Category Archives: Finance (government)

Are Virginia Colleges Deferring Maintenance?

Source: State Council of Higher Education for Virginia

According to calculations of the State Council of Higher Education for Virginia (SCHEV), the replacement value of the buildings and grounds of Virginia’s public colleges and universities totals $12.2 billion. And according to the National Association of College and University Business Officers (NACUBO), institutions should plan for an annual reinvestment rate of between 1.5% and 3.5% of that replacement value to offset wear, tear and depreciation.

The Commonwealth established a maintenance reserve program in 1982 to provide funding for facility repairs that are not addressed in the institutions’ operating budgets and are too small to quality for bond financing. Examples might be roof repairs, boiler and chiller replacements, or major electric system upgrades.

Over the past 10 years, the Commonwealth has chipped in about $75 million per year to the maintenance reserve program, according to a report (page 212) submitted Monday to the SCHEV Resources and Planning Committee. That contribution has fallen consistently short of the 1% guideline ($120 million this year) that SCHEV recommends. As of 2011, the cumulative shortfall had grown to $501 million, and this year the state kicked in only l$63.2 million for higher-ed maintenance. 

Instead of funding the maintenance reserve out of operating revenue, the state addressed the condition of colleges’ buildings and grounds by making two state bond issues for new construction. Those outlays did improve the condition of college and university buildings and grounds. But the effect since FY 2009, states the SCEHV report, has been to change the funding source for the maintenance reserve program from the general fund to bond proceeds.  “As a result, the state bond funding for new construction, renovation and deferred maintenance is constrained by the annual debt capacity.”

As Finance Policy Director Dan Hix reminded SCHEV at its monthly board meeting today, the state has little capacity this year to issue new debt without jeopardizing its AAA bond rating. While some money may be available for higher-ed capital projects, he said, it won’t be much.

The practical consequence of state funding policy, Hix said, has been to compel colleges and universities either to generate their own maintenance funds by raising tuition or to simply put off maintenance projects. He offered no estimate of the size of the deferred maintenance liability.

Bacon’s bottom line: The Commonwealth of Virginia is constitutionally mandated to submit balanced budgets. But as I have blogged in the past, there are many forms of hidden deficit spending. One is unfunded pensions. Another is deferred maintenance. I was unaware before today that there was an issue with the condition of colleges’ buildings & grounds. But I’m not surprised. Deferring maintenance is one of the oldest fiscal tricks in the books — I lay odds that the practice dates back to Nebuchadnezzer and the Hanging Gardens of Babylon. Given the stress of higher-ed finances, no one would be surprised that it occurs here in Virginia as well.

While we have a sense of how much the state has short-changed its colleges and universities, we don’t know how many institutions sucked it up and found the money to conduct needed maintenance projects, and how many put off the spending for the next guy to worry about. Perhaps that’s an issue that boards of visitors could dig into. If not, maybe the bond rating agencies will find the practice of interest. One way or another, Virginia’s higher-ed system could be building up a big hidden liability.

Thank You, GASB, for Bringing Tax-Break Transparency to Local Government

How to blow a hole in your tax base without really trying.

Every year, local governments across Virginia publish a voluminous document called a Comprehensive Annual Financial Report (CAFR) that describes their fiscal condition, detailing revenues, expenditures, debt, and growth in the tax base. This year, CAFRs should include a new data point: revenue foregone due to business tax incentives.

Few localities have bothered to compile and report this information before. But the Government Accounting Standards Board (GASB) issued a directive that requires state and local governments to disclose any taxes being abated, the dollar amount of the tax breaks, and any other commitments made by the government as part of a tax-abatement agreement. This “statement 77” goes into effect for financial statements beginning after Dec. 15, 2015. The data should begin surfacing in 2016 annual reports being submitted this year.

The accounting issue has become an issue because tax giveaways have become so ubiquitous. By one estimate, reports a Land Lines magazine article on GASB 77, state and local governments spent $45 billion in tax incentives in 2015, including $12 billion in property tax abatements. According to another estimate, total business incentives have tripled since 1990.

