Should McKinney Refund $29,770,931 to Taxpayers from Excessive Taxation? You Make the Call!

McKinneyFB

Municipal budgets are a compilation of tons of numbers. The focus is usually on Revenues & Expenditures. However, not to be overlooked are the resulting Fund Balances, both the incremental addition or drawdown for any particular year as well as  the cumulative Balances.

Fund Balances should be clearly highlighted in a budget. They should also be viewed in light of the overall expenditures in each fund. There are several “funds” such as the General Fund, The McKinney Economic Development Fund, The McKinney Community Development Fund and the Water & Sewer Fund. The largest is the General Fund where most of the property taxes, sales taxes, franchise taxes and building permit revenues can be found. Also, the Police, Fire, Parks & Recreation Departments and most all typical city tax-supported services can be found in the General Fund.

The McKinney General Fund budget indicates a financial policy desired minimum Fund Balance of 90-days of Expenditures or about 25%. That’s pretty healthy. I also wouldn’t consider a 120-day balance or about 33% to be excessive but rather very healthy.

While the Budget documents are of value, I consider them secondary to the Comprehensive Annual Financial Report (CAFR), which are the audited financial statements for a government entity. You will note from my table above that I have recapped some key number from the last 10 years of CAFRs for McKinney. These CAFRs are available at this link. The pages from the CAFRs I am using to compile my table can be found here.

To summarize my table and the CAFR schedules behind it, the City of McKinney has continually under-budgeted Revenues and over-budgeted Expenditures. Sure, there will be a variation out of a 10-year view, but the story is unmistakable.

The supporting schedules also show the changes between the Original Budget, the Revised Budget and the Actual Results. The Revised Budget figures are often shown late in the year about the time the Budget is presented to the City Council. That would be right about now as the City Council Budget Workshop is scheduled for tomorrow August 4th, when there are less then 60 days remaining in the Fiscal Year (October through September).

I would like to think that such a sophisticated staff as McKinney has, with all kinds of software and computing power to slice and dice the financial data, tailor queries and such, could stand flat-footed in August and get a very close estimate of the year-end actual numbers a few weeks away.

As you can see, the Actual results show the General Fund Balances to be well in excess of 120 days or 33% year after year for a decade. As of the end of September 30, 2016, the Fund Balance in the audited financial statements totals $65,606,029. When compared to Expenditures of $108,998,422, the metrics are 220 days or 60.19%.

If you compared to 120-days, the excess would be $29,770,931!

So, what could be done or should be done with that excessive amount? First, you would have to convince the City Manager that it is excessive, because he argues just the opposite. Actually, all you have to do is convince the City Council, the policy makers who adopted at the staff’s recommendation for a General Fund Balance level of 25% at a minimum.

Ah, nobody said anything about a maximum!

Would the City be in dire straits if the Property Tax Revenues had been $29 million less in recent years? Hardly. But you make the call. I want to see somebody stand up and tell me that $25-35 million at 120-days is too skinny.

Could the $29 million have been spent to buy 2-3 downtown garages out of cash and the City still be in sound financial condition? Yes. Or the same spent on a new city hall or on any kind of infrastructure needs? Yes.

Could or should the $29 million be returned to the Taxpayer since the rates could have much much lower in recent years and the City still be fiscal responsible? I think so, but you make the call. The $29 million excess got there because of unneeded taxation, pure and simple.

Has a refund like this ever been done before in the region? Yes, Farmers Branch did so many years back. They called it a dividend to the taxpayers.

Does the City have excessive reserves in other Funds? Yes, download the most recent CAFR and take a look. You will be blown away.

Did the City Council sitting in early 2017 when the FY 2016 CAFR was presented to them and accepted by the Council understand the General Fund had a $65 million balance? Dunno. Ask the three still on board or call up the four still active in the community. What about the current Council members? Dunno either. Ask them.

What is the staff projecting for the contribution to the General Fund Balance (or drawdown) going to be as of the end of the fiscal year in 60 days? I’m told a decrease of $381,105. And for FY 2018? I’m told it will be zero, that Revenues and Expenditures will be exactly the same.

We shall see.

Will Fund Balances even be discussed at tomorrow’s Budget Workshop?

Tune in.

LFM

 

 

A Few Governance Wishes on July 4th

It was only a couple of months ago that I had high hopes of there being a big turn in political leadership in McKinney. Then it happened in grand style. A corner was turned and now the road ahead looks promising. I’m not expecting 7-0 votes on every issue by any means. But I see possibilities for new unities that serve the good of McKinney. That wish of mine is happening – yet to fully unfold, but the formation is visible and tangible. And it is beautiful!

I only wish that the Citizens of McKinney would wake up and get active to assure a more balanced, reasonable and business-like approach to politics and governance for the long-term. For political extremists like the Tea-Party to control or unduly influence city politics is flat wrong. Unlike County, State and Federal government, most of the municipal services are here because the Citizens asked for them. We want safe neighborhoods, recreation, parks, libraries and senior programs. We are here for a Quality of Life to meet our needs in the Maslow sense.

