Monthly Archives: October 2008

Presidential candidate John McCain drew a crowd tens of thousands strong at his campaign rally in Hampton Roads earlier this week, and it wasn’t just because the former naval aviator was once stationed at Oceana Naval Air Station. While his supporters share McCain’s flag-waving patriotism and his larger world view, material self interest undoubtedly lurks beneath the surface. Many Hampton Roadsters undoubtedly believe that local military establishment will fare far better under a McCain administration than an Obama one.

I’m not making a partisan statement or casting a value judgment here. My point is not to dredge up the rights and wrongs of U.S. foreign and military policy. I’m simply observing that the Elephant Clan, for better or worse, funnels more money into the military than does the Donkey Clan. Commuities dependent upon military spending, such as Hampton Roads, fare better during Elephant Clan administrations.

Back in the 1990s, the Hampton Roads economy lagged the nation in per capita income growth. That’s because the Clinton administration was spending the “peace dividend”: cutting back the size of the military and curtailing military pay. The Bush administration instituted a dramatic reversal, pumping up military expenditures and payrolls, and Hampton Roads prospered.

As James V. Koch, former Old Dominion University president, writes in his 2008 State of the Region report, “DoD spending is responsible for more than 70 percent of the economic growth of Hampton Roads since the start of the new millennium and perhaps as much as 45 percent of our gross regional product. … The most important component of defense spending is military compensation, which accounts for 56 percent of spending in the region.”

Koch does not speculate on what a Barack Obama administration might mean for Hampton Roads. But I will. Unlike Clinton, who faced no major perceived military threats in the 1990s and felt safe drawing down the military, Obama has promised to contiue fighting the war on radical Islam by escalaating the American presence in Afghanistan. There won’t be a “peace dividend” for him to spend. Still, he will likely look for ways to shave military spending — and that may impact the Navy, which is a less-than-critical player in the anti-insurgency wars.

What can the inhabitants of Hampton Roads reasonably look forward to? Lower pay raises, for starters. Since 2002, compensation of military personnel has increased 63 percent, according to Koch. Even McCain would be unlikely to replicate such an increase. The prospect of Obama doing so is just about nil. Koch also raises the possibility of the loss of an aircraft carrier, which, along with accompanying task force and base support, could take $800 million a year out of the regional economy.

One could reasonably argue that an Obama presidency would be better for the United States economy as a whole (I would not share that sentiment, but I concede that it could be reasonably argued). But that logic does not extend to Hampton Roads. There is every reason to fear that the region will turn from an outstanding performer of the 2000s decade into an economic laggard. The non-military presence there just isn’t dynamic enough to make up the difference.

In a bold stroke of investigative journalism, WaPo has nailed the Washington Airports Authority for excess travel by Board members and their families at Agency expense. (“Airport Board’s Travel Spending Has Few Limits” 13 October)

Great Work! Got them dead to rights…

But where is WaPo on the big problem: Plowing $100s of millions into the wrong transport projects?

• Overbuilding the Regional airport capacity and thus raising the cost of long distance travel

• Overbuilding the Regional capacity for short flights that are inefficient, pollute the ground with noise and pollute the air excess atmospheric emissions

• Dumping money into an airport that is in the wrong Regional location with short runways and cannot avoid creating world class noise pollution with the Core of the in the National Capital Subregion

• Agreeing to build a ground transport system the does not serve the needs of air travelers and without insisting on functional settlement patterns in the station-areas that would help pay for the cost.

But WaPo nailed those travel expenses …

Why? See THE ESTATES MATRIX

EMR

Jonathan Mallard, a Bacon’s regular and a candidate for the 4th District School Board seat in Richmond, has created a budget game, of sorts. Or perhaps it’s more of an experiment. Using data from the RPS he’s created a spreadsheet that shows where the money went. It’s a mind-bending list of numbers, to be sure. But it also offers an opportunity for anyone to go in and tinker with them and come up with a budget of their own.

My results always come back as “0”.

It feels like we’re on an economic roller coaster these days, so why not plot real estate values since 1890 on a virtual roller coaster and go for a ride? Just remember to hold on tight.

(cross-posted at Tertium Quids)

As I argued in my last post, fiscal crises call for emergency measures. Gov. Timothy M. Kaine has no choice to resort to whatever short-term expediency he can find to close a $2.5 billion revenue gap in the current biennial budget. But it would be nice if Virginia’s fiscal exertions resulted in some lasting gains in productivity.

