Tag Archives: Boomergeddon

The GOP’s Hail Mary Pass

Posted on December 20, 2017 by | 49 comments

House Speaker Paul Ryan savors his biggest legislative victory.

Faced with a chronically slow-growth economy, expanding deficits, mounting federal debt, and a looming funding crisis for the U.S. welfare state, Republican congressmen are, to borrow a football metaphor, throwing a hail Mary pass into the end zone in the desperate hope of scoring a winning touchdown. They are gambling that tax cuts combined with President Trump’s deregulation agenda will boost economic growth from roughly 2% per year to 3% or more, reducing the tax burden for millions of Americans, creating new jobs, boosting wages, and bending the curve on long-term deficit projections.

Convinced that the tax cuts will prove to be a disaster for everyone but the rich, Democrats and the mainstream media have subjected the tax plan to relentless, unremitting attacks. Viewed in terms of static economic analysis, we are told, the tax cuts will inflate federal deficits by a cumulative $1.5 trillion over the next ten years. Suddenly, deficits matter!

Republicans respond that measures in the bill — accelerating write-offs for business investment, encouraging the repatriation of hundreds of billions of dollars in corporate profits to the U.S., and making the corporate tax rate more competitive internationally — will stimulate economic growth. Unlike the Democrats, I think that much will prove to be true. My question is: Will faster economic growth generate enough new tax revenue to offset that $1.5 trillion? Longer term, will it avert Boomergeddon?

Let’s dig into the numbers. The Congressional Budget Office’s current 10-year budget forecast assumes a modest 2.1% annual growth rate over the next ten years, a slight uptick from the trend established during the Obama years. But economic growth has accelerated to roughly 3% in the past couple of quarters, and the Trump administration’s deregulation + tax cuts strategy could nudge it even higher. Let us assume for purposes of discussion that, thanks to the tax cuts, the U.S. can grow the economy at a sustainable rate of 3.1% annually. What does an extra percentage point in economic growth get us in deficit fighting?

Well, the latest CBO federal revenue forecast for the next ten years is $43 trillion. A 1% boost in federal revenues will yield $430 billion, not nearly enough to close the $1.5 trillion gap. The analysis gets a bit more complicated because economic growth and higher incomes push Americans into higher tax brackets while a roaring stock market generates massive capital gains. So a 1% increase in economic growth could produce more than a 1% increase in federal revenue. Let’s go for the gusto and double the growth-to-revenue ratio, assuming that federal taxes increase actually increase by $86 billion per year over current projections. That’s still doesn’t close the ten-year $1.5 trillion gap.

Could the economy grow much faster than 3.1% over the decade ahead? I’m skeptical. First, Baby Boomers are retiring in droves, and the working-age population is stagnating. A growing labor force supports economic growth; a stagnant labor force undermines it. Second, the Federal Reserve Board, intent upon unwinding the monetary stimulus of the Obama years, will continue to raise interest rates. It goes without saying that higher interest rates are a damper to economic growth.

In summary, in my untutored opinion, I think that the U.S. will see modestly faster economic growth over the next few years. The Dems have predicted economic Armageddon. They won’t get it. The lives of millions of Americans will improve… in the short run. But Republicans are deluding themselves if they think modestly faster economic growth will reduce the nation’s long-term structural budget deficit. Entitlement spending is still running out of control, and the nation still faces a hideously painful fiscal reckoning. Our 20-year future still looks like Boomergeddon.

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Posted in Business and Economy, Federal issues, Government Finance

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Bacon Bits: Film Flam, State Workers, Fun & Games with Chicago Debt

Posted on November 14, 2017 by | 3 comments

Yummmm. So tasty.

Film incentives a money loser for state. Incentives for producing films in Virginia doubled under the McAuliffe administration, reaching $14.3 million in 2015-2016 and totaling $43 million over five fiscal years. But Virginia’s film industry has returned about 20 cents for every dollar it received in tax credits and 30 cents for every dollar in grants over the five-year study period, according to testimony yesterday before the Joint Legislative Audit and Review Commission (JLARC). Legislative auditors concluded that 95% of the productions would not have been filmed in the state were it not for the credits, reports the Richmond Times-Dispatch.

State employment compensation needs reform. Compensation for the state’s 105,000 employees is “nearly equivalent in value” to that of private-sector employees in Virginia. Although salaries lag the private sector by about 10%, the state makes up the difference with generous health insurance policies. The compensation package does have challenges, however, hiring employees in the fields of health care, health and safety inspection, public safety, and information technology, finds a new JLARC report. “State employee salaries could be more strategically managed if they were … prioritized for jobs that exhibit the most pressing workforce challenges.”

Boomergeddon watch: Chicago. Despite $36 billion in public pension debt, a prospect of $550 million in budget deficits over the next three years, and a reliance upon the state of Illinois, the budget of which also is in a shambles, Chicago just issued a AAA-rated bond. How is this possible? Chalk it up to creative financial engineering. The city is selling off its right to receive sales-tax revenue from Illinois to a separate public corporation, which will issue new bonds backed by those funds. This securitization insulates bondholders from the city’s finances. Chicago is using the proceeds to pay off old, higher-coupon paper, so it will ease its interest burden for a while. However, writes financial blogger John Rubino, “since [the city] runs a chronic deficit, it will soon be back in the market to borrow more, at which point it will have to pay up – since those AAA bonds are siphoning off so much money. Then the downward spiral will resume, with no more tricks available to delay the inevitable.”

