Is It Time to Blame the Victim?

New College Institute, Martinsville, Va.

New College Institute, Martinsville, Va.

by James A. Bacon

Martinsville is one of Virginia’s hard luck cases. Once a thriving center of home-grown furniture and apparel enterprises, its economy has been hollowed out by international trade, and its unemployment rate chronically runs around twice the state average. Earlier this year, when the statewide unemployment rate was hovering around 4.0%, joblessness in Martinsville had barely dipped below 8.0%.

Given the persistent slack in the labor force, one would think that workers would go to great lengths to get a job. Remarkably, many are not. At a recent Martinsville City Council meeting, city officials and economic developers estimated that about 1,400 jobs were unfilled in the area.

“We don’t have an employment problem. We have a participation problem” — people don’t want to be part of the workforce anymore, City Manager Leon Towarnicki told the council, reports the Martinsville Bulletin.

Said Mark Heath, CEO of the Martinsville-Henry County Economic Development Corp: the key to filling available jobs is “to motivate people that it’s better to have a job and go to work” than rely upon government aid to sustain themselves.

As an example, Heath cited the experience of the local New College Institute, which launched  the Center for Advanced Film Manufacturing in 2014 to train employees for jobs at Eastman Chemical Co. and other local high-tech manufacturers. Students take 28 credit hours of work over two semesters. Financial aid is available; no one is turned away due to an inability to pay. Moreover, graduates are virtually guaranteed a job. Heath had hoped that 40 to 45 people would enroll this semester. The actual number: 15.

Bacon’s bottom line:  The conventional wisdom in Virginia is that unemployment is high because there aren’t enough jobs and that, therefore, government needs to do something to stimulate job creation. A more sophisticated version of the CW is that there is a mismatch between job requirements and the skills of the workforce — Governor Terry McAuliffe has famously said that there are nearly 30,000 tech vacancies in Northern Virginia alone — implying that we could lick the problem if only the educational/training system did a better job of equipping workers with the skills that employers need.

Without question, solving the jobs-training mismatch is part of the solution. But how we explain the situation in Martinsville, where a mechanism exists to train workers and provide them jobs, and there disappointingly few takers?

Dare we “blame the victim” and suggest that not all Virginians are equally motivated to find work… that some are content to live on government support, as meager and inadequate as that may be?

Read the comment thread on the Martinsville Bulletin article. It’s fascinating. Some readers point out that it’s hard to go to school if you can’t afford to pay for rent, gas and day care. Others, many of whom put themselves through school to earn a credential needed for a job, have no sympathy whatsoever. As one man a said, “I just spent over two years going to school at night while working 45 hours a week. Where there is a will to succeed, a way is made. Work ethic is dying in this country, and it is starting to show.”

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

UVa Fund Is Legal and Proper, State Auditor Finds

Source: Auditor of Public Accounts

Source: Auditor of Public Accounts. (Click for more legible image)

by James A. Bacon

In morning testimony before the General Assembly, a state auditor provided a detailed breakdown of how the University of Virginia cobbled together its controversial $2.2 billion Strategic Investment Fund: UVa was in full compliance with the Code of Virginia, and all of its monies have been properly accounted for over the years.

To label the Strategic Investment Fund a “slush fund,” as former Rector Helen Dragas had done in a Washington Post op-ed was “a little bit of a mischaracterization,” said Eric M. Sandridge, the audit director in charge of higher education programs for the Department of Public Accounts. “The university was allowed to do what it did.”

While the term slush fund has a connotation of illegality, Dragas said in submitted remarks, she did  not mean to imply that UVa had done something illegal or “nefarious.” Rather, she said, “It was in view of these facts … that a small group of people went behind closed doors to discuss how to spend large sums of public money for other-than-originally-intended purposes … that the term slush seemed to fit.” (Dragas did not deliver her remarks in person because of a personal commitment of long standing.)

While Sandridge’s account supported the narrative maintained by UVa officials about the origin of the fund, he stated that his audit did not inquire into the legality under the Freedom of Information Act of a closed Board of Visitors session in which the fund was discussed, nor did it address the appropriateness of the university’s policy.