Read the governor’s press release, and you’ll see that, at most, there are only $175 million in enduring efficiencies contained in the governor’s emergency financial plan. From the press release:

The Governor’s reduction strategies include

• $100 million in improved business practices and efficiencies
• nearly $32 million in the reduction or elimination of current services
• over $27 million in reduced personnel costs
• over $13 million in reduced discretionary expenses

For example, the Department of Forestry will save $50,000 by sharing the cost of a hydrologist with Virginia Tech; the Science Museum will save $100,000 by closing for an additional day each week; the Department of Taxation will save over $1.7 million by reducing technology costs; and the Department of Mental Health, Mental Retardation, and Substance Abuse services will save over $2 million by consolidating certain targeted administrative services regionally for their mental health treatment centers.

The other measures represent fiscal business as usual: withdrawing $400 million from the rainy day fund, borrowing $250 million for capital outlays, delaying pay raises for state employees, a hiring freeze and even 570 layoffs.

The layoffs sound like a real cut. But how lasting will they be? I went back to the Commonwealth of Virginia’s official employee count and deleted any line items pertaining to higher education in order to get pure numbers on state administration. Here’s the track record since 2001:

2001….. 66,927
2002….. 64,908
2003….. 64,044
2004….. 64,368
2005….. 63,099
2006….. 63,486
2007….. 65,309
2008….. 66,193

However, these numbers don’t tell the whole story. I suspect that the big drop from 2005 to 2006 represents the transfer of many state IT employees to Northrop Grumman — someone please correct me if I’m wrong. Also, I’m not clear about whether these numbers include “contract” employees. Whatever the details, after the temporary austerity budgets of the Warner administration shrunk state payroll, the numbers have crept back up to where they were at the peak of the dot.com prosperity (or even higher, depending on how the state counts IT and contract employees).

The moral of the story: Freezing positions and laying off employees without re-engineering government processes is a temporary expedient only. These moves will not create any lasting improvements to the cost of administering state government.

With respect to the current economic pain it is elementary that:

A. If a nation-state with a democratic governance structure is going to create an economy based on consumer consumption (much less claim to lead the world in creating democracies with market economies) then:

1) Agencies of that nation-state must insure that the market benefits the vast majority who are expected to consume. The market cannot be tilted in favor of a tiny minority who have an appetite for luxury goods but consume only an insignificant fraction of the total goods and services no mater how much they waste.

2) When the economy depends on consumer consumption, Agencies cannot ask those at the top of the Ziggurat what they want, they must determine what those who are expected to consume need to be prosperous, happy and safe.

3) Agencies cannot create a system of governance that privatizes profit and socializes risk, and above all,

4) Agencies must make sure that the rate of consumption is sustainable and that consumer expectations are rational and that the vast majority benefit.

Any alternative to these Elementary Rules are unsustainable for a democracy with a market economy. The last 60 years of consumer-driven economic “growth” in the US of A has not been sustainable as evidenced by the current “meltdown.” Both political parties have violated all four Elementary Rules of governance sustainability.

Right wing nuts are harping on the transgressions of ACORN and similar groups. Illegal and fraudulent actions are wrong. However, with an obscene and widening Wealth Gap, ACORN- like groups are exactly what citizens can expect to happen. The next step is radical populism as documented by nearly a century of experience in South and Central American, Caribbean and African attempts at democracies with market economies.

No nations-state can:

1) Import energy and cheaper labor

2) Burn up natural capital, and

3) Subsist on loans from those who sell Citizens, Enterprises and Agencies the energy, goods and services they need to survive.

B. If a nation-state is going to create an economy that depends on trust, enterprise, intelligence, saving and investment then Agencies must manage the money supply such that the cost of money (interest) allows savers to can make a reasonable return from investing and are not forced into:

1) Speculating on the true value of land

2) Gambling on stock and commodity markets, or

3) Swapping valueless definitives of tangible assets.

If financial Enterprises are to have money to loan, Agencies must ensure that interest rates encourage savings not tax breaks that encourage Global short-term profit seeking, aka Supercapitalism.

