Tag Archives: Boomergeddon

(Fiscal) Winter Is Coming

Congressional Budget Office projections of federal government annual budget deficits.

Let me set the scene by reviewing a few numbers. The federal deficit is on course to hit $1 trillion annually by Fiscal Year 2020. With retiring Baby Boomers swelling Medicare, Medicaid and Social Security expenditures, deficits will increase inexorably for decades. The U.S. national debt stands at $21.7 trillion. As deficits pile up and interest rates rise, the national debt expressed as a percentage of the GDP, 78% today, will reach 96% by 2028. CBO projects that interest payments on that debt will increase from $263 billion in 2017 to $915 billion by 2028, putting increasing deficits on autopilot that no amount of budget cutting can offset.

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Fairfax Supervisors Face County’s Monster Pension Crunch

Fairfax County Board of Supervisors Chair Sharon Bulova

Once upon a time, way back in the year 2000, Fairfax County’s general-employee pension plan was amply funded at 109% of projected needs. But the funding ratio dropped severely during the last recession and has been hovering around 70% in recent years. Today unfunded pension liabilities for Virginia’s largest local government are roughly comparable in size to that of the Virginia Retirement System, which which state employees and many local government employees participate.

Taxpayer groups are sounding the alarm and, astonishingly, the Board of Supervisors is actually studying proposals to address the shortfall.

County officials have proposed a range of tweaks to the pension plans for public safety workers and general employees. (School teachers have their own plans not controlled by the county board.) Among the changes: The minimum retirement age would be bumped from 55 to 60, the retirement-eligibility formula would increase age + years served from 85 to 90, and the final salary-averaging period for calculating retirement-payments would be increased from three to five. The changes would apply only to new employees hired on or after July 1, 2019, reports Inside NoVa.

Said Board Chair Sharon Bulova (D): “The Board, all of us, have felt this is a contractual, really, issue. If you joined the county under certain expectations and you’ve based your retirement plans on what you believed would be the deal when you came to the county, we are not changing that for current employees.”

Sean Corcoran, president of the Fairfax Coalition of Police Local 5000 described the proposed pension changes as “a completely contrived crisis.” Others speaking for county employees warned that the plan would create a new class of “second-class employee” and would hurt morale and recruitment.

But taxpayer advocates said the proposed reforms were just a start.

Arthur Purves, president of the Fairfax County Taxpayers Alliance, said while the county’s population increased 20 percent since 2000, inflation-adjusted salaries for county employees rose 35 percent, health-insurance payments went up 194 percent and pension costs increased 244 percent.

County real estate taxes since 2000 have increased three or four times more than the inflation rate, said Purves, who blamed compensation increases as the culprit.

The proposed pension cuts for new employees “are only a small and necessary start,” he said. “You need to look at raises.”

McLean Citizens Association president Dale Stein said county pension borrowing went up $600 million during the last three years and added officials were basing their calculations on average annual returns on investment of 7.25 percent, while returns over the past decade averaged just 5.9 percent.

“We strongly urge the Board of Supervisors to ensure a strong, competitive compensation package for all county employees,” Stein said. “In making those packages possible, the realistic question is, ‘Where in the heck is that money going to come from?'”

The Inside NoVa article did not say how much the proposed changes would reduce the unfunded liabilities.

Bacon’s bottom line: You can keeping kicking the can down the road but eventually you run out of road. The time to act is now. Relatively small changes today can fix a problem that is still a couple of decades away from a full-blown crisis. Failure to enact reforms, however, will make necessary changes all the more painful in future years.

Whispers of the “R” Word

Source: World Economic Forum

With the stock market taking a beating, all of a sudden economists are uttering the “R” word — recession. JPMorgan Chase & Co. has put the odds of a U.S. recession beginning within 12 months at one in three — up from an 8% probability a year ago, reports the Wall Street Journal.

Central Banks in Europe, Japan and the United States are walking back quantitative easing policies designed to fight the past recession, and interest rates are rising. Germany and Japan both reported negative growth in the past quarter, and the Chinese economy is slowing. The expansion of global trade has diminished to a crawl. The dollar is increasing in value, putting developing countries that went on a borrowing binge — in U.S. dollars — under heavy pressure.

The U.S. economy remains strong for the moment. But if developing nations start going Venezuela on us, it’s not entirely clear which banks, hedge funds, and other investors might go belly up, launching investors worldwide into risk-avoidance mode and sending cascades of fear ripping through the global economy in unpredictable ways — just as the subprime-mortgage fiasco did in 2007. The governing authorities did not foresee the last recession, and it’s like that the masters of the universe won’t see the next one coming until it’s upon us. One thing you can count on: With global debt as a percentage of global GDP at record highs, the unwinding of trillions of dollars of banking, corporate, government, and consumer debt will be frightful.

As I reported three weeks ago, Secretary of Finance Aubrey Layne conducted a sensitivity analysis of the Virginia budget to see what would happen if a recession comparable to the last one occurred. General Fund revenues would decline from $21 billion a year by $9 billion a year over three years. Admittedly, no one is predicting such a scenario… at the moment. But we would be fools to ignore the possibility, given the fact that the Commonwealth has set aside reserves utterly inadequate to help it through a 40% downturn in General Fund revenue. The impact on state governance would be catastrophic.

