Tag Archives: Boomergeddon

This Is What a Fiscal Meltdown Looks Like, II

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

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

by James A. Bacon

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

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

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

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

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

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

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

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

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

Playing the Racism Card… Just Pathetic

howard_myers

Mayor Howard Myers. Photo credit: WTVR

In other Petersburg-related follies… Petersburg Mayor W. Howard Myers has told fellow City Council members that the attacks on his leadership are motivated by racism and partisanship.

“I will as a representative of Ward 5 and as major duly to my right hand, serve the public without blemish and from scare tactics from a few racists[s] and Republican supporters,” he wrote in an Aug. 11 email that he asked the city clerk to share with other council members, reports the Richmond-Times Dispatch.

Dude, you presided over the worst financial meltdown of a Virginia locality probably since the Great Depression and you think your critics are motivated by racism? Under your watch, the city is facing a current-year budget gap of $12 million (nearly 20% of General Fund revenue) on top of $19 million dollars of unpaid bills, and you have conceded in unguarded remarks that you had no idea how this all happened, yet you expect anyone to believe that the people who are unhappy about it are being partisan in their attacks?

Do you know how totally pathetic that is? Not only pathetic, but in this racially polarized era, wildly irresponsible?

As I understand from the news coverage, Petersburg’s five City Council members are all African-American while many of the citizens who get irate and engage in shouting matches with you during council sessions are mostly white. Yeah, I suppose one reason that they’re argumentative is that they’re racist. But there’s another possible explanation: They’re pissed off at how you ran the city into the ground!

This Is What a Fiscal Meltdown Looks Like

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

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

by James A. Bacon

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

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

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

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

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

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

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

Debt to TVOP: A Fiscal Warning Flag for Virginia Localities

debt_to_value

by James A. Bacon

The financial travails of the City of Petersburg has prompted some readers to wonder if other Virginia localities are fiscal time bombs waiting to go off. There are many causes of fiscal dysfunction but one sure sign of trouble is a heavy burden of long-term debt.

One way to measure that burden is to express debt as a percentage of the tax base, in particular as a percentage of the true value of property. Local governments have many revenue sources, but the property tax is the one major source which city councils and boards of supervisors can control. Therefore, the value of taxable property is a good proxy for a locality’s tax base, and the ratio of debt to the tax base is a good indicator of fiscal health.

To get a sense of which localities might be over-extended, Jim Weigand, a regular reader and concerned citizen of Lynchburg, calculated net debt as a percentage of true value of property (TVOP) for fiscal 2015. The ten most leveraged localities appear in the table above, with Accomack County heading the list at a fear-inducing 22.8%. The state average is 3.4%, and the least leveraged locality in Virginia, Mecklenburg County, is three-tenths of one percent.

Petersburg ranks fairly high on this list, 19th in the state, with a ratio of 6.8%. Buena Vista, another fiscal basket case we have written about on Bacon’s Rebellion, cracks the Top 10 with a ratio of 10.1%. The City of Richmond, whose inept fiscal management we have highlighted, does not appear on the list… because it could not comply with the data reporting requirements!

If I were a citizen of Norfolk, Portsmouth or any of the other localities atop the list, I would regard this ratio as a warning flag. This one metric along is not sufficient to declare a locality to be in poor fiscal shape. Many factors go into calculating a locality’s health. But a high debt-to-tax base ratio is undeniably a worrisome sign. Conversely, an exceedingly low ratio raises questions as well. Is Mecklenburg County spending enough money on utilities, school buildings, public safety buildings and the like?

To view a list of all Virginia cities and counties, click here.

Petersburg Narrowly Avoided Debt Default

petersburg_city_hallby James A. Bacon

The city of Petersburg’s financial woes are so bad that it nearly defaulted on a $4.5 million Revenue Anticipation Note (RAN) due June 30, but was saved at the last minute by a team of auditors dispatched by Secretary of Finance Richard D. “Ric” Brown. “It was questionable up to June 29,” whether the city would be able to pay off the note on time, Brown told the Richmond Times-Dispatch.

The revelation of the near-default occurred deep in the T-D story tracing how Petersburg came close to financial collapse, but the story provides no details on how the default was averted.

The article does provide considerable new detail on how problems have been festering for years. The emergency auditors found that the city needs to close a $12 million budget gap this year even as it addresses $19 million in unpaid bills.

The city has been running structural deficits for years. Auditors with Davenport & Co., which has advised the city on-again, off-again for several years, issued recommendations in 2012 for shoring up the city’s finances but the city took no action. As the city’s finances deteriorated, S&P, the bond-rating agency, downgraded its debt to BBB, a below-investment grade rating.