Many state and local governments have been addicted to tax incentives as a tool for recruiting businesses and capturing the tax revenue they generate. Here in Virginia, local governments reap real estate property taxes, machine & tool taxes, BPOL (business professional and occupational license) taxes, and a share of sales taxes paid by businesses in their borders. Many are willing to forego some of those tax revenues in order to capture a business and the balance of the revenue it will pay.  While Virginia localities haven’t gone to the extremes of some regions — the Land Lines article highlights the Kansas City metropolitan area and Franklin County, Ohio — tax exemptions are widespread.

For purposes of calculating a jurisdiction’s fiscal health, it is critical to get a handle on its real estate property tax base, which accounts for about 30% of all local revenue nationally. Local governments typically track the impact of non-profit and tax-exempt hospitals, universities and state facilities within their borders. Excessive reliance upon exemptions for corporate citizens also can hollow out a locality’s tax base, but that information is not readily available to citizens.

Few observers would advocate abolishing all tax incentives. Attracting a cornerstone facility such as an automobile assembly plant can generate tax revenues even after abatements, draw suppliers to an area, boost worker productivity, spark the creation of new training programs at local colleges and universities, and recruit top technical and managerial talent in a positive feedback loop. But all too often, incentives are handed out to everyone as businesses learn to play the game. A huge challenge for economic developers is gauging whether a business prospect is seriously considering relocating to other localities and needs the incentive as a tie-breaker or if it is just seeking to extract a subsidy for a decision it has already made.

Tax exemptions also raise equity issues. Why should newcomer companies get better tax treatment than businesses that have demonstrated a commitment to a community and paid taxes all along? From a social justice perspective, how much money is being diverted from priorities such as schools and infrastructure for all? From a free market perspective, could localities use the money to reduce tax rates for everyone?

People are less likely to ask those questions if they have no idea how much money local governments are leaving on the table. Transparency is good. GASB’s reporting requirement will make the information available in localities’ annual reports. Now it’s up to citizens to ferret out that information and make something of it.

Uh, Oh, Look Who’s “City B”

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.

A Better Model for Lending to the Poor

LendUp office in Chesterfield County. Photo credit: Richmond Times-Dispatch.

It’s time to introduce into the public lexicon a distinction between “social justice warriors” and “social justice entrepreneurs.”

Social justice warriors (or SJWs, as they are known short-hand on some conservative blogs) seek to remedy the conditions of the poor and downtrodden through political action, typically calling upon government to wield its power and money to fix some perceived institutional wrong.

Then there are social justice entrepreneurs. Instead of seeing government as the answer, they look to private action: creating new business and not-for-profit models to help the poor. The entrepreneurs don’t agitate, they don’t wave placards, and they don’t frequent protest rallies. They go out and change peoples’ lives for the better.

Regular readers of this blog know that I have no patience with SJWs, most of whose “remedies” are counter-productive, if not outright destructive. By encouraging the poor to buy houses they can’t afford, take out higher-ed loans for degree students never complete, and shutting down lenders-of-last-resort like payday lenders, SJWs have worsened the plight of the poor — all for the most noble of motives, of course.

California-based LendUp Global Inc., is an example of a social justice enterprise that has the potential to help ameliorate the lives of millions of poor people — without a single dollar of government funding. The company, which has established its first East Coast office in Chesterfield County, was recently profiled by the Richmond Times-Dispatch. I base the following account upon that article.

Sasha Orloff had worked in finance, including an internship at the Grameen Foundation, a global nonprofit co-founded by Nobel laureate Muhammad Yunus that provides micro-financing for poor people in developing countries.  His experience there inspired him and his stepbrother Jake Rosenberg, who had worked in technology at Yahoo! and an online gaming company. They conceived the idea of tapping the emerging FinTech industry to make small loans to an estimated 100 million Americans, mostly poor with low credit ratings and income volatility, who cannot get loans from traditional banks. In early 2016, LendUp raised $150 million in venture capital with the goal of becoming a better small-loan provider.

As with payday lenders, LendUp’s interest rates are extremely high on small, short-term loans. A $250 loan repayable within a month would carry a finance charge of $44, equivalent to an annualized interest rate of 214 percent. Interest payments must cover the transaction costs of making the loans, after all. They also reflect the increased risk on non-payment by low credit-score borrowers. 

