Category: Economics

Grateful to Have a Job

.Reading time 5 minutes.

I was raised in a blue-collar family, and I will forever give thanks for that upbringing. There were many times when it was said that an extended family member had a good job. Often it was enhanced to say a “good-paying” job. It was also said in a tone that implied there was not a guarantee that the job was going to be there forever. Actually, I distinctly recall an expression of worry that employment could or might end abruptly.

It was also ingrained in me to work hard. All my early jobs were blue-collar or clerical. I learned early on that I could out-work just about everyone around me. That was my security, in a good way. My first new car was a 1967 VW that costs $1,670 with a $47 monthly payment. I was employed as a paint maker and sought some assurances from my boss that my job was secure. He couldn’t promise anything, but he all but said I was as safe as anyone.

Now, well over a half-century later, I find myself still grateful to have a job. I work for myself, but reputation is only as good as my last job serving my client base. I work just as hard as I did at the beginning. I don’t take it for granted that I will have a job or a client base tomorrow. Every day is a gift.

I try hard not to compare myself to the generations that have followed me. But I don’t sense that fear of losing a job, and perhaps not being able to find another one right away. That’s too bad. That “healthy fear” is good motivation. You tend to deliver more than is expected of  you, and often more than you are compensated to do. Everything else being equal, you always want to be the last to be laid off, not the first.

Today most employment evaluations make a distinction between meeting expectations and exceeding expectations. I’ve often wondered why exceeding expectations shouldn’t be what the compensation level is for. Meeting expectations would be an insult to me. I would be bored in a job where all I did is meet expectations. That’s saying average is okay. Not in my DNA.

It was years ago that I ran across a boss at a bank who had 30 years of experience. I quickly realized he actually had 1-year of experience 30 times. That’s being a little harsh, but there comes a point when the second 10-years of experience may not have the incremental added value than the first. And the third decade perhaps a little less. Yet that gets very expensive when there is an expectation that the compensation should rise faster than the added value. That’s bad arithmetic.

Only if you have ever had to make a payroll out of your own personal pocket would you understand or appreciate this seemingly cruel statement.

So, on this day, I want to reach out to anybody who will listen to say thank you! From my paper route as a teenager, to all my blue collar jobs as a janitor and construction laborer and then clerical jobs that prepared me for being a professional: I’m deeply grateful for allowing me to work, to serve and to be compensated fairly. I’m rich beyond belief, and I’m not talking about my bank account. To enjoy what one does is a blessing, and I’ve not been idle, unemployed or unhappy for the entirety of my working life. Just the opposite.

And, in even a deeper gratitude, my analytical skills and interests have not waned. I consider local government as the most wonderful laboratory on Planet Earth. I don’t believe I have reached my pinnacle. It’s always been in front of me. Thank God! Although my energy level isn’t what I once had, my intellectual capabilities are still growing. Believe me, I don’t take anything for granted. I just hope to continue growing until I can’t go any longer.

Thanks to you for being a part of my journey. LFM

The Professional Tea Party Distortionists Keep on Distorting!

.Reading time 8 minutes.

Well, only one person took me up on my offer! It was for a school district. I started off thinking there was a discovery to be made that would be at odds with my expectations, but that was not the case.

Meanwhile, the Tea Party churned out a handful of distorted articles this week such as this one about Tarrant County. The headline reads “Tarrant County Proposes 9 Percent Tax Hike” while the sub-header reads “Tarrant County Commissioner’s proposed property tax rate would raise their average property tax bill 35 percent from just five years ago.”

Don’t miss the picture of the fat hog in the story. How elegant. And inflammatory. And intellectually dishonest. I can just hear the Tea Party Faithful slobbering a joyful yelp of approval. We now know where carnival barkers go when they retire.

Then comes their aha moment. The Average Tax Bill has gone from $348.38 to $512.11 as the Average Taxable Single Family Value has grown from $131,962 to $218,850 in 2019. Woo-hoo! Isn’t that criminal?

Wait a minute! Let’s be fair. I don’t work for Tarrant County nor do I know anybody in government there as far as I know. I just want to look at facts and encourage you to do the same. Here’s my take from the table below. Most of the data is from the statistical section of their FY 2018 CAFR.

Population drives everything! I see that Tarrant County’s population has grown from 1,807,750 to 2,057,926 from FY 2009-2018. That’s 250,176 more people to serve. That’s huge by any yardstick you want to use. But instead of showing off with the total 13.84% like the Tea Party is prone to do, the Compounded Annual Growth Rate (CAGR) of 1.45% is a more fair way to provide a perspective.