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Posted in Economic development, Government workers and pensions

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Entitlements, Fiscal Limits and the Looming Age of Rage

Posted on November 8, 2017 by | 50 comments

Now that Democrats are close to parity with Republicans in the House of Delegates, there is renewed talk of Medicaid expansion in Virginia. Meanwhile, in Washington, President Trump and Republicans are pushing a tax-cut plan that would spur economic growth but, even with stronger growth, would increase deficits by $1.5 trillion over the next ten years. Nobody is talking about the $14.6 trillion national debt except as a cudgel against partisan foes. Even as Medicare, Disability, and Old Age and Survivors trust funds are projected to run out within a single generation, entitlement reform is not up for discussion.

Just a reminder… Here’s are U.S. budget deficits forecast by the Congressional Budget Office without counting proposed GOP tax cuts:

The “on-budget” deficit is what we conventionally think of the deficit. It does not include the draw-down of “off-budget” Medicare and Social Security trust funds. Data source: Congressional Budget Office.

Within eight years, the U.S. will be running $1 trillion-per-year deficits every year, pretty much forever. And the CBO forecast does not take into account the likelihood of a recession or two over the next ten years, in which case deficits will metastasize.

And here’s the off-budget forecast. Payouts for Medicare hospitalization, Social Security disability and Social Security old-age programs exceed tax revenues, but interest income on the assets will keep the respective trust funds in the black for the next couple of years. By 2020, however, the off-budget numbers shift  into deficit mode and plunge rapidly thereafter.

Barring major changes in U.S. spending programs or economic growth, here’s when the trust funds are expected to run out, according to Medicare and Social Security trust estimates:

  • 2028: Disability trust fund runs out of money.
  • 2029: Medicare hospitalization trust fund runs out of money.
  • 2035: Social Security trust fund runs out of money.

Back when the Simpson-Bowles commission tackled the deficit issue in 2010 — the last time Americans thought seriously about entitlement reform — the county had 25 years before keystone social safety net programs imploded. If Congress had acted then, it could have put the trust funds into fiscal balance with relatively minor tweaks (slightly higher payroll taxes, slightly reduced benefits, slightly older retirement ages) that had a large cumulative effect over many years. But a decade of delay will require more painful sacrifices, which means they likely never will be made.

If nothing gets done until the trust funds run out of money — what I call Boomergeddon — the programs will have to cut benefits to match revenues generated. We are only twelve years from massive dislocations to the Medicare program, and 17 years from disruptions to Social Security. Baby Boomers beware, your retirement will be a lot uglier than you realize.

As for those $1 trillion+ on-budget deficits every year, they put Virginia at special risk. Any Congressional effort to tame deficits without touching entitlements will require cuts to discretionary spending, the biggest pot of which is related to defense, intelligence and homeland security…. which happens to be Virginia’s biggest industry sector. Son of Sequester will subject the Virginia economy to chronic economic stress and fiscal pain. But instead of dealing with Virginia’s long-term structural issues, the next session of the General Assembly could well consume itself in a renewed debate over expanding Medicaid.

As Americans speak no evil, see no evil, and hear no evil, we hurtle toward an era of brutal fiscal limits, broken promises to millions of Americans, and polarization and rage that will surpass anything we see today.

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Posted in Federal issues, Government Finance, Social Services and Entitlements

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How to Build Strong, Resilient Cities and Towns

Posted on October 25, 2017 by | 10 comments

Chuck Marohn

Cities and counties across the United States are experiencing chronic fiscal stress, and the reason has nothing to do with Republicans or Democrats and everything to do with what Chuck Marohn calls the “growth Ponzi scheme.”

“Why are cities going broke?” he asked at a forum hosted by the Partnership for Smarter Growth, Coalition for Hanover’s Future, and the Virginia Conservation Network at Randolph-Macon College last night. “We can’t we keep the grass in the parks mowed? Why can’t we keep the library open past 5 o’clock?”

After World War II, the United States embarked upon a massive, society-changing experiment that departed from the accumulated wisdom of millennia of experience of building cities. That experiment, commonly referred to as suburban sprawl, changed the growth paradigm from building places with a pedestrian orientation to building places with an automobile orientation. Over the course of just two or three decades new zoning codes and highway construction transformed the character of cities across the country. Initially, that experiment seemed to work out well. Now the fiscal flaws are evident for all to see, and the system is on the verge of collapse.

In the post-World War II era, developers and government struck a deal: Developers would build a subdivision or shopping center, including roads and utilities, and then would turn over the infrastructure for local government to maintain. Early on, the arrangement seemed like a great deal for government. Taxes on the houses and commercial buildings generated loads of cash flow while the infrastructure cost almost nothing to maintain. In a typical cul de sac development in the mid-1990s, infrastructure would cost the builder $6,600 per development. Less visibly, localities had to spend thousands more on infrastructure outside the subdivision, such as arterial roads and highway interchanges. Everyone ignored the fact that it would take, say, 37 years to recoup the cost of all that infrastructure through property tax revenues. Because infrastructure costs little to maintain when it’s new, new subdivisions proved to be revenue gushers. But over time, roads required more and more maintenance and subdivisions began operating tax-wise at a net loss.