Against that backdrop, Virginia is flush with revenue right now from better-than-forecast economic growth and a series of potential windfall gains resulting from federal tax cuts, a Supreme Court ruling on Internet sales taxes, proposed entry into a regional carbon cap-and-trade system, and a Medicaid tax on hospitals. The big question is, what do we do with this money? Do we crank up new spending programs? Do we give some of the money back to taxpayers? Or do we build up our financial reserves to spare Virginia some of the trauma stemming from a possible reprise of the last recession?

Blue Wave Does Not Change Do-Nothing Consensus

The 2018 Congressional elections have been dubbed by some as “the most important mid-term elections in history,” but that’s mostly partisan blather. Democrats did indeed re-take control of the House of Representatives. But two more years of hyper-partisan gridlock will not change the nation’s perilous fiscal trajectory.

While many bemoan the lack of consensus in Washington, there is in fact a consensus — a consensus to ignore growing deficits and the surge in the national debt, except as a club to be wielded hypocritically against the other party. No one wants to touch entitlements. No one is serious about cutting discretionary domestic spending. And no one has articulated a scaled-back foreign policy that would permit a prudent shrinking of military spending.

As Trump and his antagonists mud-wrestle one another and the news media focus on political spectacle to the exclusion of all else, deficits will continue to climb, the national debt will continue piling up, un-cuttable interest on the national debt will consume an ever-increasing share of spending, and the Medicare and Social Security trust funds will get two years closer to depletion. The Medicare Hospital Insurance trust fund is scheduled to run out in eight years, Social Security’s Old Age and Survivors fund in 16 years. If you think politics are ugly now, just wait.

I would say that Americans are like ostriches with our heads stuck in the sand — but that would be an insult to ostriches.

Meanwhile, back at the ranch… Insofar as the 2018 elections can be said to have been a blue wave, the epicenter of that wave was Virginia. The switch of three congressional seats from red to blue portend gathering strength for the Democratic Party in the Old Dominion. If the electoral trends of the past two years continue — and there is no sign that they won’t — Democrats will take control of the General Assembly in 2019, seize the machinery of redistricting, and ensconce themselves in power for the next generation.

For the moment at least, the Republican Party is in no condition to resist the blue tsunami. Corey Stewart was an unmitigated electoral disaster. Being Trumpier than Trump is not a winning electoral formula in Virginia. But pursuing a moderate, technocratic formula didn’t work much better for Ed Gillespie in the 2017 gubernatorial race. The GOP has roped itself to the shrinking demographic base of rural/small town Virginia. It has no coherent message. It is floundering.

A blue Virginia portends a more activist government, more spending on “social justice” priorities, and higher taxes. Steve Haner’s recent piece, “Taxaginia,” lays out where we’re heading in 2019. Admittedly, the blue wave this year was propelled in great measure by culture-war issues — in particular the #MeToo movement and suburban women’s revulsion against Donald Grab-Them-By-the-Pussy Trump. But if you think the electorate will exercise a moderating influence on the tax-and-spend proclivities of the political class, just consider the referendum on Question No. 1.

Seventy-one percent of Virginians voted in favor of a constitutional amendment that would subsidize continued building in flood-prone areas. Given all the other fiscal challenges Virginia faces — unfunded pensions, under-funded capital spending, budgeting sleight-of-hand, and all the rest chronicled on this blog — the vote was utter folly. Virginians are in fiscal denial. I once thought of state/local government as the bulwark against federal collapse. I’m no longer so hopeful.

Update: Looks like John Rubino at Dollarcollapse.com and I are in sync on our appraisal of the national election. Writes John today:

As contentious as the US midterm elections were, there was never a scenario in which they mattered. Any possible configuration of Republicans and Democrats in the House and Senate would have yielded pretty much the same set of economic policies going forward: Ever-higher debt, upward trending interest rates and (through the combination of those two) rising volatility. … The system is on autopilot and it matters exactly not at all which party or which configuration of parties is running the asylum.

How Bad Can It Get? You Don’t Want to Know.

Try taking $9 billion out of this, and see what happens. Image source: Department of Planning and Budget

The United States is enjoying 112 months of uninterrupted economic expansion. We’re basking in one of the longest business cycles in American history — the average expansion since World War II has lasted 58 months. Unless someone has repealed the laws of economics, sooner or later, we’ll experience another recession.

There is a widespread belief among economists that the longer and stronger an expansion lasts, the more complacent people get about the chances of anything going wrong. They take greater financial risks, misallocating capital and seeding the next financial crisis and recession. Compound inevitable investor greed and folly with years of highly stimulative central banking policies in the U.S., Europe, and Japan that expressly encouraged people to take more risk — resulting in unprecedented borrowing and debt accumulation around the world — and the global economy could be cruising for a major bruising. When the next recession comes, it could be a doozy.