Personal Income (2018 values weren’t available) shows an increase of 2.98%, over double the population growth. That’s good. Bond rating agencies look for both ability to pay and willingness to pay. Only the Tea Party could take a healthy financial statistic and turn it into a demonic story. And few even know or acknowledge that the voters are very important, but so are the invisible bondholders (you really don’t want them to become visible!) that have invested over $300 million in TC bonds and over $9 billion for all local government entities in TC.

The Tax Base has grown by 3.61% and the Tax Rate has decreased, but the most important number is the combination of the two, the Tax Levy. That metric has grown at 2.56%. Given that the CPI has grown at 1.75%, the 2.56% appears fairly reasonable. More on that later.

TC has grown from 4,209 employees to 4,385 for the period I’m analyzing. Even in total numbers, that seems reasonable, but it will look even better when put in the proper perspective as I will do shortly.

Total spending (“Tax & Spend, Tax & Spend” in Tea Party jargon), rose from $524,959,000.00 to $640,685,000.00 (add the pennies to make it look scarier) boils down to a CAGR of 2.23%. Again, when adjusted for CPI of 1.75%, what is your conclusion? If you want to be fair.

Now let’s hone in on some of these key metrics when placed on a per 1,000 population basis. The Tax Levy has grown at a CAGR of 1.10%. The number of employees have actually dropped from 2.328 to 2.131. Imagine that! The total expenses have only risen by 0.77%, which means it has actually declined when adjusted for CPI.

I don’t see a single mention of any of these facts in the Tea Party story. It’s being portrayed as journalism. Yeah, I know. Just wanted to get a laugh out of you.

TC2

Oh wait, you thought I had forgotten about those outrageous Average Home Values. No way.

That statistic has risen by 54.25% or 4.93% CAGR. Big? Yes. Distorted? Yes, too. Let me explain why.

While CPI averages 1.75%, the more appropriate construction index is significantly higher at 2.41% annually. But that’s only part of the story.

What isn’t shown is the average size of the single family home. I don’t know that square footage number, but I do know that it has grown over the years.

But the bigger untold story is that these numbers tend to grow because new homes are being added to an existing base. I’m pretty sure that the average TC single family home was built somewhere in the 1970s or early 1980s at best. Yes, this makes the existing homes more valuable, but not to the level of new construction.

In other words, the more TC grows, the more the average single family home value is going to grow since each year adds then-current values to an older base. Look far enough into the future, and you will conclude that the average home will be $300,000 before long, and then $400,000.

And with the North Texas Area growing by 1,000,000 people every 7-8 years, the Tea Party, unable to grasp big numbers as anything other than bad, will have a field day. It’s kind of sad when incendiary statements can be fabricated from nothing more than the size of numbers that may be difficult to place into perspective.

Most people would view that increasing value as good. But the Tea Party makes it look as bad as they possibly can, completely ignorant to natural (and desired) growth in value. I don’t hear anybody complaining that they bought a house at $50,000 some time ago, and now it can be sold for $150,000.

Conclusion

The Tea Party is capitalizing on fear and distorted numbers that make them lock into a “gotcha” mode to inflame their followers. They are doing a disservice to society. They take no responsibility for having any other value in life. Cloaked in self-righteous patriotic armor, they are misleading the public as they validate their purpose by misrepresenting the perspective that more responsible government officials know is simply wrong.

I’ll renew my offer to the Tea Party. Let’s sit down and deal with all the facts with the goal of telling the most accurate and complete story possible. You claim to be all about transparency while demonstrating an obvious opaqueness. I’m calling you out and hope others will do the same. LFM

The Tea Party Distortionists & An Invitation to Same

.Reading time 6 minutes.

It occurred to me the other day that the Tea Party carries no responsibility for providing services to citizens. The only thing they do is distort and inflame.

City Councils get elected to serve the wishes of citizens. They look around. They listen to citizens on phone calls, at the grocery store and at council meetings.

The Tea Party caters to whiners and moaners – most of which make use of city services but don’t want to pay for the services they use or are provided for their use.

Local governments evaluate needs and wants of the citizens plus they have to prioritize to fit with the means of the budget as resources are never sufficient to do everything. They make decisions based on their best knowledge and skills, always within a sense of fairness across generations, geography and social strata.

The Tea Party could care less about the citizens. They have no interest in listening unless it’s someone wanting to complain about paying for services. They only want to step in to play Whack-a-Mole.

It’s easy to destroy rather than to build. It’s easier to lob a grenade than it is to enter into an honest dialogue.

City Council and staffs make great efforts to tell the municipal story accurately and fairly.