A reasonable person knows those things we want and asked for do not come free. We have a right to ask for these services, and the municipal government has a duty to provide them as efficiently as possible – and to require a reasonable payment for those services. That’s why we became a Home-Rule City about 155,000 citizens ago.

It is easy to count off the obvious services that are mostly paid for by property and sales taxes: Fire, Police, EMS, Parks, Recreation, Libraries, Streets & Lighting, Median Maintenance and Property Code Enforcement. There are many, many more services that you would notice only if they stopped being provided.

Based on an average house value in McKinney of $319,000, before exemptions, and current tax rate of $0.573, the tax bill would be $1,827.87. That equates to $5.01 per day per household. Yes, I know all about how to make things look small by dividing by the greatest denominator or look really huge by multiply the tax bill by 10 or 20 years.

But look, this is reasonable arithmetic. We are getting all of these services and paying property taxes equal to a venti Frappachino at Starbucks! Dear Citizen, you have been sucked into the vortex of Tea-Party hate-mongering by unthinking reaction to taxes. They are the cost of providing largely 24×7 protection of life and property in McKinney.

Do I think the taxes are too high? While reasonable, I am 100% positive they could be lowered and should be for the next fiscal year beginning October 2017 and ending September 2018. However, the full answer is too elaborate for this blog. I will be blogging more on this after July 25 when the property values are certified by the appraisal district followed by the obligatory publishing of the Truth-In-Taxation rates two weeks later.

I can talk about lowering taxes and even raising taxes when necessary without my blood pressure going up or down. So long as we are able to keep a perspective!

Since this is My Wish List blog, my point here is that I simply wish elected officials and citizens would do a little homework and keep things in perspective rather than being blindly persuaded to buy into the Tea-Party rhetoric. You are being deceived in the worst way.

For those of you elected largely because you had to subscribe to the Tea-Party propaganda to get elected, I wish you would simply think for yourselves. It is obvious when you are being sent text messages on the questions to ask. Or when your vote doesn’t match the expression on your face.

Collin County

I believe the same hysteria applies to Collin County politics. You can be conservative and still be responsible. County government is a little different. They deal mostly with the ugly services. That is the phrase I have used since the 1970s when I worked for county government for a couple of years. I actually love county government. They deal with the criminal justice system, mental health and other services that fulfill the State’s obligation. They are the chief administrative arm of the State. Who steps up to bury or cremate the dead pauper nobody will claim? That would be Collin County.

With the average Collin County home value being $339,000 and a tax rate of $0.208395, the annual tax bill (before exemptions) would be $706.46 or $1.94 per household per day. So, it is appalling to me when Collin County won’t pay their bills instead of protecting the Tea-Party Darling, AG Ken Paxton. C’mon, County Judge Keith Obvious and Commissioner Chris Oblivious. Get real. Actually, Get out! A robot can be programmed to say NO!

I wish for a Commissioners’ Court that would simply be realistic and honest rather than being puppets for the Tea-Party. I wish for a Court that would be more of a regional participant. I wish for low taxes but not at the expense of deferral in needed spending or to siphon off of Dallas County for indigent health care while recklessly blaming them for stepping up to the responsibilities Collin County shuns.

I wish for Commissioner Court leadership that engenders a more collaborative relationship with Collin County cities. Collin County is not an island within the region and the Commissioners’ Court is not an island within the county itself.

Our future is too important for Tea-Party control to annihilate basic good business decisions that affect everyone over the next several decades. I believe the Tea-Party to be the essence of evil motives without regard to reality.

Please, Dear Citizens. Get educated. Get involved. Help Collin County find a balance that is fair and reasonable. Put the people in front of and above politics. We have a chance to make this great county become even greater. Elect collaborators and communicators who can think for themselves and make informed decisions on their own. LFM

 

When Conservatism Stinks

I hate labels. But I know we can’t escape using them. I’m conservative for the most part, but then I’m not a Republican (although I’ve always voted so while pinching my nose) and certainly don’t buy in to the Tea Party mindset of “just say no often and loud and ignore reality.” And add Patriot to the description so the positions can look iron-clad and justified. Fact is, I don’t like any extremes.

But I am a human. And a Citizen. And neighbor. And a Religious Person.

I support a few charities like Hope Women’s Center in McKinney. But I don’t go to their dinners any more – the banquets where some of Collin County’s finest conservatives stand up and plea for help for a good cause in the region. There are many good causes. And there are several agencies that help. I heard the number of charities in McKinney alone reaches way past several dozen, way more than I would have guessed. And of course, Collin County churches are always there to help. Help to feed and clothe and counsel.

But not to treat for health needs, especially critical health issues.

If Collin County leaders were as caring as they sound when asking for money and help at banquets, we would have our own hospital for indigent care. Oh, calm down. I can hear the Political Conservatives shouting and levitating off their cushy seats at the horrible thought of imposing on a taxpayer to help someone less fortunate.