How would another 2008-scale recession impact state government finances here in Virginia? Someone asked that question of Virginia Finance Secretary Aubrey Layne, and he gave an answer at an Oct. 25 hearing of the Senate Finance Committee. (You can hear his remarks here. Go to the 23-minute mark.)

Layne emphasized that he knows of no mainstream economist who is predicting such an event, at least not in the next 24 months. But the fiscal consequences would be cataclysmic. Virginia’s General Fund budget would experience three years of what Layne, in his understated manner, described as “fairly significant” declines in revenues:

Year 1 — $2.6 billion
Year 2 — $3.7 billion
Year 3 — $3 billion

Those numbers are cumulative. The declines would total $9.3 billion over the three years. As a point of comparison, the FY 2019 General Fund budget is a bit more than $20 billion. That wouldn’t be a mere budget crunch. It wouldn’t cause routine pain and hardship. It would mark the end of state government as we know it. It would unravel the social fabric.

As Layne noted, Virginia has limited policy “levers” to pull to counteract such a drastic revenue fall. The Commonwealth is prohibited from running deficits, and it can’t print money. The state has about $1 billion in reserves — that would get wiped out in the first year. 

Broadly speaking (this is my analysis, not Layne’s), Virginia has three options: raise taxes, cut spending, or engage in fiscal sleight-of-hand. Higher taxes would reduce the state’s long-term economic competitiveness, crippling the state in the long run. As for cutting spending, many argue that the state is already under-investing in key areas such as K-12, higher education, mental health… and the list goes on. So-called “unmet needs” are limitless.

That leaves fiscal sleight of hand. Remarkably, Virginia has retained one of the gimmicks it adopted during the last recession — the “accelerated sales tax,” in which the state compels large retailers to accelerate payment of the sales tax by a month. That created a significant bump of revenue in 2010 when the state needed it most. But budget makers never fully unwound the measure. Lawmakers, suggested Layne, might consider reverting to the traditional way of collecting the tax. (Total state sales tax revenue this year is projected to be around $3.5 billion. Unwinding the accelerated payment, I presume, would entail foregoing about 1/12th of that sum, about $300 million.)

The state also could do what it did from the last recession, short-changing payments to the Virginia Retirement System and paying back the balance over time. But this time around, we’d be ten years closer to actually needing the money to pay for the pensions and healthcare benefits promised to the latest wave of retiring state employees. Borrowing from the VRS at this point would be reckless in the extreme. Without getting into specifics, Layne suggested that legislators might want instead to “look at” the retirement benefit plan obligations.

One other option would be to refrain from issuing long-term debt. Virginia tends to borrow up to the limit of its bonding capacity. (To preserve the state’s AAA bond rating, bipartisan policy dictates that debt payments not exceed 5% of General Fund revenue). Exercising self-restraint now would preserve the state’s debt-issuing capacity in the event of a major revenue downturn.

The Northam administration is preparing its budget recommendations for the next fiscal year, and legislators will have a lot of their own ideas on how to modify it. Virginia will benefit from windfall revenues from a variety of sources, and likely run a budget surplus, too. This may be one of Virginia’s few remaining opportunities to put its fiscal house in order before another recession. Failure to prepare for the inevitable downturn would be unforgivable.

Moody’s: Virginia Local Government Credit Quality Healthy despite High Debt Burdens

Moody’s bond ratings for 28 cities and 38 counties in Virginia. Source: Moody’s. (Click for larger image.)

Moody’s, the bond-rating firm, has disseminated a new report on the credit quality of Virginia local governments — answering many of the questions we have been posing on this blog.

The good news is that Moody’s rates Virginia’s business climate highly and says that local governments have “wide latitude” to protect their bond ratings by raising taxes and cutting expenses.

The bad news is that local-government flexibility to raise property tax rates might reassure bond holders but is not a prospect that taxpayers will relish. Which raises the question: How likely are local governments to raise property tax rates? Moody’s does not get into that, but it does observe that that Virginia local governments have high debt burdens, big pension obligations, and aging infrastructure to contend with.

For your reading pleasure, I have extracted verbatim the high-level conclusions from the Moody’s report:

  • High debt burdens can constrain local governments’ financial flexibility. In general, Virginia local governments have debt burdens that exceed national medians, largely due to debt issued for schools. High debt burdens lead to higher-than-average fixed costs, including debt service, the annual required contribution for pensions, and the “pay-as-you-go” portion of retiree health benefits. In turn, local governments’ flexibility to raise funds to address capital needs faces limits.
  • The federal government’s major role in Virginia’s economy is a strength but carries some risk of cutbacks. The state is home to the world’s largest naval base and the Pentagon as well as a number of non-military operations. In 2016, it ranked first in the US in military spending as a share of gross state product (11.8%). While the Hampton Roads and Northern Virginia economies benefit from the large federal government presence, both face exposure to federal budget reductions, though massive cuts are unlikely.
  • Continued private-sector investment will boost revenues and provide stability. A highly education workforce, weak union protections and significant population growth will continue to generate private-sector expansion. The expanding private sector will fuel tax base growth and provide a stabilizing factor in case of cuts in military and other federal government spending. Virginia has experienced a substantial bump in Eds and Meds with the higher education and healthcare industries consuming a greater share of employment.
  • Legal framework helps local governments maintain solid reserves. Cities and counties can raise property taxes, their largest revenue source, without state-imposed caps or voter approval. The ability to control the tax rate, along with flexibility to reduce personnel costs, has contributed to strong financial positions. However, operating funds include school operators, so reserves generally trail national medians.