The Tea Party consists of Quintessential Distortionists.

Let me provide an example:

Tea Party: “OMG, look at this wasteful spending. The General Fund has doubled in just the last 10 years!”

Local Government: “Yes, but the population has gone up 78% and Inflation has increased to make up 20% of that change. The 2% difference is mostly due to

  • New or expanded programs requested by the citizens and blessed by the council,
  •  Unfunded mandates.
  •  Big-ticket items such as public safety body cameras and similar things approved by the council.
  • Things that didn’t exist 10 years ago, such as investments in IT security to address ransomware attacks.

An Open Invitation to Tea Party Distortionists

Let’s make a deal. How about you and I sit down and analyze a city of your choice. I hope it is one I know little or nothing about so we will be on level ground or maybe I will be disadvantaged.

We will be civil and look only at the facts. You will allow me to analyze historical data through the adopted FY 2020 year budget. We will use audited financial data from FY 2018 backward.

We will both discover, at the same time, the number of employees, the property tax revenues and the total General Fund expenditures that have been when adjusted for population and inflation.

If we cannot tell from public documents, we will then ask city management about any anomalies or jumps or drops to explain what may appear to be deviations from trends. For instance, if there has been the opening of a fire station or recreation center during the study period, we will have an answer to better understand the data.

In addition, and in the same spirit, we will ask the city officials to tell us how growth over a decade came about? How did programs get added or expanded? Who asked for them to be included in the budget, and why did the elected official say yes?

Were any of the budget additions in the past decade due to unfunded mandates? Do you know what those are and how they were imposed on local governments?

Then I will ask you to tell me what part of the budget growth you find wasteful or not of your liking. What part of the city services would you cut? It is unfair for you to blob me or the city with no more than a judgment on the dollar increase over a period of time. We can’t easily respond to blobs. Help us by specifically pointing to the underlying element(s) of your complaint.

Do you attend council meetings, and especially workshops, to learn about the evolution of city services? Tell me how you gain insights that enable you to make statements or draw conclusions about budget growth. That sounds like a critical statement, and I don’t mean for it to be so. I’m simply wanting to understand how you evaluate what a city needs or wants and how you arrive at findings and conclusions.

That is, if you will agree to enter into a dialogue with me so that we can arrive at a reasonable position.

BTW, do you even live in the city for which you are criticizing or making a judgement?

LFM

 

The Whack-a-Mole Citizen

.Reading time 2 minutes.

Imagine a Whack-a-Mole game with the sides removed so you can see the innards. Oh, I know the connotation of a mole, but hang with me for a minute, please.

This is the image I get when I read or see yet another story of the right and self-righteous folks appearing before the City Councils with only one mission in life: to not pay.

The Whackers don’t really have any interest in looking at the workings of government. It would be completely against their nature to listen to citizen requests for services. They don’t have the guts to be there to shout down an elderly citizen asking for their sidewalks to be fixed. They could care less about the wishes of the youth sports representatives wanting more ballfields and for them to be maintained properly.

Nope! Not in their DNA. What they want to do is stand above the responsibilities of governance and simply take the mallet to crack the noggins of the elected body and staff wanting to deal with the most basic of questions. How are we going to pay for all the things our citizens want?

Do you think these things come free? Answer: Whack!

Are you listening to what I am asking? Whack!

Do you have any sense of fairness about you? Whack! Whack!

Would you consider sitting on this side of our jobs and … Whack! Whack!

Are you a robot? Whack!

Have you ever been responsible for running any kind of business? Whack!

Is it your plan to do anything other than wield a mallet? Whack!

Have you ever asked the city to fix a problem?

Have you ever needed the police, fire or EMS?

Do you children participate in any of our recreation programs?

You’re being awfully silent. Are you reconsidering your position? Whack! Whack!

I see.

LFM

 

Why Should I Apologize for Serving the Citizens’ Needs & Desires?

.Reading time 6 minutes.

Every citizen is going to have to put themselves in the shoes of their LOCAL elected governing bodies. Here’s the deal as I slip into those combat boots:

“Dear Citizen:

I was elected to listen to your needs and to your wants. You come before this governing body asking for things at every council meeting. We evaluate those requests. We know about most of them because we walk and drive the community. We attend luncheons and all kinds of meetings. We talk to you on the phone. We ask you for advice, such as priorities and urgency. We can’t do everything you ask, but we would if we could. We try our best.

We know that you are intelligent and don’t truly think for a minute that there is a free lunch. We’d give services and utilities away for free if that were possible, but no responsible person would ever entertain that foolish notion. None of us are fools. And name one service we provide that was dreamed up only by local elected officials. Just about everything we do is because 1) you asked for it; or 2) because the state or federal government imposed it on us.