What was the solution? Build more new subdivisions and use the surplus revenues to cover deficits from the old subdivisions. Use good money to cover bad, like a Ponzi scheme. But at some point it’s impossible to build enough new subdivisions (strip malls, office parks, etc.) to cover the deficits. That’s where the nation is now, said Marohn. For thirty years, local governments enjoyed the “illusion of growth.” Now they’re facing the reality of chronic fiscal stress. Absent changed policies, they’ll follow Detroit into the abyss. For many, it is too late.

“We need growth so bad today that we’ll do all sorts of crazy stuff,” Marohn said. “We’re lending money to people we know can’t pay it back. We’re desperate for growth. We have to have it or everything falls apart.”

The United States is hitting the limits of its ability to fund more growth. There is no rabbit to pull out of the hat to rescue the nation from its predicament.

As an example, Marohn cited Lafayette, La., a city that is reasonably well run administratively yet experiences chronic fiscal stress. An in-depth analysis of its development patterns revealed that its downtown and older neighborhoods, which are compact and densely developed, net out fiscally positive but that the majority of the city, especially newer areas built according to suburban zoning codes, net out negatively. The median family in Lafayette makes $45,000 a year and pays $1,500 in local taxes. To cover the cost of the its growing infrastructure liability, the city would have to raise taxes to $9,000. “That will never happen,” he said. “Lafayette will have to make some very hard decisions about what to maintain and what to let go.”

Not all cities are in equally bad shape. Some grew more slowly and built less hop-scotch, low-density sprawl that inflated the expense-to-revenue ratio of its neighborhoods. Some have more flexible zoning codes that allow more adaptive reuse. And some are more willing to change than others.

“We should not accept decline as normal,” Marohn said. The answer is not some top-down Marshall plan. It’s the opposite — a bottom-up approach that emphasizes small, low-risk, high-return investments based on intimate local knowledge. Over time, small incremental improvements — bike lanes, cross walks, tree plantings, sidewalk widenings — can go a long way to rebuilding the tax base. The highest-return investments, he suggests, are those that enhance pedestrian and bicycle mobility. They make places feel safe and inviting. Their scale is a single block or intersection at a time.

The advantage of making small, safe bets is that if nothing gets better, you haven’t squandered much money. You haven’t mortgaged the farm, so to speak. But if the small bets do work out, you learn from experience and replicate the successes. In every community, Marohn says, there is a abundance of “pennies, nickels and dimes laying on the ground.” Over time, small improvements, leveraged by private investment, can create enormous value. “This is how we build wealth: slowly and incrementally.”

Marohn also abhors the rigidity of zoning codes and preaches the virtue of flexibility. Municipal planners suffer from the illusion that they can divine the future and anticipate the proper mix and location of residential, commercial and industrial property for the foreseeable future. But markets are too dynamic for anyone to predict long-term demand for different categories of real estate with consistent accuracy. A resilient city, he says, is flexible. A big-box building surrounded by a huge parking lot, typical of suburban development, is difficult to recycle into a different use. A single building set in a downtown street grid is very easy to switch from one use to another. Flexible development patterns like those found in downtown areas will prove more resilient in times of change than inflexible patterns. “Zoning codes are some of the most destructive things we have,” he said. “We need to rethink them.”

Thirdly, Marohn suggests that cities need to make it easier for entrepreneurs to bootstrap new businesses. While some 240 cities and regions across North America decided to chase the Amazon second headquarters, the economic-development deal of the decade, only one can win. Will Amazon HQ2 be a net gain to a community after a realistic accounting of costs and tax revenues and adjustments for incentives? Color him skeptical. It is more prudent, he says, to foster new business formation, which can be helped through a prudent relaxation of building codes, zoning codes and other regulations.

“If we play the Wall Street game, if we play the Washington game, we’ll get wiped out,” he said. By embracing new fiscal analytics, relaxing zoning codes, and embracing a philosophy of making small, low-risk, high-return public investments, America’s cities and towns can prosper.

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Posted in Infrastructure, Land use & Development

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Boomergeddon Watch: The Elderly Require Millions in Local Government Services

Posted on October 24, 2017 by | 7 comments

The Lorton Senior Center in Fairfax County. Photo credit: Washington Post

A decade or so ago when I worked for the Boomer Project, principals John Martin and Matt Thornhill warned that local governments in Virginia needed to prepare themselves for the age wave. The elderly have special needs, not all of which can be met by Medicare, Medicaid and Social Security. People in the health care and social services communities seemed interested in what John and Matt had to say, but nothing much happened. Now we’re ten years down the line, and localities are beginning to feel the pinch.

Take Fairfax County for example, a jurisdiction of 1.1 million population which is expected to see its elderly population grow from 135,000 to 172,000 over the next eight years. A Washington Post review of 13 agency budget reports found that services for seniors drove spending increases of $43.8 million since 2014, or nearly 10 percent of the county’s total spending growth.

Old people? Who would have figured?

The Fairfax County Fire and Rescue Department is on pace to exceed 100,000 emergency calls this year — 10,000 more than in 2014. People age 65 or older represent 40 percent of the volume. The agency’s budget has grown nearly 19 percent in the past four years. …

Fairfax’s Division of Adult and Aging Services, which connects elderly residents to county programs and operates a hotline for seniors and their caregivers, has increased its budget by $986,000 since 2014.