I’ll provide details in future blog posts.

Virginia Ill Prepared to Weather a Recession

Thin ice

I’m not sure how Virginia’s Secretary of Finance, Aubrey Layne, sleeps at night. He is by nature a fiscal conservative, and he was in frequent touch with the rating agencies that threatened earlier this year to downgrade Virginia’s prized AAA bond rating. While elected officials may ignore the fiscal warning signs, it’s Layne’s job to pay attention to the warning signs. They’re coming fast and furious.

In recent days, I have drawn attention to analyses by Truth in Accounting and the Mercatus Center that have highlighted the precarious nature of the Commonwealth of Virginia’s finances. Now come new warnings from bond-rating firms S&P Global Ratings and Moody’s Analytics. As reported by Reuters:

While U.S. states’ financial health has strengthened in 2018 compared with last year, fewer than half have enough financial reserves to weather the first year of a moderate recession, according to an S&P Global Ratings report on Monday. …

Only 20 states have the reserves needed to operate for the first year of an economic downturn without having to slash budgets or raise taxes, S&P said.

Meanwhile, from Moody’s Analytics:

A Moody’s Analytics report, also released on Monday, said the number of states with sufficient reserves to withstand a recession increased to 23 from 16 last year.

However, that leaves 27 states lacking sufficient reserves. And who might they be? According to Moody’s (my emphasis):

Those states, in order of least-prepared, are Louisiana, Oklahoma, North Dakota, New Jersey, Montana, Kentucky, Virginia, Missouri, Arizona, Illinois, Pennsylvania, Wisconsin, Kansas, New Hampshire, Mississippi, Michigan and Arkansas.

More than nine years since the end of the 2007-2009 recession, and Virginia is one of the states least prepared to weather an economic downturn?

Virginia has a rare chance to put its fiscal house in order. We’re benefiting from a trifecta of (1) a temporary acceleration in economic growth and tax revenue, (2) a windfall from the federal tax cut, and (3) a windfall from the ability to start collecting a tax on Internet sales. Some people say, whoopee, let’s spend the windfalls! Others, including my esteemed colleague Steve Haner, say, let’s give it back to the taxpayers. I have yet to hear anyone (other than myself) say, let’s use the windfalls to pay down liabilities, build up reserves, and generally strengthen Virginia’s financial condition.

This is easy money. If we spend it or give it back, I can guaran-damn-tee you that a time will come when we’ll wish we’d set it aside for when we really needed it. Cutting spending and/or raising taxes at that time will be very painful.

Virginia Unfunded Liabilities: $5.4 Billion

Source: Truth in Accounting

Here is more confirmation, as if any were needed, that the Commonwealth of Virginia is running hidden deficits in the form of unfunded pension and retiree healthcare liabilities… Truth in Accounting, a nonprofit devoted to transparency of government finances, gives Virginia a grade of “C” for its financial practices.

By the standards of the 50 states (and District of Columbia), that’s not a bad score. Virginia’s unfunded liability averaging $1,900 per taxpayer is less onerous that that of all but 11 states. So, if you’re inclined toward Pollyanna-ish views on government finance and debt, we’re not doing so badly.

But here’s what Truth in Accounting has to say in its Virginia profile: “Virginia’s financial condition is not only disconcerting but also misleading as government officials have failed to disclose significant amounts of retirement debt on the commonwealth’s balance sheet. Residents and taxpayers have been presented with an unreliable and inaccurate accounting of their government’s finances.”

Highlights:

  • Virginia has $35.8 billion in assets to pay $41.2 billion worth of bills.
  • The $5.4 billion shortfall averages $1,900 per taxpayer.
  • Despite reporting all of its pension debt, the commonwealth continues to hide $936.9 million of its retiree health care debt.
  • Virginia’s reported net position is inflated by $1.5 billion, largely because the commonwealth defers recognizing losses incurred when the net pension liability increases.

The best funded states are Alaska ($56,000 surplus per taxpayer), North Dakota, Wyoming, Utah, and South Dakota, all of which have set aside more than enough money to pay their pensions and retiree healthcare liabilities. The top “sinkhole” states are New Jersey ($61,400 debt per taxpayer), Connecticut, Illinois, Kentucky, and Massachusetts.

Remember, the Truth in Accounting methodology does not take into account hidden deficits in the form of maintenance backlogs on roads, bridges, mass transit, school buildings, water and sewer plants, etc., much less the potential liability associated with rising sea levels. Nor does it cover the liabilities associated with local governments or a welter of independent and quasi-independent authorities. The fiscal health of the Commonwealth and its localities is far more precarious than even Truth in Accounting portrays it.