Now comes state government that thinks they know you better than we do. But wait. I’m not going down that road. To bash the Lege and the Gov is not constructive. You know what? Let’s just deal with what we are handed. You, the citizens, and we, the council. Don’t make any mistake about it. We’ve been handcuffed by the state without regard to our pledge to serve you.

And here’s a glimpse of the future. It is highly likely that we may have to hold an election every year for you to approve to pay what you have asked for us to provide. Representative government has been partially tossed out the window. That’s okay. We will put your wants and needs into the budget, but you will likely have to give direct approval as a separate step.

That’s the deal now. Let’s be honest. Holding an election each year is not all that expensive in the grand scheme of things. It’s simply a nuisance and will cause fatigue. Gird up! We didn’t ask for this, but it’s the law of the land. And we will follow the law.

We hope that part of the election routine will be coupled so that capital project approval will be married to the cost of operations. That has actually always been implied. You don’t expect us or anyone else to build a fire station, recreation center, ball fields or swimming pools and then expect the staffing, equipment and programming that goes inside to not cost something, right?

Did you know that the Operating & Mainteance costs, at least over time, are about 2-pennies for every 1-penny of the O&M tax rate? If permitted, we will start including this dual-approval on the ballots: “Approval for $____________ in Project X along with the companion O&M Costs that will mostly be paid for out of Ad Valorem Taxes.”

We may even have to go back and re-vote for some past project approvals or at least to explicitly approve the O&M that you implicitly approved into past bond elections.

The weird part of this onerous requirement on us and you is that we may be asking you to vote annually just because your values went up. We fully understand that our property tax revenues are the results of both taxable values and tax rates. Thanks to the new legal constraints, we may be asking for voter approval only because inflation has outpaced our property tax values. It’s complicated. We’re all for disclosure and being fair, but our Truth-In-Taxation laws are gravitating toward IRS-like hoops when all we are trying to do is to pay for the services you requested.

What we do know is that we won’t stop listening to your needs and wants. If you are willing to pay for these things, we will service your requests. It just might have to be in two steps.

We ask for your patience. We wouldn’t wish this imposition on anyone in the business of helping citizens. However, we are confident that you can wear our shoes at two critical times in our future: 1) when you ask for new services or for us to continue existing services that meet the needs of our community; and 2) be there for the companion decision to pay for those services.

No matter who is wearing the shoes, you can’t have one without the other.

Thank you!

Your Local Elected Official”

Who Owns Your Population Data?

.Reading time 4 minutes.

That obnoxious screeching sound is coming from my fingernails going down the chalk board to get your attention.

You must understand the value I place on population data. Just about everything in local government current operations and forecasting is driven by population. Employment population is important, too, but residential population takes the front seat.

I also place great value on the data in your CAFRs, Official Statements for debt issuance and the multitude of expert studies and master plans that lead to decisions for future infrastructure and public facilities.

But here’s my problem. Rarely do I find the same historical numbers in all these documents. The tip off is when I see the same population numbers for multiple years, all rounded to even thousands or hundreds.

Then the difference is forecasted numbers is all over the board, the one I am scratching.

I realize this is a difficult issue and that there are dozens of federal, state and local agencies producing forecasts. And they vary so greatly that the red flag is glaring. I also know that there are pop estimates as of a calendar year, a fiscal year, and the federal numbers are often as of July except for the census as of April. Good grief!

Don’t bring me another problem, Lewis, unless you have a solution!

I do.

Recommendation

  • First, appoint someone in the City to be the official keeper of both historical and future population estimates. Probably the City Planner or the Public Works Department.
  • Reconcile all of your official documents with population and employment history to show the same numbers – and change them!
  • Have your Pop Keeper to be the only official source for future forecasts. Who can be more accurate than the City staffers keeping track of building permit data, utility connections and occupancy rates? Who else can track and see the future coming than those dealing with annexations, zoning, platting,  land use, densities and the remainder of the pipeline?
  • Have your staff delve into forecasting methodologies from your COG and all federal and state agencies. But don’t have them spend much time there. Instead, send your official history and forecasts to them, along with your methodology and implore them to use your numbers.
  • Have an annual review of pop forecasts with a presentation to your govering body AND have them adopt your forecasts.
  • State in your RFPs, Engineering and Consulting agreements that only your official forecasts should be used.
  • Change the organizational vocabulary such that you speak of revenues and expenses as well as workload measures on a per capita basis with the same zeal as a manufacturer talks of those items on a per unit or gallon basis. Dollars may go up. Big deal. That means little in light of the dollars per capita that might even be going down.