Last year, the hotline took in nearly 17,000 calls, up from 15,400 in 2013. They varied from pleas for Medicaid assistance to arranging rides to doctor’s appointments and setting up in-home care. Calls to the hotline led social workers to open 2,714 cases for adult protective services, which applies to people who are no longer able to function independently. …

Elderly slip-and-fall cases are a huge concern as senior citizens become less mobile, officials say. That has contributed to a rising demand for assisted-living centers and nursing homes. In Fairfax and elsewhere, proposals for new or expanded facilities have sparked major zoning battles and concerns over the cost of and effect on roads, sewers and other services.

“The vast majority of people want to stay in their communities as they age, but many of those communities weren’t designed for that,” said Rodney Harrell, a public policy director at AARP. “We’ve spent decades, and maybe even centuries, not planning for aging and designing for aging.”

Seniors’ needs don’t just crowd out operating budgets, they make demands on capital budgets. Last year Fairfax voters approved $37 million in bonds to replace an aging senior center in Chantilly and build a new one in Lorton. Given competing demands for capital funds — parks, sewers, and other infrastructure — the county has deferred asking voters to approve $16 million in bonds for a senior center in Springfield.

Bacon’s bottom line: Wake up, people! The age wave is not some abstract thing that will happen a decade or two from now. It’s here. Federal government deficits amounted to $688 billion in the fiscal year just closed, due in large measure to age-related entitlements that neither Republicans nor Democrats have the stomach to fix. Deficits will be running $1 trillion a year within a few years even if the economy remains strong. Meanwhile, local governments, which are fiscally stressed already, are under increasing pressure to deliver senior-related services on an unprecedented scale. Local governments can’t take over the role of care-giver, but they can do a lot through zoning and transportation reforms to help seniors remain independent for longer. It’s time for creative thinking.

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Posted in Social Services and Entitlements

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How Medicaid Is Cannibalizing Virginia’s Budget

Posted on October 12, 2017 by | 1 comment

Source: JLARC

Three big trends are worth noting from the Joint Legislative Audit and Review Commission 2017 state spending update, a review of state spending over the previous 10 years.

First, General Fund spending has been constrained by limited revenue growth resulting from Virginia’s weak economy. The increase in spending has averaged 2.0% per year. Adjusted for inflation and population growth, General Fund spending actually declined 1% over the decade.

Second, the Medicaid program has crowded out spending for other priorities. Medicaid hogged 60% of all General Fund revenue growth over the decade. Medicaid’s share of the General Fund pie increased by 73%.

Third, the healthy growth in non-General Fund spending was driven in large part by tuition increases at Virginia’s colleges and universities. In other words, when faced by stagnant revenue and untouchable Medicaid spending increases, legislators cut what was cuttable. They reduced state support for higher education knowing that colleges and universities could fall back upon the expedient of raising tuition.

Cheerful thought of the day: As Virginia’s population ages, Medicaid spending will go one way — up — and it will continue to squeeze other spending categories. Here’s the spin that Republican legislators put on the JLARC report:

House Speaker William J. Howell, R-Stafford: “Once again, this annual report from JLARC shows that the increasing cost of Virginia’s current Medicaid program is crowding out needed funding for our public schools, colleges and universities, roads, and law enforcement officers. We consistently argued that Virginia can barely afford its existing Medicaid program, let alone the massive cost of expansion, and this report vindicates that position.”

Speaker-designee Kirk Cox, R-Colonial Heights: “It’s a simple proposition: if you cannot afford your mortgage payment, you don’t build a new addition to your house. Virginia’s current Medicaid program covers around 1 in every 8 Virginians, and as this report shows, the costs are staggering and continue to climb, despite ongoing reform efforts. It would be financially irresponsible to ask taxpayers to fund the massive expansion contemplated under the Affordable Care Act.”

Del. S. Chris Jones, R-Suffolk: “Even as we instituted major reforms aimed at bending the cost curve, and controlled spending growth in other areas of state government, Medicaid costs continue to increase dramatically. This growth eats into funding that could be used for our teachers, law enforcement officers, and hard working state employees.”

Bacon’s bottom line: Yeah, the Republican leaders are stingy bastards for not expanding Medicaid. But the alternative is worse. Latest news on the Boomergeddon front: The state of Illinois, which expanded its Medicaid program in 2013, incidentally, and now has to cover 10% of the expanded costs not funded by the federal government, has $16.5 billion in unpaid bills. The state also has $200 billion in total liabilities, including pension debt. Meanwhile, pundits are asking if debt-ridden Chicago will become the next Detroit. One good recession, and it will be.

To see what it’s like to operate a government bordering on insolvency, watch Puerto Rico flail as it tries to recover from Hurricane Maria. It’s not a pretty picture. It’s easy to be compassionate when you’re paying with other peoples’ money. When other peoples’ money runs out, everything goes all to hell.

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Posted in Government Finance, Health Care, Social Services and Entitlements

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Disaster + Fiscal Insolvency = Puerto Rico

Posted on September 29, 2017 by | 26 comments

Lights out in San Juan. Photo credit: Los Angeles Times.

I can watch only so much CNN and MSNBC before I get nauseated, but I have seen enough the past day or two to be appalled at how the media are spinning the post-hurricane disaster of Puerto Rico: It’s another Katrina. The Trump administration hasn’t responded fast enough or aggressively enough to help the battered territory, where two hurricanes shut down electric service, cell phones, the transportation system and government services. Others can engage in the blame game if they want to, but I want to point out the obvious: Puerto Rico illustrates the incapacity of a bankrupt government to carry out basic functions under highly stressful circumstances.