The national debt now exceeds $21 trillion, and I read recently that the federal government has unfunded liabilities of roughly $100 trillion over 30 years. Yet Democrats are campaigning on expanding entitlements (Medicare for all, free college for all, etc.) while President Trump is promising another round of middle-class tax cuts. Both political parties are in total denial. The federal budget is unsustainable, and when the national government can no longer maintain its promises and breaks its social contract, and the country slides into chaos, state governments will be the main line of defense against anarchy.

Hint: Do not even think about moving to New Jersey or Illinois. Alaska is looking pretty good right now. Grizzly bears don’t riot or throw Molotov cocktails.

Caution: These Links Will Ruin Your Sleep

A campaign pitch for an incumbent member of Congress you will not hear:  You are getting $4 worth of government for every $3 you pay in taxes and fees, and the other buck is piled on as debt for your kids and grand kids to pay! You should vote me back in!

The Treasury Department’s own news release Monday, flagged by The Republican Standard,  attempted the spin that this is not the fault of President Donald Trump and the halcyon days coming thanks to his wise policies will soon begin to reverse this.  Hang with us!  Reading through the actual reports on income and spending, however, it is impossible to build up any hope.

This is another one of those cases where I indulged my own morbid curiosity and am now sharing the results.  I do not spend much time with the federal reports, compared to the state spreadsheets, but from time to time everybody should dig into the depressing details.  Stop reading my observations and dive into the actual reports – I won’t be offended.

The federal budget is broken into two big categories:  on budget and off budget.  This in no way correlates to the state’s system of splitting things into general fund and non-general fund.  The federal off-budget component is mainly Social Security pension and disability payments.   Other situations where specific taxes or fees pay for specific programs, including Medicare and the Post Office, are lumped into the on-budget categories.

When Social Security was collecting healthy receipts exceeding its annual outlays, it was producing surpluses.  These off-budget surpluses provided a nice way to hide the true size of the deficit in the on-budget category.  Well, for federal fiscal year 2018 (which ended September 30) that was a very small fig leaf indeed – about $6 billion, compared to $49 billion the year before.  Will the current fiscal year 2019 produce the first cash flow deficit for Social Security?  Will that wake up anybody?

When you back out that small off-budget surplus, the on-budget deficit was $785 billion, just under 25 percent of the $3.26 trillion in on-budget spending.  That on-budget deficit grew $70 billion, almost ten percent in a single year.  You can choose whether to blame higher spending or tax cuts.  Machts nichts.

The big federal tax cut went into effect three months into this past fiscal year and was in play for nine months, but individual income tax receipts grew 6 percent for that year.  Perhaps it’s too soon to judge the impact until people file next year.  But the impact of the corporate income tax changes did show up last year, with a $92 billion (31 percent) drop in CIT revenue.  There was a healthy boost in customs duties and that will really take off for 2019. (Is that the plan? Make tariffs the main source of federal income for the first time since President Polk?)

The federal officials quoted in the official release make much of slight decreases in a couple of social benefit programs, such as SNAP (a.k.a. food stamps), but reviewing the spending sheets really reveals the depth and breadth of income-based transfer programs, plus the political genius of sprinkling them through so many difference parts of the budget.

SNAP and other food programs are in the Agriculture Department ($91 billion).  Federal student aid ($46 billion) is in Education.  Medicaid ($389 billion), Temporary Assistance for Needy Families ($21 billion) and Children’s Health Insurance Program ($17 billion) are in Health and Human Services.

Housing gets its own programs for the economically challenged ($48 billion).  The Earned Income Tax Credit ($59 billion) is buried under the Treasury Department and the Social Security Administration handles the Supplemental Security Income payments of cash ($55 billion) that are not part of the regular disability coverage, which is (of course) off budget.  I’m sure I missed some.  I think the Veteran’s Administration still makes some pension payments based on poverty (maybe not.)

A single Department of Federal Need-Based Assistance which puts all those programs in one basket would approach $800 billion and would be larger than defense spending or the payments on the debt ($521 billion).  Which of course is why no politician of either party will ever, ever do that and make things that clear.

What is the choice on November 6?  There really is no reason to differentiate the parties on this issue any more, or to believe any candidate promising something else.  A bipartisan deal on Fiscal Year 2019 explodes spending and the projected deficit this year approaches $1 trillion. We are in this condition in a strong economy and looking at the deficits run coming out of the last recession indicates the deficits in the next one (inevitable) will approach $2 trillion.

Chesterfield’s $50 Million Fiscal Landmine

Virginia and its local governments are constitutionally obligated to balance their budgets ever year. But as I have repeatedly pointed out, there are many ways to duck that obligation. One is to rack up unfunded pension liabilities. Another is to under-fund maintenance.

Today we discover that even a highly reputed county with a AAA bond rating can engage in fiscal sleight-of-hand. From today’s Richmond Times-Dispatch: “Chesterfield County needs $50 million for school maintenance problems that could keep kids out of schools if they are not addressed soon.”