In summary, treat the population forecasts as sacred and have every internal and external player use your numbers for consistency and accuracy. Own the data! LFM

 

What is the House Value Needed to “Breakeven” in Your City?

.Reading time 6 minutes.

Dear Lewis:

My mayor wants to know the value of a single-family residential home necessary to “breakeven,” meaning for residential to pay its own way?

Dear Colleague:

Thank you for asking me my least favorite question. However, it is an important question, and I will try to answer. But be forewarned, I’m going to give you my shortest answer or at least one you can work through on a cafe napkin. There is a reason.

This is a tough one. The answer has to be understood in the context of mix. If you had nothing but property taxes and nothing but residential, then the answer would be easier. It would be exactly the average value of a single family home available from your appraisal district. I know I can’t satisfy you with that answer that fits into a non-existent world. Yet it is instructive to frame your response starting with a pure single family residential community. Undertanding this one point makes the remainder of the explanation easier to digest.

Yet when the mix of all General Fund revenues is considered, and the tax base internal mix is considered, then the portion paid by the residential class forms the basis for saying the average home value is paying their share – and higher than average value is paying more than their share of their pie with the opposite also being true.

That sounds like circular thinking, but there you have it.

Try Harder, Lewis!

A better way of looking at the cost question is to ignore revenues for a minute and look only at the expenditure side initially.

If you are spending $36 million in the General Fund budget, and you have a population of 50,000, then the services equate to $720 per capita. If you have 3 people per household, then you need $2,160 per household. You can conclude the need for an AVERAGE house value of $540,000 ($2,160 / $0.40 O&M Rate * 100) to carry the costs before other revenues help lower the property tax requirement.

If you have a revenue base that yields 40% from other sources, then you only need an average house value of $324,000 ($540,000 * 60%), net of exemptions.

So, what is your average home value on the tax rolls?

It is $200,000, you say. Hmm! That’s a respectable amount. Let’s dig deeper to understand $540,000 on one end of the spectrum and $200,000 on the other end.

I expected your average home value to be considerably less since we’ve left out a million things, most notably the non-residential tax base. And here’s the deal. Some cities have little and some have much.

Here’s the way I would answer the question with necessary generalities included:

“If City of Fiscal Bliss had only property taxes (and then only a residential tax base) to cover the cost of general government services, it would require an average house value of about $540,000 to cover costs or else a very sizable tax rate increase applied to our average house value of $200,000 currently. Fortunately, we do have a respectable commercial tax that lowers the burden on the homeowner. We also have sales taxes, franchise taxes and some user fees to help lower the property tax burden. Therefore, we conclude that our average house value times our General Fund tax rate of $0.40 per $100 or $800 is our net breakeven cost even though property taxes alone would not cover the true service cost of $2,160 per home.”

Oh my! You aren’t going to like my answer, are you?

As I said, it’s complicated. The clue that this was not an easy question was when the  Mayor said average. That was the signal that the Mayor’s field of view was going to be too narrow. Here is the trap. You want to explain, but the Mayor wants the time, not how a watch is made. So, blurt out $540,000 and then ask if you can explain. I’m pretty sure you will have the Mayor’s attention with the obligatory pregnant pause following your incredulous number.

If you have an average home value of $200,000 in your community, then that should mean you are striving to add house values much greater than the average. It is a fact that the true cost is $2,160 per home, and it is also true that it would take a $540,000 at an O&M Rate of $0.40 per $100 to generate the true cost of service.

But thank goodness you have other revenue sources. Your citizens pay a sizeable amount cost recovery in the form of sales taxes and franchise taxes. You also have direct fees for some services. Otherwise, your average SF value would have to be $540,000 or else your tax rate on an average of $200,000 would have to be $1.08! ($2,160 / $200,000).

Did I just blow your ears back?

But We Paid a High-Priced Consultant for Another Answer

A more elaborate analysis would be necessary to offer much more help here. And while the calculations could get more sophisticated, and the wording much more verbose, I’m not sure the accuracy would be better or the conditional wording more understandable.

Does this help?

Lewis

Do You Watch Key Oil & Gas Data? You Should.

.Reading time 6 minutes.

The role in Oil & Gas is big for Texas. You may think the concern is only for the oil patch to the west. But the HQs for many of these companies are in the metropolitan areas. Meaning engineers and executives. Meaning high paying jobs. Meaning the people who raise up the housing market and a ton of other economic benefits like property values and sales taxes from discretionary spending.

I’ve got a few charts to show you. One I have sent a few times in recent years. Another is a new one. If you don’t like to study charts, let me explain in a nutshell.