And let that be a warning to everyone. Puerto Rico is the future of many U.S. states unless we get our acts together. Garnering less attention than the human tragedy in Puerto Rico, the states of Pennsylvania and Connecticut have made headlines, too, in the past week. After Pennsylvania passed a budget without enough revenue to pay for its spending, S&P Global Ratings downgraded the state’s debt to A+, down two notches from the coveted AAA rating. Meanwhile, despite having the highest median household income in the country and the second highest tax burden (taxes as percentage of income), Connecticut faces a $3.5 billion biennial deficit. The state, notes the Wall Street Journal, is groaning under heavy debt load, large unfunded pension liabilities, and a shrinking population. S&P has placed nine Connecticut localities on negative credit watch.

Those two states have a long way to go before they achieve Puerto Rico-levels of insolvency, but they indicate the direction the U.S. is heading. On a national level, Republicans have abandoned any pretense at crafting a tax reform plan that will shrink the deficit (something that can be pinned on the Trump administration). The national debt is $20 trillion and growing, even in the absence of a recession, at a rate of more than $600 billion a year. It’s not a question of if we will share Puerto Rico’s fiscal fate, but when.

So, what happens when governments approach fiscal insolvency? One thing they do is starve infrastructure maintenance. Puerto Rican roads were in worse physical condition than roads in any U.S. state. Of the island’s 2,280 bridges, 55.8% were considered structurally deficient or functionally obsolete before the hurricanes struck. The territory has chronically under-invested in its water systems, which also failed during the hurricanes, and the government-owned electric system, the Puerto Rico Electric Power Authority (PREPA), has been a disaster-in-waiting for years now.

Reports the Los Angeles Times:

As of 2014 the government-owned company was $9 billion in debt, and in July, it filed for bankruptcy under the provisions set by the Puerto Rico Oversight, Management, and Economic Stability Act, a law signed by President Obama in 2016.

Problems accumulated. Cutbacks in tree pruning left the 16,000 miles of primary power lines spread across the island vulnerable. Inspections, maintenance and repairs were scaled back. Up to 30% of the utility’s employees retired or migrated to the U.S. mainland, analysts said, and the utility had trouble hiring experienced employees to replace them.

The neglect led to massive and chronic failures at the Aguirre and Palo Seco power plants. The three-day blackout in September 2016 underscored how fragile the system was, and that the company was “unable to cope with this first contingency,” the Synapse Energy report said.

No wonder the island’s electric grid collapsed. No wonder officials say it will take four to six months to restore electric power.

If you want your city, county or state to show resilience in the face of natural disasters, you need to have governments and utilities that are fiscally resilient. Entities hobbled by excessive debt scrimp on maintenance and upgrades, leaving roads and utilities more vulnerable to disruption and depriving authorities of resources with which to respond to emergencies.

Puerto Rico would be in terrible shape no matter what. Hurricane Maria wrought devastating destruction, and recovery is impeded by the fact that the island, unlike Houston and Florida, is inaccessible to help by land. But the incapacity of bankrupt government and utilities have made the challenges immeasurably worse.

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Posted in Disasters and Disaster Preparedness, Energy, Telecommunications, Transportation, Uncategorized

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Uh, Oh, Look Who’s “City B”

Posted on September 5, 2017 by | 3 comments

The city of Richmond is “City B,” the unnamed locality, which, along with Petersburg, Bristol and two unnamed counties, was noted by the Auditor of Public Accounts as in severe fiscal stress, reports the Richmond Free Press. While State Auditor Martha S. Mavredes has not identified Richmond publicly, the city’s name is included in a report that has circulated widely within government circles.

That classification, which was based on 10 financial ratios taken from localities’ Comprehensive Annual Financial Reports (CAFR), might come as a surprise to investors in Richmond’s AA rated bonds. But the city’s score under Mavredes’ methodology has plummeted in the past two years from 50 in fiscal 2014 to 13.7 in 2016. The weekly did not provide the data behind the scores.

The low rating is all the more astounding given the fact that the city is not an aging mill town like Petersburg and Bristol, but has a diversified economy with strong government and finance sectors, and has enjoyed extensive real estate re-development, a growing population and an expanding tax base. The main warning sign has been the inability of city administrators to consistently meet deadlines for publishing their CAFR.

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Posted in Government Finance

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Boomergeddon Watch: U.S. Virgin Islands

Posted on August 2, 2017 by | 4 comments

Trouble in paradise…

The borrowing window has slammed shut on the U.S. Virgin Islands, reports Reuters. With about 100,000 inhabitants, the U.S. protectorate, acquired from Denmark during World War I, owes more than $2 billion to bondholders and creditors — the biggest per capita debt load, about $19,000, for every man woman and child, in the country. And that figure doesn’t include the islands’ woefully underfunded pension and healthcare obligations. Reports Reuters:

How these islands will recover from years of budget deficits and a severe liquidity crisis remains to be seen. The territory lost its single-largest private employer five years ago when a refinery shut down. Gross domestic product has declined by almost one-third since 2008. At times this year the government was operating with just two days’ cash on hand.

Locals live with pitted roads, crumbling schools, electricity outages and deteriorating medical care.

At the Juan F. Luis Hospital and Medical Center, plumbing troubles are just the beginning. Doctors have stopped performing some vital procedures, including implanting pacemakers and heart defibrillators, because the facility can’t pay suppliers for the devices, officials say.