The county issued $300 million in bonds after a voter-approved referendum in 2013 to replace and renovate county schools. Apparently, there’s only $13 million left for fixing facilities — far short of what’s needed.

Dan Champion, a program manager for the firm EMG, said there are schools across the county with serious electrical, air conditioning and roofing problems. If not adequately addressed over the next two decades, the cost of the repairs could rise to nearly $1 billion, he said.

The Times-Dispatch article delves into the riff between the county administration and the school system. There’s a lot of finger-pointing going on. Regardless of who is to blame, it is clear that Chesterfield schools have run $50 million in maintenance deficits over the years. And now the county is on notice that, absent corrective action, the maintenance deficit could reach $1 billion over 20 years.

How many other Virginia school districts have engaged in deficit maintenance spending? How many other agencies and localities have piled up unfunded liabilities for deteriorating roads, highways, bridges, mass transit systems, water and sewer plants and pipelines, libraries, administration buildings, courthouses, jails, prisons, municipal gas systems, IT systems, automotive fleets, and the rest of the state’s vast infrastructure?

Administrators and elected officials have no interest in knowing the truth that might make them look bad. So, nobody tracks this information until it becomes an explosive issue. What’s that noise we hear in Chesterfield? Kaboom!

Oops, Where Did that $3-4 Million Deficit Come From?

The idea behind the Commonwealth Center for Advanced Manufacturing (CCAM) is fantastic: Create a facility where Virginia manufacturers and universities can collaborate on advanced-manufacturing research projects that all participants can share. Research staff for the Prince George County-based facility are expert in everything from “vertical diffusion furnaces” and “robot arm-based automation cells” to “thermal spray coating” and “corrosion crack healing,” and they conduct about $7 million a year in research.

Just one problem: The program is operating at an annual deficit of between $3 million and $4 million a year. Debts include $2 million in unpaid rent to the University of Virginia Foundation and a tapped-out bank credit line, according to the Richmond Times-Dispatch.

Said Secretary of Finance Aubrey Layne: “They’ve got to put together a business plan that makes some sense.”

The Center has procured state and federal funding commitments to build a $12.6 million Advanced Manufacturing Apprentice Academy next door. But state officials, reports the T-D, say they won’t release $9 million in bond money planned for construction of the academy without an answer to the center’s financial questions. Said Layne: “That is not going to happen until this issue is solved.”

Bacon’s bottom line: As I have ranted and raved and inveighed and fulminated, Virginians have no idea how many fiscal land mines are out there. Yes, the Commonwealth has a AAA bond rating (although we have skirted on the edge of a downgrade), but no one has tallied up the long-term commitments, unfunded long-term liabilities, maintenance backlogs, and fiscal tricks of all the local governments and independent authorities set up to serve the interests of the Commonwealth.

After the Petersburg fiscal meltdown, the General Assembly began monitoring the health of local governments, looking for early warning sides of impending financial apocalypse — a big step forward. But no one is tracking dozens of non-governmental entities. Only a couple of months ago, for instance, was the public made aware of a $3.5 billion unfunded pension liability at the Washington Metro mass transit system serving Northern Virginia. Now we learn that CCAM is running a big budget deficit and racking up long-term debt.

The federal government has accumulated a $21 trillion national debt, and soon will be adding to it at a rate of $1 trillion a year — during an economic boom. The Medicare trust fund is projected to run out in 2026. The Social Security trust fund is expected to run out in 2034. Uncle Sam will never collect a big chunk of the $1.3 trillion in student loan debt outstanding, and taxpayers will have to pick up the tab. Meanwhile, states like Illinois and New Jersey are one sharp recession away from fiscal collapse.

As Boomergeddon looms, Virginia traipses merrily along, most recently creating a new Medicaid-expansion entitlement, with no clear idea of its overall fiscal condition. Our lawmakers look no more than two years ahead — the time horizon dictated by the biennial state budget. Although they are attuned to the necessity of maintaining a AAA state bond rating, the credit-worthiness of state bonds is just one piece of the whole. The credit-worthiness of Virginia’s counties, cities and towns is another piece. The credit-worthiness of our state universities is yet another. The credit-worthiness of a plethora of independent authorities is still another. No one, to my knowledge, has analyzed all the pieces as a whole and stress-tested the system. Until we do, we’re flying blind. It is foolhardy to pretend otherwise.

A Thoughtful Reminder of Another Pension Landmine

A recurring theme of Bacon’s Rebellion is that billions of dollars of liabilities lurk in the balance sheets of Virginia’s state/local government and quasi-governmental organizations — from the $20 billion unfunded pension liability of the Virginia Retirement System to the $3.5 billion unfunded pension liability of the Washington Metro system. Some don’t get the attention they deserve. As I come across new examples, I’ll bring them to your attention…

Like Fairfax County’s $5.6 billion pension liability. According to the Fairfax County Taxpayers Association (FCTA) Watchdog Report:

The Fairfax County pension liability is now $5.6 billion. … There are 400,000 homes in Fairfax County, so the liability amounts to $14,000 per household. To pay the liability will require an increase in the real estate tax of $1,000 for 14 years. The liability and the real estate tax will increase unless the retirement age is increased to 65 or 70 years of age — as compared to the current 55 to 60. Without such a change, the liability per household will get worse in the future because the number of county and school employees has been increasing 1.6% per year while the population has been increasing only 0.9% per year.

