problem facing the health care industry in Virginia and the rest of the country isn’t Obamacare or the lack of new medical discoveries. It the lack of transparency that hides what is really going on with pricing tests, drugs and hospital and doctors’ fees. Big Insurance and Big and Small Pharma cut secret deals. We are all affected.

I’ve been wanting to blog about this – especially after Jim Bacon’s recent post on the supposed tech trend in health care – but I wanted to wait until a story I’ve been working on for a few weeks was posted at Style Weekly, where I am a contributing editor.

In it, I explore the strange story of Health Diagnostic Laboratory, a famed Richmond start-up that went from zero to $383 million in revenues and 800 employees in a few short years. The firm said it was developing advanced bio-marker tests that could predict heart disease and diabetes long before they took root. HDL’s officials thought it would transform the $1.6 trillion health care industry.

Richmond’s business elite applauded HDL founder Tonya Mallory, a woman who grew up just north of the city and had the strong personality and drive to create the HDL behemoth. Badly wanting a high tech champion in a not-so high tech town, the city’s boosters did much to publicize HDL and Mallory, believing they could draw in more startups.

The story was too good to be true. It start to deflate last summer when the federal government noted that HDL was one of several testing labs being probed for paying doctors $17 for using HDL tests for Medicare patients when Medicare authorized $3 per test. Mallory resigned Dept. 23. Several lawsuits by Mallory’s former employer, Cigna health insurance and another have accused HDL of fraud. HDL has responded in court.

One legal picture suggests that HDL wasn’t a true tech startup but a new firm that stole intellectual property and sales staff. HDL says no, but its new leader Joe McConnell has taken steps to reform sales and marketing and is said to be working with the U.S. Department of Justice to settle a federal investigation.

The HDL affair raises issues about the inside marketing and apparent payoffs that are the biggest problem the health care industry faces. It doesn’t matter what kind of “market magic” combined with new technology comes up if something like this keeps happening.

This is all the more reason for a universal payer system. That may be “socialized” medicine but in my opinion it is the only logical way to go.

Interview: McAuliffe’s Economic Goals

 maurice jonesBy Peter Galuszka

For a glimpse of where the administration of Gov. Terry McAuliffe is heading, here’s an interview I did with Maurice Jones, the secretary of commerce and trade that was published in Richmond’s Style Weekly.

Jones, a graduate of Hampden-Sydney College and University of Virginia law, is a former Rhodes Scholar who had been a deputy secretary of the U.S. Department of Housing and Urban Development under President Barack Obama. Before that, he was publisher of The Virginian-Pilot, which owns Style.

According to Jones, McAuliffe is big on jobs creation, corporate recruitment and upgrading education, especially at the community college and jobs-training levels. Virginia is doing poorly in economic growth, coming in recently at No. 48, ahead of only Maryland and the District of Columbia which, like Virginia have been hit hard by federal spending cuts.

Jones says he’s been traveling overseas a lot in his first year in office. Doing so helped land the $2 billion paper with Shandong Tranlin in Chesterfield County. The project, which will create 2,000 jobs, is the largest single investment by the Chinese in the U.S. McAuliffe also backs the highly controversial $5 billion Atlantic Coast Pipeline planned by Dominion because its natural gas should spawn badly-needed industrial growth in poor counties near the North Carolina border.

Read more, read here.

(Note: I have a new business blog going at Style Weekly called “The Deal.” Find it on Style’s webpage —   www.styleweekly.com)

Yes, Boomergeddon Still on Track

obamaby James A. Bacon

President Barack Obama seemed pretty darned impressed with his economic and fiscal stewardship of the United States during his State of the Union speech last night. “We’ve seen the fastest economic growth in over a decade, our deficits cut by two-thirds, a stock market that has doubled, and health care inflation at its lowest rate in 50 years,” he crowed.

Let’s unpack that statement. Yes, we have seen the fastest economic growth in ten  years — which is a real indictment of the economic growth before the last two quarters. The last time we had economic growth this strong was… yikes!… during the George W. Bush presidency!

Yes, our deficits have been cut by two-thirds. The FY 2014 deficit was “only” $483 billion — one-third the $1.4 trillion deficit in in FY 2009. Unfortunately, the deficit is still massive by historical standards, and the Congressional Budget Office (CBO) expects the deficit to start climbing in FY 2016 to nearly $1 trillion by 2024.

Yes, the stock market has doubled. That’s one thing we truly can credit Obama’s economic policies for. The Federal Reserve Board’s zero-interest rate policy, pursued with the full backing of the administration, has pushed the stock market to record highs. As a small-time stock investor, I’m grateful. I’m sure America’s millionaires and billionaires are grateful, too. The poor and middle class, not so much.