From the beginning of the controversy, which originated when Dragas first revealed the existence of the Strategic Investment Fund, UVa maintained that the fund was created by aggregating discrete reserves of money plus the investment returns on that money. By moving the money from miscellaneous pots where they were generating little income, the university consolidated them into a pool that could be invested more profitably in longer-term holdings by the University of Virginia Investment Management Company (UVIMCO).

Sandridge provided the first detailed breakdown of those money sources:

  • Capital Renewal program. UVA bills university departments on a regular basis to cover future lump-sum bond payments rather than bill them at the last minute when the payments come due. This source added up to $545 million in 2015.
  • Health plan reserves. The university sets aside a multimillion-dollar reserve as part of its health care self-insurance program. This amounted to $45 million in 2015.
  • Internal bank. The university maintains a fund to balance the daily cash flow needs of all its operations. In 2015 this amounted to $916 million.
  • Ivy Foundation. This money, a $45 million gift, was set aside for three major building projects. Upon completion of the projects, any remaining monies will be used to set up an endowment and moved out of the Strategic Investment Fund.
  • Aramark Dining Services. In a 20-year contract with Aramark Dining Services, the university received a $74 million grant to use at its discretion. However, the university must repay an unamortized balance should the agreement terminate before 2034.

None of these funds came from cost-cutting initiatives as I had improperly deduced from a reference that Rector William H. Goodwin made to “efficiencies in operations.” Rather, it appears that the university administration identified funds that were sitting around collecting dust and pooled them in such a way as to create a large, investable pool of capital. Over nine years, the university has earned $575 million through this strategy.

Where does the $100-a-year number come from? University officials have said that they expect the Strategic Investment Fund to generate about $100 million a year that could be spent on university advancement. Sandbridge explained how that number was devised. UVIMCO’s long-term investment pool has returned more than 10% annually over five-, ten- and twenty-year periods. Assuming a comparable return on investment on $2.2 billion in the future, UVIMCO could earn more than $200 million a year. Using the same policy as the university endowment of spending no more than 4.6% a year, that would provide $100 million to spend while retaining a somewhat larger amount in order to grow the investment pool.

Bacon’s bottom line: University officials deserve praise for devising a way to maximize the value of more than a billion dollars in under-utilized cash. The financial engineering, which entailed lining up $300 million lines of credit from four banks, is a genuine financial innovation that other universities may be able to emulate.

Two issues remain. The first is transparency. It has taken two months and a state audit to provide a full explanation to the public. What took so long? As Dragas asked in the testimony she submitted:

As the board took actions to restructure debt, authorize lines of credit, and modify liquidity policies — all of which were typical governance activities in large, financially complex institutions — never were we told that these actions were related to directing $2.3 billion to rankings pursuit or given the alternative of considering them in the service of tuition reduction. … The University has yet to produce documentation or recordings showing otherwise.

The second question is how the $100 million a year should be used. The Board approved using the funds to advance the strategic goals outlined in the Cornerstone Plan, essentially a strategic plan to bolster the prestige of the university. Dragas suggests that the money could have been used to offset aggressive tuition increases. Many legislators and members of the public would agree.

Dominion to Recover $140 Million for Burying Electric Lines for Outage-Prone Customers

A screen capture from a Dominion video shows the machinery used to bury electric lines.

A screen capture from a Dominion video shows the machinery used to bury electric lines.

by James A. Bacon

The State Corporation Commission ruled earlier this week that Dominion Virginia Power can recover up to $140 million on what it has spent to bury about 400 miles of electric distribution lines. By putting the overhead tap lines of the 6,000 most outage-prone customers underground, the electric company hopes to significantly reduce time spent restoring electric power after hurricanes, ice storms and other widespread service disruptions. The benefit to improved reliability will cost customers an average of fifty cents to the monthly bill.

The General Assembly had passed enabling legislation in 2014 but the State Corporation Commission (SCC) turned down Dominion’s first proposal to bury 4,000 miles of overhead lines serving some 150,000 customers on the grounds that there was insufficient data to show a positive cost-benefit ratio. But the SCC approved the pilot program, which will apply retroactively to overhead lines that Dominion has already buried, with the expectation the Dominion will regularly provide data on outages and restoration times to use in evaluating the program.