C. If a nation-state desires to evolve a stable economic system it must create a system that:

1) Does not rely on unsustainable “growth”, and

2) Reflects the organic structure of human economic, social and physical activity, the first step is a Fundamental Transformation in governance structure.

There is a need for several strong, competitive Regional banks in every New Urban Region, not MegaBanks and MegaSpeculators – Enron, WorldCom, Lehman, AIG, Citi and all the rest – that have lost touch with the role of banking and investment in a society.

D. If a nation-state wants to expand dwelling ownership then:

1) The dwellings must be near Jobs and Services rather than encouraging the Wrong Size House in the Wrong Location.

2) Agencies must discourage speculation on home value.

Over the last 60 years owner occupied dwellings have increased in value at about the rate of inflation. When the current wave a write downs is complete the values will be below inflation. This means that the internal rates of return on many investment strategies are much higher than on real estate, especially owner occupied dwellings.

To paraphrase the current VW ad (“Have a baby for love, not for German engineering), “Buy a house for living, do not buy a house for speculation.” You hear about the bonanzas is house speculation hyped by real estate agents that is not what you learn from careful analysis of regional data.

While dwelling speculation is bad, far more money is lost than is made in raw land speculation. Raw land speculation loses were the major component of the REIT recession and the Savings and Loan recession. Loans on badly located and inefficient sized dwellings are the lynchpin of the mortgage meltdown. In the end citizens pay for the bail outs of speculators.

Both D 1) and 2) are directly related to that fact that there is too much land held for urban land uses and that which is developed is dysfunctional because the total location variable costs are not fairly allocated.

This is the first of four posts on Elementary Rules and Realities, the others will focus on “The Role of the Media,” “Swift Boating the Mortgage Crisis” and “The Bottom Line.”

As you can guess, all Elementary Rules and Realities relate to Agency, Enterprise and Institutional actions that generate dysfunctional human settlement patterns.

EMR

The outlines of the spending cuts that Gov. Timothy M. Kaine has in mind to close a looming $3 billion revenue shortfall in the $77 billion biennial budget are coming into view.

As Jeff Schapiro reports in the Times-Dispatch today, Kaine will focus on controlling state payroll, which runs about $5 billion annually (or $10 billion over two years). The commonwealth could save $250 million by canceling 2 percent pay raises for state employees this year and next. Layoffs are an option, but the savings are offset by expensive severance benefits to state employees. I’m betting that vacant positions will remain unfilled, with reductions to be made through normal attrition.

The state can tap another $400 million or more in the rainy day fund, and it can finance some construction projects by borrowing money instead of paying cash. (Whether that option makes sense in today’s financial environment, however, may be debatable.)

The Governor has set an example to the rest of the state administration by finding $900,000 in cuts from the Executive office budget this year and $1.4 million next year. The second-year cuts will amount to 10 percent of the office budget. And that’s on top of $667,000 in cuts from previous initiatives.

According to a press release, cuts in the Governor’s Office include elimination of 8 positions through layoffs and turnover, trimming the grocery bill for “official events” by 25 percent, reductions in travel on state business, cuts in staff cell phone costs, newspaper subscriptions and travel, sending more invitations by email instead of snail mail, and smaller dry cleaning bills for linens at special events. You know the Governor’s Office is getting serious when the order goes out: No more bottled water.

Bacon’s bottom line: Emergency measures are fine for emergencies, which the current budget crisis clearly is. But the culture of state government is such that the costs inevitably creep back ito the system. The Warner administration cut hundreds of jobs, but a few years later, state employment levels hit new highs. In other words, there were few long-term gains in productivity that allowed the state to do the same work with fewer employees. Imposing temporary austerity measures is no way to run an organization for long-term efficiency.

The commonwealth has many smart, highly motivated employees. I’ve met them. They’d be an asset to any organization. But state government has lots of deadwood, too, which no one seems able to root out. I have friends who work as contractors for state government who tell stories, which should horrify tax-paying citizens, of nincompoops in do-nothing jobs. Stae workforce productivity remains a huge issue.

Have you seen any new restructuring and reform initiatives lately? Does anyone know which of the restructuring initiatives of the Warner administration have been completed? It does little good to slash costs for a year or two then return to Business As Usual. State government needs to find ways to drive costs out of the system permanently.

Gov. Kaine will have more to say about state spending priorities later today. His personal parsimony sets a good example. But tax-paying Virginians deserve a lot more.