In a very short time frame, from early 2011 through yesterday, the price of West Texas Intermediate Crude (WTIC) has been as high as $113.93 and as low as $29.02 per barrel (42 gallons). As recent as last October, the price rose back to respectable levels in the $74 range. Then by the end of December 2018, the price plunged to $45.33. Since then WTIC has struggled to get back $60.14. I am far from being an expert, but my guess is that if WTIC stayed around $60, there would be many happy campers with nobody complaining when that price point translates to the gasoline pump.

WTIC+RIGS

The chart above shows rig counts, but I’ve added a chart below to zoom in on the critical points. Rig counts are just one metric, but many seem to watch for Baker-Hughes to release that information every Friday. If rig counts influence oil field decision makers, then perhaps we should keep an eye on it, too.

As WTIC prices rise and fall, rig counts generally do the same. Until they don’t. As the old saying goes, “the trend is your friend … until it bends at the end.”

RigCounts

Rig counts were pegged over 2,000 in the US when WTIC prices were in the stratosphere. At that time, Texas had about a third of the entire country. At the low point, May 20, 2016, the rig count had cratered to only 404 with Texas’ share rising to over 40%. As you can see above, the rig count peaked last November 9th and has been easing downward since then. Texas continued to rise to about 54% of the share in the US. Texas is down to 570 with the remainder of the US accounting for 511. It’s still early, but it appears a rollover is in process.

Gasoline

I would be remiss if I did not include the correlated numbers that touch the gas pump, meaning the pocketbook. The chart above may bring back some bad memories when we had to pay $4.00+ at the pump when processing, delivery and federal and state taxes are added.

You may also recall that the Texas sales tax numbers were headed in the wrong direction about the time WTIC dropped and the price of gasoline followed. It was huge, and it actually changed the direction of the Texas economy using the sales tax yardstick.

There is a reason for that, and Wal-Mart could tell you why. They measure the things that pour money into their stores by the ordinary citizen as well as the things that take money away such as tax law changes. An extra dollar per gallon in gasoline savings a week puts that money in their stores.  Just twenty bucks a tank full turns into big spending.

See the chart below of sales tax collections for all local governments. Note the slow down and then fall in the growth rate (the red line) in early 2013 even though sales tax dollars were edging up nicely. Look at the history to confirm that when the growth rate declines deep enough and long enough, absolute dollars also fall. For that to happen for Texas as a whole is quite remarkable.

But then as it was about to get ugly by early 2014, a valiant surge occurred. That was largely gasoline prices dropping. Then a drop occurred until the WTIC prices picked up with the improvement in west Texas helping the entire state as can be found up until 4-5 months ago. Remember that friendly trend? It started bending. With that piece of knowledge, WTIC prices and rig counts get more interesting.

STAX

The Take-Aways

We are wise to take note of the status of WTIC prices and rig counts. There are few things in our economy that rise or fall faster than the oil industry. Not only can they fall quickly, but they can fall deeply. History provides plenty of proof that it doesn’t take long before this industry touches all parts of Texas.

Now you have been equipped with a tidbit of information that might help you sound intelligent at your cocktail party tonight. My wife and I will be going to a play at a small community theatre. I’m guessing that nobody there will care, but you never know. LFM

Another Perspective on Infrastructure

.Reading time 8 minutes.

I have been writing about and giving heads up about infrastructure needs since at least 1988. Nothing was mentioned much for years. In fact, when I went to the GFOAT Board at the time to request the topic be put on a conference program, nobody wanted to talk about it. Under the umbrella concern from finance folks that nobody was going to steal a street, it died. I was politely thanked and shown the door.

Since GASB was created, that particular Board eventually made a push to recognize Infrastructure cost. The general process for things like this in the governmental accounting world is to 1) don’t talk about it; 2) talk about it and measure it for informational purposes; 3) measure it but put it only in a footnote and 4); place it on the income statement and balance sheet. I wrote years ago that some cities are bankrupt and don’t know it. When assets turn into liabilities, it can wreck financial statements to make that most basic acknowledgment

The finance folks fought GASB at first, but we now about a dozen years of Infrastructure and especially the Depreciation numbers appearing in the CAFRs for the General Assets. In the footnotes. I am pretty certain that nobody has highlighted this information to their City Councils. That’s a shame. I often wonder how many City Managers even look at these numbers to put dollars to the gigantic investments in assets under their watch? When I started writing about Infrastructure that many cities may be bankrupt and not know it, I wasn’t kidding. Move that General Assets Depreciation number to your income statement and tell me how you look?