As Rosenberg acknowledges, “There is a subset of the population that actually needs payday loans, and for this population, banks cannot readily serve them for a wide range of reasons.”

“Yes, payday loans are expensive. The real problem is there is no other options,” he says. “The average borrower is getting ten [payday loans] a year, and they have no pathway to a better product. The key thing is, we’ve tried to create a model where we win when the customer wins. … We do that by trying to incentivize behaviors that are constructive to the consumer’s financial life. If they do those things, they get access to more, the cost goes down, and the amount of capital they can get goes up.”

LendUp offers customers a “ladder” out of the indebtedness trap. The company provides financial, advising customers on how to improve their credit rating and qualify for lower cost debt. Borrowers can win points by paying back loans on time. As they prove themselves, they can work from payday-like loans to installment loans of up to $1,000 with lower interest rates.

Earlier this year, LendUp passed the $1 billion mark in loans provided. It has made more than 3.5 million loans.

Time will tell if LendUp has a profitable business model. But if it does, it should have no trouble attracting capital and expanding. Most likely it will attract competitors, and it will push the payday lending industry to reform itself — either develop a better business model or get dismembered by new tech-savvy, FinTech enterprises.

Interestingly, although LendUp’s East Coast operation is based in Virginia, the company does not offer loans in the Old Dominion. The article does not explain why, but don’t be surprised if there are regulatory restrictions inspired by do-gooders trying to protect the poor from predatory lending.

Bacon Bits: The Latest in Government Ineptitude and Short-Sighted Thinking

It’s Hard to Teach without Teachers. With a week to go before the start of the new school year, the Richmond Public Schools still has about 90 teacher openings, according to the Richmond Times-Dispatch. Why the shortage, which seems to be a chronic issue? Perhaps the school conditions are so terrible that no one wants to work for the city schools. Or perhaps the school administration is dysfunctional that it can’t execute basic tasks. Whatever the case, I’ve seen no reporting to suggest that any other locality in the Richmond region has a comparable problem.

Hopewell the Next Petersburg? The City of Hopewell is now 21 months behind completing its Comprehensive Annual Financial Report, and that has some City Council members broiling, as reported by the T-D. One city official points to a $51.8 million in year-end cash and investments as proof that the city’s financial position is OK. But an auditor said he had uncovered about 90 instances of money being transferred without documentation — the same practice that preceded Petersburg’s fiscal meltdown.

What Hurricane Harvey Portends for Hampton Roads. Flood damage in the Houston area will run into the tens of billions of dollars. Much of the cost will be covered by an under-priced, under-funded federal flood insurance program that subsidizes construction in flood-prone areas. (Much of the balance will be covered by an under-funded federal government that will have to borrow the money.) According to Politico, about one percent of insured properties have sustained repetitive losses, accounting for more than 25 percent of the nation’s flood claims. So far, Congress has resisted serious reform, but the program is fiscally unsustainable.

Thought experiment: What would happen to Hampton Roads if federal flood insurance charged actuarially sound premiums? What would that do to property values?

A related question: Who insures infrastructure? Presumably rate payers cover the cost of maintaining electric lines. How big is that subsidy? I’m guessing that state and local governments have no insurance for roads and highways. What is that potential exposure? And how about the implicit subsidies for water and sewer service? People who choose to build and live in vulnerable locations — this now effects me, because I now am a co-owner with my brother and sister of the family beach cottage — should pay the full cost of their locational decisions.

Will that ever happen? Probably not.

Bacon Bits: Bristol, Big Ships, and Blue on Blue

Petersburg, Meet Bristol. The City of Bristol has been identified as “City A” in the recent report by the state Auditor of Public Accounts that scored even lower than Petersburg in a rating of fiscal stress, reports the Bristol Herald-Courier. Bristol hasn’t experienced the dramatic budget deficits of its fiscally challenged counterpart on the Appomattox River, but the city of 17,000 on the Tennessee state line is burdened by general-obligation bond debt of more than $100 million stemming from its backing of the failed The Falls commercial center.