The Virgin Islands are entering a vicious downward cycle. Unable to borrow, it cuts government services. As quality of life declines, people leave. As the population stagnates (or shrinks) the debt burden for those who remain gets even worse.

Here’s why what happens in the Virgins don’t stay in the Virgins:

Bond buyers for years whistled past the territories’ shaky finances, comforted in the knowledge that these governments couldn’t seek bankruptcy protections available to many municipalities.

“There was an idea that because of the lockbox structure and the fact that the territories did not have a path to bankruptcy, they had to pay you,” said Curtis Erickson, San Francisco-based managing director of Preston Hollow Capital, a municipal specialty finance company.

That all changed in 2016 when Congress passed legislation known as PROMESA giving Puerto Rico its first access to debt restructuring. The move sparked a ferocious battle among creditors to see who would shoulder the largest losses.

If bond holders end up taking a haircut for their holdings in Puerto Rico and Virgin Island bonds, they may start re-appraising their exposure to debt of, say, Chicago, Illinois and other deeply indebted U.S. municipalities and states. They may demand higher risk premiums for investing in municipal debt, which will impact governments with low bond ratings most of all, increasing their borrowing costs and making their debt burden all the more burdensome.

The dominos are falling…

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Posted in Government Finance

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Boomergeddon Watch: Illinois and Puerto Rico

Posted on June 2, 2017 by | 9 comments

S&P Global has warned that Illinois’ debt could be downgraded to junk bond status if the state doesn’t get its fiscal affairs in order. Paralyzed by partisan gridlock, the Prairie State hasn’t had a budget in two years. Since the Great Depression, no other state has gone for more than a year without a budget, reports the Wall Street Journal. Meanwhile, the state’s unfunded pension liability exceeds $130 billion, and its backlog of unpaid bills has hit a record high of $14.3 billion.

If S&P, Moody’s and Fitch all downgrade Illinois debt to junk status, the state will be in violation of numerous loan covenants which could trigger more than $100 million in penalties, and make state and municipal debt even more expensive.

In parallel developments, Bloomberg reports today that the bankrupt Commonwealth of Puerto Rico has lost two percent of its population in each of the last three years. Since the economy began contracting a decade ago, the cumulative loss amounts to 400,000 residents from an island with population of 3.4 million today. By contrast, Puerto Rico’s fiscal turnaround plan assumes that the population will shrink only 0.2% each year over the next decade. Good luck with that!

The exodus means that fewer people will remain to shoulder the island’s $74 billion debt, trapping Puerto Rico in a vicious cycle of a contracting economy, cutbacks to core government services, and a population fleeing the deteriorating conditions.

Hmmm. As its turns out, Illinois is one of only seven U.S. states that experienced a population decline in 2016. Between 2000 and 2010, the population grew only 3.3%, one third the national rate. Then the population has declined every year since 2013 by a cumulative total of about six-tenths of a percent. A 2016 poll found that 47% of respondents said they would like to leave the state, citing taxes, the weather, government, and poor job opportunities in that order as the reason.

Just think what will happen when the next recession comes. Instead of Okies fleeing the Dust Bowl, we’ll see Illini fleeing the Blue State governance model.

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Posted in Demographics

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Boomergeddon Watch: Higher Interest on Debt

Posted on April 11, 2017 by | 8 comments

Graphic credit: Wall Street Journal

Today’s Wall Street Journal editorial page explores the ramifications of the Federal Reserve’s decision to dial back years of Quantitative Easing and near-zero interest rates. Higher interest rates will translate directly into higher debt payments for the world’s largest debtor, Uncle Sam.

Interest on the debt rose $28 billion for the six months of fiscal 2017. Annualized, that amounts to $56 billion in a budget that is running a $522 billion deficit this year

During the era of Quantitative Easing the Fed purchased trillions of dollars of financial assets, the profits on which were remitted back to the U.S. Treasury. That amounted to a gift of between $50 billion and $70 billion or so above typical remittances of the pre-QE era. As the Fed unwinds QE and disposes of its assets, those remittances will decline as well, creating a double-barreled shot to federal budget deficits. Between higher interest payments, lower remittances and the structural imbalance of spending and revenue, increasing federal deficits are on auto-pilot. Not a single additional dollar of spending increases or tax cuts is necessary to push the nation toward fiscal crisis.

The Trump administration has different budgetary priorities than the Obama administration — it wants to increase defense spending while cutting domestic spending — but it appears to be no more serious about attacking deficits than was the Obama administration. Insofar as there seems to be a fiscal policy, it amounts to cutting regulations, reforming the tax structure and protecting American jobs from foreign competition in order to boost economic growth. In theory faster growth will generate a gusher of tax revenue that will more than make up for the tax cuts.

In my humble appraisal, dialing back regulations and reforming the tax code will stimulate economic growth, but not by a miraculous amount. The U.S. economy faces strong headwinds of an aging workforce, stagnant productivity, runaway education and health care costs, a spread of social dysfunction from the lower class to the working class, massively underfunded pensions, and fragile overseas economies. The global economy is more heavily leveraged with consumer, business and government debt than at any time in peace-time history and remains extraordinarily vulnerable to black swan events. Boomergeddon is coming. The only question is whether it takes fifteen years or twenty to get here.