“If we were to get the full 4,000  miles of underground line, it would cut the typical hurricane outage period of seven to ten days in half,” says spokesman David Botkins. There is no way to estimate what difference the pilot project will make until the data comes in, but he said Dominion targeted “the most outage-prone and most difficult to repair tap lines” in its service territory — “the worst of the worst.”

In granting approval, the SCC wrote, “We find that the [project] satisfied statutory requirements, and is reasonable, prudent, and in the public interest.”

Even with the kind of automated equipment shown in the photo above — Dominion will not be handing the job over to ditch diggers — the expense is considerable. The cost of $140 million spread over 6,000 customers is $23,000 per customer. Dominion’s long-term vision, covering about 150,000 customers, would cost an estimated $2 billion.

But Dominion contends that cost-per-customer is not a relevant metric. Payback will accrue to all customers when restoration is shorter following large weather events, allowing the Commonwealth to return to normalcy sooner, says Botkins. In fact, an industry expert estimates that the economic benefits of the first 400 miles of undergrounding exceeds the cost by a ratio of over 2 to 1.

Stated the SCC ruling:

Dominion should be prepared to establish, with specificity, how the [Strategic Underground Program] has resulted in demonstrated system-wide benefits, as well as documented local benefits to the neighborhoods in which distribution lines have been placed underground. The Company has the burden to collect the data necessary to measure … “whether the SUP can be a cost effective means of ensuring reliability for its entire system.”

The buried lines are scattered throughout more than 80 cities, towns, and counties in Dominion’s service territory. In a typical example, The company placed 11 miles of overhead lines to underground in King George County; 24 separate projects impacted 68 customers.

In major outages, Dominion has a hierarchy of response. First, it attends to hospitals, water pumping stations, emergency centers and other critical needs. Next it tackles major circuits where a single repair job can put a large number of customers back on line. Then the company works its way down to subdivisions with a few customers, and finally to individual houses.

“The overhead lines in the back lots are very labor intensive,” explains Botkins. “It’s hard to get the truck back in there. The crew has to do a lot of the work by hand. It’s very time consuming.”

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.

A Free Market Alternative to Payday Lenders

sasha_orloffby James A. Bacon

Most everyone recognizes that payday lenders create a poverty trap for poor and working class Virginians. While the lenders do provide a valuable service by extending short-term loans for emergency situations, the annualized interest rates are extremely high, and borrowers often find themselves rolling over their loans from month to month at considerable expense. On the other hand, half the U.S. population has a FICO score below 680, meaning they can’t be approved for credit by most banks. Say what you will about payday lenders, they aren’t as bad as Vito the Loan Shark. Even payday lenders don’t break borrowers’ kneecaps when they fall behind on their payments.

That’s why I have always opposed legislated restrictions on the lending of payday lenders. Taking away poor peoples’ only credit alternative, as unpalatable as it may be, may satiate the outrage felt by crusading social reformers, but it doesn’t actually do the poor people any favors. If the social reformers want to help, I have long suggested, perhaps they should get into the business themselves and provide a better deal.

Well, it appears that someone is doing just that.  LendUp, a lending institution backed by Silicon Valley money, has introduced a new approach to extending credit to the poor. The company came to my attention because it is opening an East Coast office in Chesterfield County to serve Eastern and Central time zones. The description provided by the Richmond Times-Dispatch article and the company website shows how the combination of innovation and competition is the best social reform one could ask for.

“We started LendUp because the traditional banking system wasn’t working for more than half of Americans and the payday market was fraught with abusive practices,” LendUp CEO and co-founder Sasha Orloff said in a statement. The RTD explains how the company works:

The company provides short-term loans to consumers with low credit scores through its LendUp Ladder product….

The process is handled entirely online — not at a store like most payday lenders operate — and decisions are usually made within five minutes, the company said on its website. If approved, consumers could have money in their account in about 15 minutes.

The company offers a single payment loan of between $100 and $250 that has to be repaid in seven to 30 days. It also offers an installment loan of between $260 and $500 that requires two payments and a credit check.

Annualized interest rates still can amount to 250%. LendUp offers the same justification as payday lenders: “Some customers do not pay us back and, like insurance, the interest covers what we lose.”