Virginia’s Gulag Archipelago keeps growing.

Back a decade or so ago, Republican Gov. George Allen got attention for his proposals to expand the state’s prison system. That was then.

Today, the hot idea is to create “detention centers” for those hordes of illegal immigrants that we all know are overrunning the Old Dominion doing such awful things as working as gardeners or in poultry or crab-picking plants.

Up in places like mostly white and affluent Prince William County, the Republican board of supervisors won’t tolerate such Barbarians at the Gate. County police are under orders to check the citizenship of anyone stopped for any crime, including running a stop sign. They are finding that their provincial nationalism if not racism is expensive

Once you round up all of those illegal immigrants, typically dark-skinned and Spanish-speaking ones, where do you put them while they are waiting to be deported back to Mexico City or Tegulcigalpa or wherever?

The Town of Farmville and a tiny Richmond-based outfit called ICA-Farmville have an idea.

They have won approval from the U.S. Immigration and Customs Enforcement for a $21 million detention facility that will have 1,040 beds just for the typically dark-skinned people waiting the weeks or months for deportation. Town Manager Gerald Spates said that Farmville can use the detention center because it will employ about 200 people, have a $8.2 million payroll a year and generate more than $700,000 in taxes. Farmville is a college town with a few furniture stores so it can use the money.

The detention center was originally planned for Cumberland County but was rejected. “We decided it would be a good fit and we were very supportive of it,” Spates told me. So, Farmville sought and won an ICE contract for the facility.

The managers of the detention (or minimum security prison depending upon your point of view) is an outfit based in Richmond called ICA/Farmville. ICA stands for “Immigration Centers of America” and its principals include Ken Newsome who is also president of AMC Bakery in Richmond. Other partners are Warren Coleman and Russell Harper of Harper Associates in Richmond. ICA-Farmville did not return repeated phone calls.

I could not find out if ICA-Farmville had any experience running detention centers with human beings. I did find out that Newsome gave money to Republican Jim Gilmore’s senatorial campaign, however.

That’s not the only politically-connected contribution involved. The project has won two grants for $581,760 for water, sewer and other infrastructure for the center from the Virginia Tobacco Indemnification and Community Revitalization Commission. This is the highly politicized body that decides how the state’s share of the 1998 Master Settlement Agreement with four tobacco companies will be spent.

So, once again, we have people in Virginia making a buck trading in human lives. Richmond, after all, used to be the nation’s No. 1 slave auction center. It raises other points as well:

The number of illegal immigrants has dropped below the 12 million estimate, Pew Research says. The reason is obvious. With the economy heading south fast to recession it’s harder to find jobs. Plus, the immigration crackdowns have made dark-skinned Spanish people skittish about being around whether they are illegal or not. With trends such as these, one wonders about the long term viability about the Farmville project.

The Washington Post has reported that ICE’s admininistration of illegals in Virginia is a bad joke. It takes lots of time and money to move captured suspects around and haul them hither and yon to appear before a judge, often via videoconferencing. The system the Post says, is beset by waste and dysfunction. Maybe the detention center is a good idea, if this is the case. But shouldn’t efforts be made to fix the system first before building prisons?

You have to wonder what the tobacco commission people are thinking. Why are awful projects like this considered so worthy of our share of the tobacco company settlement. Let me give you an idea what other states do with their tobacco money. In North Carolina, the Golden Leaf Foundation, that state’s tobacco commission, has given $20 million to Historically Black North Carolina Central University to create the Biomanufacturing Research Institute and Technology Enterprise (BRITE). The purpose of BRITE is to help train minority college students for jobs with top pharmaceutical firms in Research Triangle Park nearby.

Funny that when I mentioned this contrast to an editor of mine up in the DC area, he just laughed and said, “Well that’s Virginia for you.”

I still am puzzled why this state and some of the people in it are so inclined to create prisons. Spates tells me that the detention facility will feature bunk style housing with televisions and computers.

But let’s face it. It is still a prison. A handful of private investors will profit from it. Farmville will scarf up some limited tax dollars. And instead of using public money for more worthy purposes, such as helping train a new generation of drug researchers, Virginia will merely end up with more cooks and prison guards and “Cool Hand Luke” style wardens.

What we have here is “Failure to Communicate.”

–Peter Galuszka