Implications for Virginia. The Old Dominion is more dependent upon federal spending than almost any other, and we have more to lose than most from a federal fiscal and monetary meltdown. We need to diversify our economy, we need to bullet-proof the balance sheets of our state and local government, and we need to re-think how we deliver core government services more cost-effectively. Indeed, we should strive to be not merely resilient in the face of federal budgetary disaster, that is, in a position to survive a Boomergeddon scenario, but to be, in the words of Nassim Nicholas Taleb, “anti-fragile,” that is, in a position to actually thrive amidst a federal fiscal crack-up.

How could Virginia prosper while the rest of the country descends into fiscal anarchy? Simple: by preserving the ability to maintain core government services like roads, education, health care and public safety while other states experience fiscal insolvency and disintegrating services. Corporate capital and human capital will flee to the oases of order and sanity. Think of California during the Great Depression. Think of Switzerland today.

I acknowledge that it’s difficult to act upon projections of what might happen 15, 20 or 25 years from now. Indeed, many will accuse me of gloom-mongering. But I have read enough history and experienced enough history to know how rapidly things can change. Everything is fine… until it’s not. And then we’ll wish we’d heeded the warning signs.

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Posted in Business and Economy

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The Biggest Lie of All: Government Can Pay Its Pensions

Posted on February 23, 2017 by | 2 comments
State-local pensions are just one aspect of unsustainable government spending.

State-local pensions are just one aspect of unsustainable government spending.

Many people get infuriated by President Trump’s many inconsequential falsehoods — does it really matter how big his inaugural crowds were? — but they remain sanguine about the trillion-dollar untruths that our public pension system is built upon. The big lie that governments will make good on retirement promises to their employees is not merely mendacious but it is destructive. Millions of Americans have built their retirement plans around a fiction. And when the Ponzi scheme collapses, government workers won’t be the only ones to suffer.

In his latest column, George Will recites some of the more glaring examples of how the big lie is unraveling.

The Dallas police and fire fund recently sought a $1.1 billion transfusion, a sum roughly equal to the city’s entire general fund budget yet still not close to what is needed. Last year Illinois reduced its expected return on its teacher retirement fund portfolio from 7.5% annually to 7% (which is arguably still too optimistic), meaning that the state needs to add $400 million to $500 more to the fund — annually. Last September, the vice chair of the agency in charge of Oregon’s pension system wept when speaking about the state’s unfunded pension promises of $22 billion. Nationally, unfunded liabilities for teachers, not counting other government employees, amount to at least $500 billion.

And don’t get me started on the fact that the Medicare hospital trust fund is expected to run out in only 12 years and Social Security trust fund in 16 years, at which point payroll tax revenues will be insufficient to maintain full benefits… Or the fact that the pensions run by companies in the S&P 1500 Index were unfunded to the tune of $562 billion.

Some of the shortfall can be attributed to absurdly generous provisions of pension plans in particular states and localities, some to fiscal indiscipline by government at all levels, and some to the Fed’s seven years of near-zero interest-rate policies that have depressed returns on bond portfolios and juiced stock market gains that cannot possibly be replicated in the years ahead.

Will concludes with the salient point:

The problems of state and local pensions are cumulatively huge. The problems of Social Security and Medicare are each huge, but in 2016 neither candidate addressed them, and today’s White House chief of staff vows that the administration will not “meddle” with either program. Demography, however, is destiny for entitlements, so arithmetic will do the meddling.

Few elected officials are willing to deal with the issue that offers no immediate political reward. Here in Virginia, one of the few, House Speaker William J. Howell, R-Stafford, has announced that he will not seek re-election.

Thanks in part to Howell’s stewardship, Virginia’s budget, backed by a AAA bond rating, is in better shape than those of many other states. But the U.S. learned after the 2007 real estate crash what AAA bond ratings are worth when the economy shifts from normal conditions to crisis conditions. Boomergeddon is coming. The only question is when.

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Posted in Government workers and pensions

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No Magical Solutions for Trump

Posted on February 21, 2017 by | 10 comments

Says Rep. Tom Cole, R-Oklahoma: Trump’s numbers don’t add up.

Someone in the national press corps is finally focusing on an issue less ephemeral than Donald Trump’s tweets: the fiscal disaster that looms if all of the president’s programs are enacted. Writes Rachel Blade and Josh Downey in Politico:

“I don’t think you can do infrastructure, raise defense spending, do a tax cut, keep Medicare, Medicaid and Social Security just as they are, and balance the budget. It’s just not possible,” said Rep. Tom Cole (R-Okla.), a senior member of the House Budget Committee. “Sooner or later, they’re going to come to grips with it because the numbers force you to.”

Duh.

If designed properly, tax cuts could be stimulative, but it takes a leap of faith to think that faster economic growth would recoup all the lost revenue. Carefully designed deregulation of the healthcare, banking, telecommunications and energy sectors could promote growth as well, although not without some offsetting risks and costs. Even if economic growth does rebound, it will likely trigger inflation and the Federal Reserve will raise interest rates. There are no magical policy levers that will allow the U.S. to fulfill all of Trump’s promises without running up deficits and the national debt.

My hunch is that the GOPs in Congress can water down the more fiscally irresponsible of Trump’s plans but won’t stop them all. Trump will blame the resulting deficits on Obama, just as Obama blamed his deficits on Bush. Words won’t change anything. Boomergeddon is coming. The only question is when.