The difference is that LendUp allows borrowers to earn points to get larger loans at lower interest rates over time by making on-time payments, taking free financial education courses and referring friends to LendUp. The business model is built upon improving borrowers’ financial literacy, helping them build their credit scores, and ultimately charging them lower rates.

Ironically, although LendUp is locating its East Coast office in Virginia, the Old Dominion is not one of the states listed on the company’s website where the service is offered. The RTD article offered no explanation why that would be. Perhaps the company has more regulatory hoops to jump through here. If the social reformers want to accomplish some good, perhaps they could lend LendUp a hand.

Stick It to the Hedge Fund Managers!

VRS_management_fees2
by James A. Bacon

One of the voices urging reform of the Virginia Retirement System (VRS) is a semi-retired University of Virginia economics professor, Edwin T. Burton III, who served 18 years on the board. He argues that the VRS pays too much in management fees to outside investment firms that pursue labor-intensive strategies and should rely on low-overhead funds that index stock and bond markets.

In fiscal 2016, the VRS generated a 1.9% return but lagged the 3.99% return on the S&P 500. The year before, the VRS generated a 4.7% return compared to a 7.4% return for the S&P. “We haven’t come close” to the 7% rate of return assumed by the VRS in reaching its calculation of $22.6 billion in unfunded liabilities, he told Michael Martz with the Richmond Times-Dispatch.

Getting a higher rate of return is the best way to boost the financial health of the state retirement fund. Of course, that’s easier said than done. Everyone would like to boost returns on their financial investments, but very few investment managers have outperformed the market consistently. While pension funds can tinker with their portfolios, shifting funds between stocks, bonds, real estate, private equity and hedge funds, often chasing yesterday’s hot categories, they can’t control their returns. But they can control how much they pay outsiders to generate those returns.

As it happens, the VRS paid $362 million in management fees in 2015, according to its 2015 Comprehensive Annual Financial Report. (The 2016 report is not yet online.) That sum is divvied up between ten major investment categories such as U.S. and foreign equities, fixed-income, real estate, hedge funds and other alternative investments.

Hedge fund managers stick out like a sore thumb — they collected $87 million in management fees. Hedge funds delivered outstanding returns for many years, which justified their sky-high management fees, but they have stubbed their toes in recent years. With some 10,000 funds playing in the sandbox, typically betting on movements of currencies and commodities, competition has squeezed industry profit margins to nothing. After years of sub-par returns, there is no justification for the overly generous fee structure.

VRS also paid exceptionally high fees to “alternative investment” managers and for its “strategic opportunities portfolio.” Taxpayers might wonder if those fees are worth the returns they generate.

Remarkably, the VRS staff, which manages one third of the portfolio, cost one-tenth that of the hedge-fund and alternative-investment managers.  If the entire portfolio were managed that efficiently, management fees would have cost only $81 million in 2015 — a savings of about $280 million! Over the years, that could amount to billions of dollars.

So, why don’t we fire the hedge fund managers?

It gets complicated. First of all, you don’t mind paying higher fees to managers who outperform the market averages. Unfortunately, the VRS annual report doesn’t tell us the performance of its individual funds, and even its discussion of investment categories (stocks, fixed-income, hedge funds) doesn’t match up with the categories listed in its table of management fees. So, there’s no way the public can tell if the management-fee differentials are worth it or not.

Second, you shouldn’t judge a fund manager based on one year’s performance. Even the best can have a bad  year. What most interests me is the internal VRS performance. Does its track record over the years equal that of other fund managers? If so, why we paying the other fund managers?

Third, there is a benefit to diversifying a portfolio. The idea is to limit exposure to wide swings in any single investment category. Strong performance in one category offsets weak performance in another. A pension portfolio that invested only in stocks and bonds would be distressingly volatile.

Still, Professor Burton has a point. The VRS may be paying way more than it needs to. Saving $280 million a year won’t bail out a pension fund with $22.6 billion in unfunded liabilities (probably an optimistic assessment), but it sure would help, creating less pain for Virginia’s public-employee pensioners and taxpayers. The idea is definitely worth a closer look.