Yes, health care inflation is at its lowest rate in 50 years. Of course, that has absolutely nothing to do with Obamacare, as many assume. The cost curve in health care started bending before Obamacare was implemented, and the slowdown in increasing costs mainly reflects private-sector strategies: (a) efficiencies gained by the consolidation of the hospital industry into health systems, and (b) the shifting of private-sector plans of costs to employees, in effect forcing them to exercise more diligence as health care consumers. To quote PWC:

Doctors and hospitals are adopting standardized processes that offer the prospect of better value for our health dollar. At the same time, consumers are starting to price-shop for health services and put new demands on the delivery of care. Over one-quarter of employers have a high-deductible health plan as their highest enrolled medical plan in 2014—the highest percentage ever. With more individuals making healthcare purchasing decisions, value and price are the new mantra.

Ironically, the federal government, which pays for Medicare and Medicaid, is the biggest beneficiary of these changes. Because health care is the biggest single driver of expected deficits, “bending the curve” of health care inflation could make a big difference over the long term. Let’s just be clear where those cost savings are coming from.

So, is the U.S. still headed to Boomergeddon? The spending discipline imposed by sequestration has made a difference. My prediction, made in 2010, of fiscal calamity by 2025 to 2027 now looks excessively pessimistic. Calamity may be forestalled until 2030 or so.

Only a fool would think the U.S. is out of the fiscal woods. The CBO says that, without major policy changes, built-in structural deficits will grow relentlessly from hereon out. The projection goes out only ten years, but by year eleven, the deficit likely will be running at 1 trillion annually. Meanwhile, we have unresolved problems looming like the Social Security Disability Insurance trust fund running out of money next year, triggering a 20% cut in benefits to the disabled. Congress likely will shore up the program by reallocating funds from the Social Security Old Age & Survivors Insurance fund, but that will accelerate the day when both funds run out of money — in 2030.

In effect, that means we have 15 years to fix the largest and most critical component of the U.S. social safety net. It is theoretically possible to restore the Social Security system to health if we make a series of tweaks that make a difference over a long period of time. But the longer we wait — and it doesn’t look like anyone is in a hurry to act — the bigger and more politically painful those tweaks will have to be.

The U.S. is deep into one of the longest (though weakest) economic recoveries in its history. Another 10 years of steady economic growth would be unprecedented. There will be another recession. Hopefully, it won’t be nearly as calamitous as the last one, but it will drive deficits higher. The reversal of Federal Reserve Bank’s quantitative easing will have an impact, too. The Fed has been handing over nearly $100 billion a year in profits, resulting from its purchase of long-term bonds and its manipulation of interest rates, to the U.S. Treasury. As interest rates resume their climb, that source of pain-free deficit reduction will evaporate. Meanwhile, it’s becoming increasingly evident that our precipitous withdrawal from the Middle East is not sustainable from a geopolitical perspective. We would like to walk away from the Middle East but al Qaeda and ISIS don’t seem to want to walk away from us. There will be considerable pressure for defense spending to increase.

Without dramatic corrective action, we’re still heading to Boomergeddon. I would expect a major fiscal-financial crisis around 2030 when the combined Social Security trust fund runs out. With a divided government in Washington, D.C., there’s no chance of getting that corrective action over the next two years. After that? Who knows.

Potomac Yard Metro: a Financing Model for Mass Transit

Image credit: North Potomac Yard Small Area Plan

Image credit: North Potomac Yard Small Area Plan. (Click for larger image)

by James A. Bacon

The state will help finance a new Metro station in Alexandria through a $50 million loan from the Virginia Transportation Infrastructure Bank approved by the Commonwealth Transportation Board earlier this week. The loan is a key piece of financing for the station, which is expected to cost between $209 million and $268  million to build. In turn, the Metro station is a key piece of infrastructure to advance development of between 9.2 million and 13.1 million square feet of residential, office, retail and hotel space in the Potomac Yard.

While the Metro project doesn’t pass the Bacon litmus test for 100% user-pays financing, it does better than most  mass transit projects Virginia has underwritten, and it would open up 300 acres for high-density, high-value development only five miles from the core of Washington, D.C.

The Potomac Yard, to be built on an old CSX railroad marshaling yard south of Ronald Reagan National Airport, could be Northern Virginia’s most important urban infill project of the early 21st century. Plans call for the creation of between 4,300 and 7,100 residential units, 3.2 million and 4.2 million square feet of office space, nearly 800,000 square feet of retail and 740 hotel rooms. We’re not talking about development that might happen… some day. There is a strong, demonstrated demand for the kind of walkable urbanism planned at Potomac Yard.

From what I can tell from perusing public documents, the City of Alexandria is approaching this project the right way. The land use plan calls for creating a balanced mix of uses in a walkable environment with the goal of maximizing transportation infrastructure by distributing peak traffic over longer periods, maximizing internal trips and maximizing transit use. The plan also would put most parking underground, reducing the need for parking spaces by creating opportunities for shared parking, such as office buildings using parking during the day and residences during the night. Highest density development will be located around the Metro station.

I will say this: $200 million+ strikes me as an extraordinary amount of money to build a single Metro station. There are complicated trade-offs to be made with the station siting. A final decision and cost have yet to be determined. The problem is that the station must work within narrow confines around the existing rail line. Depending upon the design alternative selected, that entails building pedestrian bridges, retaining walls and/or new Metrorail bridges. The complexity of the construction staging is rated moderate to high, and considerable construction would take place along live tracks.