The debt bomb is worse than you think. Much worse.

Hurricanes, Risk, and Fiscal Collapse

Graphic source: Wall Street Journal

John Rubino, publisher of Dollarcollapse.com, and I think a lot alike when it comes to the inevitable fiscal collapse of the United States. The country (indeed the globe) is riding high today on a giant credit bubble right now, but sooner or later the bubble will pop and the economy will crash. If you buy into my Boomergeddon theory — that the U.S. will experience massive social upheaval when federal and state governments are unable to maintain their commitments to core services and the social safety net — you might want to check his website for your daily frisson of fear.

I, like John, have been writing about the dangers lurking in states’ unfunded pension liabilities and the exploding student loan liabilities that are undermining our institutions of higher education. I’d urge John to give more coverage to the issue of hidden deficit spending in the form of growing infrastructure-maintenance backlogs. (Read the Strong Towns blog for a primer on state/local governments’ growth Ponzi schemes.) Meanwhile, in a recent post, John drives home a point to which I have given insufficient attention: the future cost of hurricanes.

Unlike unfunded pensions, student loan defaults and maintenance backlogs, upon which we can put reasonable figures, there is no way for Virginia to budget for hurricanes. The incidence of hurricane hits is relatively infrequent and highly random and the damages are so variable from storm to storm, that budgetary forecasts are a total crap shoot. But I think we can safely say three things about Virginia:

  1. Sooner or later, another large hurricane will hit Virginia;
  2. Subsidence and sea-level rise, which will occur even in the absence of global-warming scare scenarios, will magnify the impact of major storms;
  3. Continued development along the shorelines of the Atlantic Ocean and Chesapeake Bay will lead to more storm-related damage.

John is concerned about the prospect of a monster storm hitting a big city like Miami or New York and giving us “a trillion-dollar summer” that bankrupts major insurance companies, roils insurance markets, depletes federal flood insurance reserves and forces the U.S. government into another massive bail-out “just as federal deficits are exploding, public sector pensions are imploding, and student loans are defaulting en masse.”

I, too, worry that the federal government is headed for disaster. But as I observe the proceedings in Washington, D.C., I have written off the federal government. Our political culture in Washington is so dysfunctional, so toxic, so addicted to short-term political gain, that the federal government is beyond salvation. I don’t waste a lot of intellectual bandwidth wondering what might save Washington. Nothing can. But I would like to ensure that the Commonwealth of Virginia survives the wreckage. Some government entity will have to carry on when the federal government melts down, and state government is the only alternative.

But I worry about Virginia, too. As I blogged recently, we have no idea what governments and quasi-state agencies — from the Washington Metro to local economic development authorities — have piled up in long-term debt, unfunded pension liabilities, and maintenance backlogs, much less how vulnerable they are to the next economic downturn. Now, add the risk of damage from hurricanes to roads, bridges, railroads, water and sewer facilities, coal ash ponds, the electric grid, pipelines, and other infrastructure. How prepared are our state agencies and utilities to cope with a major disaster? What would the impact be on taxpayers and rate payers, what have we set aside in reserves?

In a word: How fiscally resilient is Virginia in the face of natural disaster? Puerto Rico showed how a hurricane can push a corrupt and mismanaged polity over the edge. Surely we’d hold up much better. But that assumes Uncle Sam can continue handing out billions of dollars in disaster relief and that insurance markets are functioning. No one knows. We live in ignorance at our peril.

Virginia and the Next Global Debt Crisis

Ten years ago the Lehman Brothers debacle precipitated the financial meltdown we associate with the Great Recession, and the financial media are full of retrospectives. A key question is what lessons we learned from the epic failure. The main conclusion drawn, according to Daniel J. Arbess in the Wall Street Journal today, appears to be that the way to dig out of a debt-fueled financial crisis is to pile on more debt. But that doubles down on the original problem, he warns:

In the past decade, total global debt (sovereign, corporate and household) has spiked nearly 75%. This includes a doubling of sovereign debt, from $29 trillion to $60 trillion, according to a recent McKinsey report. Total corporate debt increased by 78% over the same decade, to $66 trillion. Bank loan volumes have been stable, although low-quality “covenant lite” loans have dominated. Bond markets have filled in, with nonfinancial bonds outstanding up 172%, from $4.3 trillion to $11.7 trillion. McKinsey says 40% of U.S. companies are rated one notch above “junk” or lower, and the Bank for International Settlements estimates 10% of legacy companies in the developed world are “zombies,” meaning earnings before interest and taxes don’t cover interest expenses.