The picture gets worse when you realize the Assets of this nature are stated as historical costs only. And, get this, a huge portion of those assets weren’t built with city money anyway. They were built by developers and builders and then given to the city. To make matters worse, many of these development assets were built by cutting and digging through open corn fields without thousands of cars whizzing by. So, bottom line, the city gets to maintain, repair, rehab and replace with city money at today or future costs plus a premium for the time and danger to work in established traffic lanes at off-peak hours and weekends.

And worse, realize that all these assets are on a slow march to deterioration. Wait long enough, and the pace picks up. In 1990, while working on Impact Fees in Plano, the point was made about the very high percentage of their infrasture that had been built during the previous 15 years. Almost as quickly as the words were said aloud, the staff and consulting team realized that at some point in the future, there would be a bubble when those millions of miles of infrastructure would wear out in about the same short period. Ouch! BTW, that was 29 years ago. That bubble is here and has been here for a long time!

The Cost of Deferral

We are all familiar with the number one method of balance a budget – heck, just defer. Kick the can down the road, as the phrase goes. And that may just be one of the reasons some cities are so reluctant to do multi-year financial planning. Kick the imbalance to next year and … well, now that year and future years’ deficits just got deeper. If I were new to a council and discovered decades of decay had been shoved ahead for me to face, I would not be silent. I’d take care of the problem and show the tax rate spike that is a direct correlation to the malfeasance of neglect from councils in the past shoved ahead to my term. Why would I apologize, and why would I act surprised?

A Picture, Please!

The City of Carrollton provided an Infrastructure Report Card in 2011 and then updated the report in 2014 and 2018. It’s a must-read unless you don’t like to be bothered by future threats and sober reality. See https://www.cityofcarrollton.com/home/showdocument?id=13439.

Inside this report is a most fascinating diagram. I doubt that you need help understanding it. It is profound. You need to keep it in your hip pocket and pull it out as regularly as you show pictures of your kids or grandkids.

CarrolltonIllustration

Hit Me With Another Cheery Note, Lewis!

Thanks for giving me the permission to say everything again in another way.

I have found another helpful tool to easily obtain a statistic and a visual I’ve used several times doing a lot of manual work. This one is very useful and here is how it works. Go to your CAFR and pull out the number of miles of roadway in the Statistical Section. In my City of McKinney, it shows there are 802 miles of roads the City has to maintain. It also shows 960 miles of water mains and 713 miles of sanitary sewers. The last two are invisible – until they become visible, and then you’ve got a big problem.

Gee, that sounds like a lot, but look at my better way to say it offered here. If I were to draw a circle with a radius of 960, the picture below tells the fascinating story in a different and disturbing way. What would you expect from the Master Disturber?

Below is a circle with a 960-mile radius. That’s the picture of the assets for which you have been deputized to be the steward. That’s the “service area” stretched out in linearly. That’s the workload plan in some form or fashion.

I’ve driven these distances before (but not in every direction). You can have this sterile little statistic of 960 miles in a report. You might even say it verbally without it fully registering, especially if your staffers talk 100 mph without pausing when giving reports. All a yawner, perhaps. Try using a picture.

Hey, I’m just trying to help you tell a story. And as much as I love numbers, a picture is often much better. LFM

https://www.mapdevelopers.com/draw-circle-tool.php

Circle

Getting Taxed Out of Your Home? Prove it!

.Reading time 10 minutes.

I find it interesting how anti-tax fanatics can camp on to a mantra and then start repeating it as truth. My fav is “People are getting taxed out of their homes.” The louder you cry it and the more emotional you get about it, the more it is accepted as the gospel, I guess.

I’d like to respond by saying “prove it!” Meaning, I don’t believe you. And if it is true, and you are over 65, then I’ve got a solution to offer. All I ask is that we talk with a little civility and respect on all sides. Well, I’ll match the responder’s tone.

Send me examples of people who are being taxed out of their homes. I will need their address. I will keep names and even the addresses confidential. But make no mistake about it, I will publish my findings.

Fire away.

For the Over-65ers

Meanwhile, I would like to respond to those over 65 this way: the state provides that you may not have to pay property taxes until you sell your home. You will eventually have to pay, and you will have to pay 5% simple interest.

The doubter and naysayer will likely respond incredulously to mean “won’t my estate may someday be in the hole?” Well, let’s examine that notion. To be as accurately as possible, I’m picking a home in my neighborhood so I can tie my calculations to a real tax bill.

The market value of the home is $419,198 (it could be any value). Let’s first address the issue of rising house values. That is the case here as shown below as the house value has increased from $212,883 in 1995 to $419,198. Holy Cow! That’s a 97% increase! Send up an Interceptor!