Complexity comes with the territory in in-fill projects. The key question is whether the project creates sufficient value to justify the higher cost. And there’s really only one way to tell: Are developers willing to absorb the cost of constructing the Metro station, or would doing so price their office, residential and retail space out of the market?

We’ll never know the answer because Alexandria isn’t loading the full cost of the Metro station construction upon the developers who stand to benefit through higher rents and leases on their properties. According to the Potomac Yard Metrorail Station Environmental Impact Statement, the project cost including interest will total $496.6 million. In 2010, the original idea was for developers to contribute $74 million directly, another $194 million through revenues generated through a special tax district, and the rest through regular taxes paid, which Alexandria would use to support municipal debt. But financing plans have evolved since then. Now the City of Alexandria is seeking $67 million from the Northern Virginia Transportation Authority. And the loan from the Virginia Transportation Infrastructure Bank (VTIB) lock in an interest rate of 2.17 percent over 30 years, reducing much of the interest expense.

In a presentation to the CTB, Assistant Transportation Secretary Nick Donohue described the VTIB loan’s complex debt structure. Repayment is secured by a combination of revenue from the special tax district and moral obligation of the City of Alexandria. Not all details have been finalized. “Upon CTB approval,” states the presentation, “additional specific loan terms will be determined as project, schedule and related documents are finalized.”

Bacon’s bottom line: There are still big unknowns to this project. We don’t know how much the Metro Station will cost. A final design hasn’t been selected, and almost every mass transit project known to man seems to undergo mission creep and cost escalation. Further, we don’t know the final terms of the VTIB loan. With those important caveats, it appears that this project comes closer to to paying its own way than any Virginia mass transit project I can recall.

There are no federal dollars. There likely will be state dollars, but they will come from the Northern Virginia Transportation Authority, which means that down-state taxpayers will not be subsidizing the project. The commitment of VTIB funds represents a small interest rate subsidy and there is a small risk that the money may not be paid, so in theory state taxpayers could be on the hook for some portion if things turn sour.

But this project differs from every other Virginia mass transit project in that developers will contribute a $74 million (2010 estimate) through direct contributions, $194 million (2010 estimate) through special tax district contributions, and millions of dollars more through payment of regular taxes used to service City of Alexandria municipal bonds. That’s a far greater contribution than will come, say, from developers/property owners of the Silver line or property owners along the Norfolk light rail line.

This is a preliminary analysis based upon a cursory examination of public documents. I invite closer scrutiny by others. But my impression is that, when it comes to paying for mass transit, this is probably the best deal that Virginia taxpayers have ever seen. The Alexandria Metro station should serve as a mass transit-financing model for the rest of the state.

A Positive Alternative to Payday Lenders

mccarthy

Thanks to the Methodist Church, Nina McCarthy found an alternative to expensive payday lenders to pay off her debt. Photo credit: Washington Post.

by James A. Bacon

It’s understandable that people get upset with payday loan companies. The short-term lenders, who use borrowers’ paychecks as collateral, charge interest rates that seem extortionate on an annualized basis. Many borrowers get caught on a treadmill of indebtedness, taking out new loans to pay off the old ones.

The problem with most consumer activists is that they focus primarily on shutting down payday lenders. But driving small-loan providers out of the market doesn’t do anything to help working-class people desperate for cash — it simply eliminates one of the few options available to them.

That’s why it’s encouraging to see churches stepping in with their own lending programs. In an article today, the Washington Post describes how the United Methodist Church in Richmond has created the Jubilee Assistance Fund, which uses church funds as collateral for parishioners to take out low-interest loans through the Virginia United Methodist Credit Union. Over 7 1/2 years, the program has helped parishioners secure 14 loans, from $500 to $8,800. Writes the Post:

Similar initiatives run by faith-based organizations across the country are shifting the way churches approach charity. These programs offer parishioners an alternative to commercial lending agencies, which often charge triple-digit annualized interest rates.

Unlike commercial lenders or even other nonprofit alternatives, these church-backed programs offer near-zero interest rates – a model, proponents say, that helps struggling borrowers get back on their feet.

This is a positive response, not a negative one, to the demand for small, short-term debt. Church programs provide poor people with more options — and better ones — than they had before, rather than taking options away.

Creating “jubilee” programs is consistent with Old Testament theology of loan forgiveness, and it plays to the natural strength of churches, which are communities of parishioners who support one another in times of need. As members of the community, borrowers arguably are more highly motivated to repay their debt. Accordingly, I would expect church lenders to enjoy lower default rates. Also, churches probably have a lot less paperwork and administrative overhead than payday lenders do. It will be interesting to see, though, if churches can achieve a scale that can help thousands, rather than dozens, of people in need.

(As an aside, please contrast the Methodist Church’s approach to economic insecurity to that of the village radicals disrupting Richmond City Council, described in the previous post. One actually helps people; the other just raises hell.)