This is what zero interest rates and quantitative easing have wrought — more debt and lower credit quality. … Higher rates are coming, possibly heralding a tsunami of credit defaults.

As the Federal Reserve and the European Central Bank slowly dial back quantitative easing, interest rates will rise, stressing debt-laden governments, corporations and households. We are already seeing the effects in Turkey, Venezuela, Argentina and other developing nations as higher U.S. interest rates push the value of the dollar higher. Defaults in developing countries will be transmitted to the developed world in ways foreseeable and unforeseeable. The financial media have remarked upon the massive exposure of Spanish banks to the Turkish economy, for instance, which could prove problematic for the larger Spanish economy, the 13th largest in the world. But global markets are so complex and intertwined that defaults can spread as unpredictably and explosively as the sub-prime mortgage loan crisis in the U.S. did ten years ago via financial innovations that have so far eluded the notice of media and regulators.

What’s it to us? That’s all fine and good for bond traders and hedge fund managers, you say, but what difference does it make to Virginia? It matters because Virginia is part of the global economy and global financial system, and what happens elsewhere will impact us. The policies we pursue at the level of state/local government can make us more vulnerable to, or more resilient in the face of, the next financial crisis.

To be sure, the Commonwealth is nowhere as vulnerable as, say, Puerto Rico was before it declared bankruptcy, or as Illinois and Chicago now are. We have a AAA credit rating, we balance our budget with only a modicum of chiseling, and we pay our bills on time. But the bond rating of the Commonwealth does not tell us anything about the indebtedness of our local governments, our universities, our hospitals, our quasi-government organizations, our economic development authorities, our housing authorities and all the other bond-issuing entities in the state. No one has toted up all those numbers.

We continually discover things we didn’t know before. While Virginia’s $20 billion or so in unfunded pension liabilities are well known, only recently has our attention been drawn to the $3.5 billion in pension liabilities at the Washington Metropolitan Area Transit Authority (WMATA), which operates Northern Virginia’s heavy rail mass transit system and much of its bus system. As the Government Accountability Organization concluded, “Due to their relative size, proportion of retirees compared to active members, and investment decisions, these pension plans pose significant risk to WMATA’s financial operations, yet WMATA has not fully assessed the risks.”

How many other WMATAs are out there?

The Metropolitan Washington Airports Authority (MWAA) comprehensive annual financial report indicates that the authority’s two pension plans were fully funded as of Dec. 21, 2017. The General Employees Retirement Plan was seemingly in great shape with assets amounting to 105% of pension liabilities. Great news! But dig into the assumptions, and we see that the pension plan projects a 7.5% annualized investment rate of return. Many actuaries are saying now that a 7% or 6.5% rate is more realistic.

Similarly, the Ports of Virginia reported an unfunded pension liability of only $8.9 million as of June 30, 2016, an improvement over the previous year. The pension was about 91% funded. The ports assumed a 7% investment rate of return, somewhat more conservative than MWAA’s assumption.

MWAA and the Ports of Virginia are two of the largest quasi-governmental business entities in Virginia, and it is reassuring to see that they have their pensions under reasonably good control. But there are dozens if not hundreds of other bond-issuing entities in the Commonwealth. After the Petersburg fiscal meltdown, the General Assembly began watching for early warning signs in Virginia’s local governments, but there are dozens if not hundreds of other entities that issue bonds and borrow money. The federal government conducts “stress” tests on too-big-to-fail banks to see how they would hold up under adverse economic circumstances. Is anyone conducting stress tests for Virginia’s public and quasi-public entities? Not very likely.

The bottom line: Another global debt crisis is inevitable, the only questions are when it happens and how the damage ricochets throughout the global economy. How vulnerable is Virginia? We really don’t know. To be forewarned, as the saying goes, is to be forearmed. We are neither.

Graph of the Day: Virginia’s Declining Fertility Rate

Source: StatChat blog

The number of births in Virginia continues declining, reaching the lowest level in years in 2017 — only 100,248. A decade before, births had numbered 108,884.

Demographers Savannah Quick and Shonel Sen at the Demographics Research Group at the University of Virginia attribute the overall dip in fertility decline to a dramatic decline for 15- to 19-year-olds and 20- to 24-year-olds and a slight increase for 30- to 24-year-olds and 35- to 39-year-olds. In other words, many women are postponing childbirth, not choosing not to have children.

This is a classic good news/bad news story. The good news is that more women are taking control of their fertility in order to pursue education and improve their job prospects before having a child. Modern-day child-raising is an exhausting, all-consuming activity. It is all but impossible for women to hold down a full-time job, raise a child (or children), and continue their education — especially if there’s no father in the picture. The persistence of poverty in a society characterized by abundant avenues for upward mobility is, at its heart, a demographic issue. If lower-income women are having fewer children, fewer children will be raised in poverty.

The bad news is that the United States needs more citizens to enter the workforce and pay payroll taxes to help support a Medicare and Social Security system that is careening toward fiscal insolvency. But incremental changes in fertility are unlikely to make much difference. The Medicare and Social Security trust funds will dissipate before children born today can enter the workforce.