Here Come the Big Ships. The CMA CGM Theodore Roosevelt, the largest ship to ever call on an East Coast U.S. port, docked Monday in Norfolk, reports the Richmond Times-DispatchThe vessel, which carries the equivalent of 14,400 containers, made its way to Virginia via the widened Panama Canal, Served by the deepest channels on the East Coast, Norfolk is the logical first stop for a generation of massive new ships; after unloading cargo there, ships rise in the water enough to navigate shallower channels in other ports. As part of a $670 million expansion plan, the Virginia Port Authority is ordering four massive cranes capable of reaching across a vessel that is 26 containers wide.

Blue on Blue. In the aftermath of the fatal white supremacist rally in Charlottesville, city government has descended into vituperative in-fighting almost as anarchic as the protests and counter-protests themselves. The proximate cause is a controversy over who to blame for the police department’s failure (or unwillingness) to intervene to shut down the demonstrations before violence broke out. Did someone order the police to “stand down”? Mayor Mike Signer, City Manager Maurice Jones, and Police Chief Al Thomas are all in major ass-covering mode. Angry citizens shut down a Council meeting. Documents are leaking. Fingers are pointing. Read the latest installment in the Daily Progress here.

Five Localities under Severe Fiscal Stress

Petersburg isn’t the only Virginia locality with serious fiscal problems, according to an analysis prepared by the Auditor of Public Accounts. But Auditor Martha S. Mavredes isn’t willing yet to publicly identify the other two cities and two counties that appear to be in bad shape, according to the Richmond Times-Dispatch.

The fiscal assessment, conducted at the request of the General Assembly, uses data filed in local governments’ Comprehensive Annual Financial Reports to develop ten financial ratios, including four that measure the health of the locality’s general fund. The scoring system establishes 16 as the minimum threshold for fiscal stability. Petersburg and another city, identified only as City A, scored below 5. Yet another city and two counties also scored below 16, while two localities, Hopewell and Manassas Park, have yet to submit financial data for 2016.

Mavredes made the presentation Monday in a meeting with a newly established joint legislative subcommittee on fiscal stress. She asked for time to notify the jurisdictions of their scores and to begin discussions to confirm that the financial assessments were accurate.

A major question was when the data should be made public. Sen. Emmett W. Hanger, Jr., subcommittee chair, said that it would be premature to identify localities before notifying them and verifying the numbers used to assess their condition. But others stressed the value of making the data public. “Knowing and not taking any affirmative actions is almost malfeasance,” said House Appropriations Chair S. Chris Jones, R-Suffolk, a former city mayor.

According to the T-D:

“City A” scored below the threshold the past three years, dropping to 4.25 last year.

“City B” dropped from a score just under 50 in 2014 to between 13 and 14 in each of the past two years.

“County A” shows “consistently low” scores, in the 6 to 8 range.

“County B” tumbled from a score of 21 in 2014 to just over 11 last year.

Two other counties showed steep declines over the three years surveyed, falling to just above and below the 16-point threshold.

Bacon’s bottom line: Mavredes is right to confirm the data before sparking a political turmoil. And she’s right to inform the localities of their low scores before informing the general public — they need an opportunity to get their act together before the bad news drops. On the other hand, Jones is certainly right to say that the sooner this data is made public the better. Localities should not be allowed to sweep their problems under the rug, allowing their situations to deteriorate even further.

One more point: I hope the Auditor of Public Accounts makes the scores available for all jurisdictions. The public should know whether their local government is in strong condition or on the financial edge. Everyone can benefit from the state’s analytical tools, not just localities in crisis.

Update: Tim Wise pointed me to the following chart included in materials submitted to the Joint Subcommittee on Local Government Fiscal Stress. These classifications, which are based on FY 2014 data, reflect revenue capacity, revenue effort and median household income.

Most of the severely stressed localities are cities — not just mill towns with an eroding economic base but a cluster of local governments — older cities, mostly — in Hampton Roads.