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Posted in Federal issues, Government Finance

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More Hidden Deficits: Bad Bridges and Bad Metro

Posted on February 15, 2017 by | 1 comment
Virginia has its share of bad bridges.

Bad bridges. Image source: USA Today

Update on America’s hidden deficits: Nearly 56,000 bridges across the country are structurally unsound, according to the American Road and Transportation Builders Association (ARTBA), as reported by USA Today.

More than one in four of the bad bridges are at least 50 years old and have never had major reconstruction work, according to the ARTBA analysis. Thirteen thousand are along interstates that need replacement, widening or major reconstruction. Virginia falls in the middle tier of states where the percentage of bad bridges ranges between 5% and 8.9%.

Don’t county on the federal government for help — unless the Trump administration moves ahead on its fiscally unsustainable $1 trillion infrastructure spending plan. The U.S. highway trust fund spends $10 billion a year more than it takes in. The USA Today article did not say how much it would cost the country to remedy the structural deficiencies.

Bacon’s bottom line: Welcome to the American way of building infrastructure. Uncle Sam subsidizes the up-front costs and the fifty states eagerly jump on board. Forty or fifty years later, the bridges wear out. The states haven’t salted away any money to fix them, and the feds say,” So, sorry, we only fund construction, not maintenance and repairs.”

If you want to build roads, bridges, highways, airports, and mass transit, you need a plan for long-term financing. Otherwise, you’re just creating a huge problem for the next generation. Eventually, the bills come due. If we can’t afford to fix what we’ve already built, we have no business building new stuff we can’t afford.

But we build new stuff anyway. A case in point comes from Loudoun Now: New estimates suggest that Loudoun County’s payments to the Washington Metro could run as much as $27.9 million higher than expected — double what was expected. (The number may be somewhat overstated because it includes the cost of a bus service, which Loudoun is already providing.)

Loudoun doesn’t have a station on the Metro Silver Line yet, but it will in a couple of years when Phase 2 is complete, and it will have to start paying its share of operations and capital costs. Unfortunately for Loudoun — and this was entirely predictable because METRO’s fiscal ills have been well known for years — METRO needs much more money than in the past to compensate for decades of under-funding and scrimped maintenance.

METRO’s problem has been brewing for decades. Fiscal conservatives have been sounding the warning for years and years. Government officials been making financial projections that everyone knows, or should know, have no basis in reality. But everyone pretends everything is fine to keep the gravy train rolling.

If it’s any consolation, $28 million is no big deal in a county budget that runs $2.4 billion a year, says county finance committee Chairman Matthew F. Letourneau. who also represents the county on the Metropolitan Washington Council of Governments and the Northern Virginia Transportation Commission. “We’re the jurisdiction that’s building $35 million in elementary schools ever year.”

Hmmm…. I wonder if the county is socking away any money for maintenance, repairs and replacement of all those elementary schools. I would be astonished if it is.

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Posted in Federal issues, Government Finance, Infrastructure, Transportation

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Chesterfield Finds $83 Million Unfunded Liabilities

Posted on January 15, 2017 by | 8 comments
Somehow Chesterfield County schools missed $83 million in unfunded liabilities until late last year.

Somehow Chesterfield County schools missed $83 million in unfunded liabilities until late last year.

Our society is riddled with unfunded liabilities. Nowhere is the magnitude of short-term thinking more egregious than the federal government. As case in point, the U.S. military has put off maintenance and repairs to the point where we don’t have the money for the military we have, much less the military we would like to have.

“The Department of Defense “has breathtaking liabilities — as much as $88 billion a year — that ought to be addressed before procuring a single additional plane, ship, or tank,” says Tom Spehr, as quoted by Robin Beres in her Richmond Times-Dispatch op-ed today.

But Virginians can’t get sanctimonious. Not only do we have the example of Petersburg to to keep us humble, we now hear of scandalous inattention to hidden liabilities afflicts one of Virginia’s most populous jurisdictions — and one with the reputation, no less, of being exceptionally well run.

In Chesterfield County, school officials are grappling with massive unfunded liabilities for a supplementary teacher retirement benefit. Under the program, teachers can retire then get re-hired under the program working part-time, temporary jobs similar to their pre-retirement work. As incentive, they get a lucrative supplement to their normal Virginia Retirement System benefits.

In 2014, reports the Times-Dispatch, unfunded liabilities were found to be $58.7 million. Now they are $83 million.

Here’s the amazing part. The T-D quotes Donald Wilms, president of the Chesterfield Education Association, as being shocked when he learned of the program’s underfunding for the past five years. “Teachers were continually told that the program isn’t going away. So I think it was natural to assume that the program was healthy,” he said. “Nobody told you it was in danger.”

Nobody, that is, except for MGT America, which provided an efficiency review of Chesterfield schools in 2010 (!!!) and noted that the  supplemental retirement plan faced a large unfunded liability in the next few years as Baby Boomer teachers began retiring. “The increased number of participants will dramatically increase the cost of this program,” warned the report.

Somebody wasn’t paying attention.

Forget the federal government. Let Donald Trump and Congress worry about that. Here in the provinces, we need to worry about how we handle our own business. Do other school systems have supplemental retirement programs like Chesterfield’s? How many other unfunded liabilities, the existence of which lurk deep within Comprehensive Annual Financial Statements, are ticking time bombs? Is anyone paying attention?

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Posted in Education (K-12), Government Finance, Uncategorized

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