One way Petersburg papered over the shortfalls was by draining its reserve accounts. “Strongly rated Virginia governments will have an unassigned cash balance in the 15% range, even higher. That’s a good target,” David P. Rose, senior vice president with Davenport, told the T-D.

Bacon’s bottom line: Let Petersburg be a warning to all other cities — and to citizens who take an interest in their local governments. In previous posts, I have alluded to the tricks to which fiscally stressed localities often resort to “balance” the budget: (1) short-changing pension payments, (2) under-investing in maintenance, and (3) slow-paying creditors. We can now add a fourth: (4) depleting cash reserves. I am sure there are others.

The comforting news (comforting to those of us not living in Petersburg) is that S&P was paying close enough attention to the evolving situation to lower its bond rating. Nearly all Virginia localities have investment-grade bond ratings — several have AAA ratings — so there may not be much to fear. Still, we should remember: bond-rating agencies have been caught napping before.

In related news… While Wall Street is urging state and local governments to take advantage of record-low interest rates and issue bonds to repair aging roads, bridges and buildings, most are resisting the siren call of piling on more debt. New government bond issues have dropped to the lowest level in 20 years — about $140 billion last year, about 53% lower (adjusted for inflation) than in 2006. (The pace of borrowing has picked up modestly this year.)

S&P Global ratings analyst John Sugden said told the Wall Street Journal that the reluctance to add debt often “reflects good budget management” by governments whose revenue projections leave no room for additional debt payments or upkeep costs for newly constructed projects.

Here’s the question: Are state and local governments spending enough to maintain their infrastructure, or is the condition of roads, bridges, water & sewer plants, commuter rail lines slowly deteriorating — a hidden form of structural deficit?

We’re All Hedge Funds Now

hedge_fundJohn Rubino, author of DollarCollapse.com, is my favorite financial blogger. He did some excellent reporting for Virginia Business magazine back in the day before he went on to become a successful author and financial pundit. In a recent post, he drove home a theme commonly expressed on this blog: that the near zero-interest rate policy pursued by the Federal Reserve Bank (and below-zero policy in some other central banks) is hidden with hidden costs and is creating systemic risk.

As global interest-rate yields are driven down, writes Rubino in his fourth post developing the theme, “We’re All Hedge Funds Now,” insurance companies are especially hard hit. They’re finding it increasingly difficult to meet their obligations to policy holders without assuming greater risk.

Such companies have no choice but to roll the dice on “growth” assets like junk bonds and equities, which fundamentally changes the nature of their business model. Instead of steady, predictable income that guarantees the ability to pay off on policies when retired, they’ll have flush years and lean years which might or might not coincide with the needs of their clients. They’ll become hedge funds, in other words, high-risk investment vehicles that do well in good times and frequently fold up shop in bad.

Globally, more and more capital is flowing into riskier and riskier investments. Sooner or later, the deck of cards will collapse. This time, when it does, the calamity will be global in nature. One thing you can bet on: The architects of the super-easy money policies will find someone to blame other than themselves. Meanwhile, here in Virginia, taxpayers will be left holding the bag for the state’s under-funded state pension fund — along with much else.

The Fed’s super-easy monetary policy is designed to keep interest rates low for the world’s largest debtor, the United States government. In effect, the Fed transfers yearly hundreds of billions of dollars of wealth from individual and institutional investors to the U.S. Treasury — no taxes necessary — by means of a process so opaque that few understand what is happening. I remain convinced that the hidden effects of loose monetary policy comprise a major reason why members of the white working/middle class are out their minds with political frustration.

— JAB

Haywire in Haymarket

Town of Haymarket revenues and expenditures.

Town of Haymarket revenues and expenditures.The green bar shows net surplus/deficit.

Looks like Petersburg is not the only Virginia jurisdiction to close the 2016 fiscal year with a deficit. This chart comes to Bacon’s Rebellion by way of Haymarket citizen Robert Weir. Haymarket, a town of less than 2,000 people in Prince William County, overspent by $789,000 — equivalent to a quarter of its revenue.

Writes Weir: “It is not beyond the realm of possibility that in the coming years many of the smaller jurisdictions may prove to be an ever increasing drag on both the larger jurisdictions and the State as the financial woes rapidly expand.”

Virginia has dozens of towns, most of them tiny like Haymarket. Is there any sanction if they run deficits, a violation of the state constitution? Is anyone paying attention to what’s going on?

— JAB