Boomergeddon Watch: U.S. Virgin Islands

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…

What Virginia Needs Is a Good Local-Government Report Card

Speaking of government report cards for states (see previous post), Virginia could use a good system for rating its local governments. As it happens, the Virginia Tea Party Federation is mobilizing to grade Virginia local governments on the basis of 20 to 30 key performance indicators on fiscal health and quality of government services.

The data will be extracted whenever possible from authoritative sources such as local Comprehensive Annual Financial Reports (CAFRs), Mark Dougherty, chairman federation’s Local Government Committee (LGC), said yesterday at the Tuesday Morning Group gathering of conservative and libertarian activists. The LCC hopes to release results in late 2017 after fiscal 201 data becomes available this fall.

The goal is to educate citizens and local government officials and to highlight opportunities to improve governance, Dougherty said. CAFRs run 200 to 300 pages long, and they are difficult for ordinary citizens to plow through. The Tea Party is looking for volunteers willing to compile data for each of Virginia’s 95 counties and 38 cities.

It will be a challenge to create a “fair” rating system, acknowledged Daugherty, who hails from Staunton. Virginia localities vary in size and needs from sparsely populated Highland County, with a $7 million annual budget, to massive Fairfax County with more than a million people and a $7 billion annual budget.

The Tea Party report cards will rate Virginia’s localities on the basis of standard measures and ratios that apply to all, but may adjust for a locality’s unique attributes. Bonus points might be awarded, say, to a county that posts its checkbooks online for public inspection, while penalties might be levied for self-declared sanctuary cities (on the grounds that the presence of illegal aliens runs up local government costs).

As an example of the kind of analysis he hopes citizens will be able to conduct, Daugherty cited Henrico County, where 20 fire-and-rescue stations serve 330,000 residents. Of its 47,000 calls last year, only 825 responded to fires. Clearly, the vast majority were non-fire related. Before Henrico builds another fire station, might it be feasible to have a light fire/rescue vehicle to patrol areas of the county that generate the most calls?

Another example: City of Richmond public schools have between 2,000 and 3,000 students in each of its elementary school grades but only about 1,200 in its high school grades. Are kids dropping out? Are parents keeping their kids in elementary school but then yanking them out of middle school, either to put them in private school or to move out of the county? That would be helpful to know in formulating educational policy. Another question arising from the data is whether the school has adjusted its infrastructure — number and size of public school facilities — to the lower number of high school students.

Daugherty pointed to Goochland County’s “Strategic Plan Report Card,” with five goals and 23 measures, as a potential template for what the Tea Party has in mind. Goochland not only looks at its property tax rate but tracks the ratio of commercial to residential property, new taxable commercial investment, and new taxable investment within its eastern growth management area. The report also measures financial liquidity, the debt-to-expenditure ratio, patrol area covered per deputy, emergency response times, and annual government employee turnover, among other indicators.

We’re No. 18! We’re No. 18!

Virginia has the 18th strongest fiscal condition of the 50 states and Washington, D.C., according to the 2017 edition of the Mercatus Center’s “Ranking of the State by Fiscal Condition.” The ranking is based on 13 measures of fiscal solvency, ranging from cash on hand to unfunded pension liabilities.

The overall ranking integrates measures for five broad categories based on fiscal 2016 data. These include (listed in the order of Virginia’s performance):

Service-level solvency. Virginia scores 4th best in the nation for this set of measures indicating how much “fiscal slack,” or leeway, a state has to raise taxes or increase spending. States with low levels of taxes, revenues, and expenses as a percentage of personal income are ranked the highest. 

Trust fund solvency. Virginia also scores well for this category, 11th, which reflects exposure to pension risks and other post-retirement benefits. 

Long-run solvency. Virginia scores 16th for long-run solvency, a set of measures capturing a state’s ability to meet its long-term liabilities.

Cash solvency. Virginia ranks 27th by this set of measures indicating a state’s ability to meet short-term liabilities.

Budget solvency. Virginia ranks 31st for this composite of two measures indicating whether a state’s revenues match its expenses.

Virginia’s ranking slipped from 15th place the previous year — not a good sign.

But if it’s any consolation, CNBC has just rates Virginia as the 7th best state to do business.