True. You could focus on that number alone and be mathematically correct if you wanted to be a warp-talker. But you could also compute the compounded growth rate over the 23-year period and learn that the actual annual rate is 2.99%. Gee, I hope the value has grown at least that much in my neighborhood.

MarketValue

So that means my tax bill has almost doubled, right? Not so fast. Never in history has my tax bill been based on the full market value. There have been generous discounts in the form of exemptions. In recent years, the owner turned 65, so the exemptions have grown in number and size. The actual base upon which the tax rates are applied are $332,936 for the City,  $302,597 for the County and about $251,000 for the School District and College District.

What’s more, the actual tax bill has been frozen for all but the City. Forever. Until the homeowner no longer lives there.

Now, let’s examine a scenario where tax bills in general are compared to home values in general. The combined tax rates for all four taxing jurisdictions equals $2.3772 per $100. Another way of understanding that number is to say property taxes equal 2.3772% of the home value. In other words, If a house value grows at 2.99% and the tax bill equals 2.38%, the homeowner may eventually get all City, County, ISD and College District taxes back when the house is sold – and then some.

The price of living in a full-service city, which benefits the homeowner, children and grandchildren, can be viewed in a different light. The emphasis on CAN BE is intentional. I may choose to be grateful for what I have. You may choose to complain. Your call.

Let’s understand the arithmetic by examining a sample:

Deferral

I’m taking my neighborhood example bill and situation and extending 25 years into the future. If the homeowner is 65, then this covers the scenario until the age of 90. One might safely assume the homeowner is no longer living in the homestead before then.

First, one might gasp that a deferred tax bill now about $6,500 annually can extend to just under $8,000 annually (due to the City taxes) in 25 years. You might equally be in disbelief that the home value could increase to $777,170. However, that is what happens when the home value grows at just 2.5% per year.

The exhibit shows the results USING THESE ASSUMPTIONS after 25 years. The deferred taxes totals $179,794.512. The accumulated interest on the deferred taxes equals $112,961.02 for a total of $292,756.14.

If the house were sold at that point for a price of $777,170, and the taxes and accrued interest paid off, there would still be equity in the home of $484,414.

What About Differing Assumptions?

I’m so glad you asked. This is when I go into my Excel teaching mode to show a feature just for this purpose. Let’s say you wanted to see what happens when the home value growth rate goes from 0% to 8% in 1/2% increments. You also wanted to see what happens if the state changed the interest rate to charge 2% to 8% in 1% increments. The interest rate was recently changed from 8% to 5%, so that assumption should be fixed for a number of years. But let’s see the results.

Boss, you just asked for 136 tables like the one above. Are you sure you want to see that many? And your response as a boss should be that you only want to see the results in the bottom line corner: What will be the remaining equity under these scenarios?

This is where a sensitity analysis (Data Table in Excel parlance) comes in. Here’s what you want to know once you understand the model above:

DataTable

As you can see, the net equity stays positive even if the house value growth increases were zero and the interest rate returned to 8%.

Other Issues

While you now have an alternative to offer those over 65 when they complain about taxes, there could be some hiccups. If they have a mortgage and the note holder balks, then this suggestion might not work. I can’t help you there other than to show them this blog.

Also, all of the air might be sucked out of the room by your city finance folks if this idea is suggested from the dias in a council meeting. There is a fear of losing revenue any time exemptions are discussed, and there should be. However, I have two responses. By the very nature of this legal solution, the tax deferrals are temporary. PLUS they pay 5%. If you have any kind of internal reserves to fund these deferrals, then compare 5% to the rate you are currently earning. Make it happen. Alternatively, my guess is that a local bank would be happy to be the financing party. Bottom line: it’s a legitimate concern with a legitimate answer.

There are already complaints that those NOT in need of this avenue of relief are taking advantage of the benefit. Sorry, I can’t help you there, either.

Conclusion

I live in a city where the mayor is way above average in smarts and heads above his peers when citizens come before the council making outlandish comments, mimicking the anti-tax mantras spoken in their ears. These naysayer robots are taken to task quite often and asked to explain in more depth. In other words, PROVE IT!

I am making an offer to my mayor as well as to your mayor and council. When you are bombarded with the “we’re being taxed out of our home,” get their address and send to me. I want to see the numbers, but I may also want to explore deeper. If they have lost their job or have huge medical bills, I want to point out that it’s not their taxes causing grief in their life. I will pray for them, but I won’t let them get away with inflammatory accusations about the cost of providing local government services.

LFM.