The cry is first and foremost how poor people are that way because they are lazy. And some are, I’m sure. But what about those who are genuinely in need? And just exactly who makes that call? Would County Judge Self and Commissioner Chris Hill volunteer to stand at the door of Parkland Hospital when a Collin County indigent is rushed in by ambulance or simply taken there by choice so they could hold up their thumbs up/thumbs down sign? Easy enough to sit at the Dais while the real boots on the ground look a person of need in the eyes.

I was the first County Budget Officer in Texas when hired by Dallas County in 1977 after enabling legislation was passed to allow the Commissioners’ Court to prepare a budget instead of the County Auditor appointed by District Judges. The Commissioners’ Court did not prepare the budget for Parkland Hospital, but they had to approve it. Therefore, I had my first introduction into the issues surrounding a public hospital in the late 1970s. There were many.

Of course, one of them had to do with the high costs of a hospital. Extremely high costs. And then the linkage to the cost-drivers, number of people served. And the inability to pay. Whoa! And then the lopsided issue of people being served who came from outside of Dallas County! Although entrants were screened for the ability to pay, and even more pressure was put on Parkland to tighten the standards, it was an imperfect system. And I’m sure it is still so. But it was not an open-door policy by any means.

The ability (and yes, even the willingness) to pay issue has not gone away forty years later. It has only grown in size. So, I have a question to ask of every Collin County citizen/taxpayer. If the situation was reversed with Collin County treating Dallas County’s indigent people, what would you do? And if another county’s response was “tough luck, sucker, the problem is there because you Collin County weaklings just don’t know how to say NO, how to slam the door in the face of the needy,” what would be your reaction?”

For the last 11 years, I have lived in Collin County. For almost six decades before that, I lived in Dallas County with a few years in Denton County. My view is the same: Take care of your own; pay your fair share; do the right thing! DO THE RIGHT THING!!!

But that’s not the response from the Ultra-Conservative, Tea-Party driven Collin County leadership manifested in two men and their backers. And that’s wrong on so many levels that I want to puke.

I was set to blog about the topic this morning after a news story came out a few days ago. Then this columnist below penned his views that included my thoughts and even some of the exact phrases I was going to use. I will take advantage of his writings to complete my comments on this topic.

Meanwhile, I look forward to the day when the Conservative Extremists of Collin County find a balance and do what is right.

Oh, did I just hear you say, “move if you don’t like it.” No way. I’m here for the duration, dude. You move. Actually, just drop your intoxicating mantra, do a group hug, step up to the plate and be responsible citizens. You are the weaklings whose days are numbered. One can be conservative and still say Yes to a need.


 

How dare Dallas County’s neighbors bite the hands that treat them at Parkland

Dallas Morning News
Written by
James Ragland, Columnist

It’s bad enough that Dallas County’s public hospital has become a lifeboat for so many uninsured people across North Texas.

We don’t need our richer neighbors up north in Collin County mocking or maligning us for doing the right thing — especially when we’re required to do so by law.

We need them to chip in.

Here’s the long and short of it: Without Parkland Memorial Hospital’s excellent trauma and emergency-room care, we’d have a bunch of people — especially those without insurance — suffering longer or dying sooner.

That’s not a polite thing to say, but it’s true.

Thanks to the Emergency Medical Treatment and Labor Act — a 31-year-old unfunded mandate from Uncle Sam — Parkland can’t turn away anyone coming through its emergency department even if they’re without insurance or the means to pay.

With 600,000 uninsured people in Dallas County alone, you can see how big of a potential burden that is on our hospital and our taxpayers.

But guess what? It doesn’t stop there.

We’re picking up the tab for out-of-county patients, too, as my colleague Naomi Martin recently reported.

Uninsured and indigent patients from across North Texas are benefiting from Parkland’s mandated largess — to the tune of $27.4 million last year alone.

This has been going on for decades.

And you know which out-of-county patients benefit the most from Parkland’s expert care and generosity? That would be Collin, the seventh most populous county in the state and one of the wealthiest based on per capita income.

Still, patients streaming in from Collin County last year cost the hospital $6 million. If you’re hoping we’ll get any of that money back, don’t hold your breath.

That’s a huge and bitter pill for Dallas County taxpayers to swallow. The one-sided deal strongly suggests that Collin and other counties aren’t able — or willing — to take care of their own.

Except — hold on — that is not the way Collin County Judge Keith Self spins it. Instead, he blames Parkland’s “liberal policies” for catching nearly 6,000 Collin County residents in its health care safety net last year.

“These are not indigent citizens,” Self said. “These are people who don’t pay their bill, they’re uninsured.”

In other words, the judge is saying his county is home to a bunch of deadbeats. Perhaps Dallas should figure out a way to slip that into its corporate recruiting brochures.

Anyway, in a tone reminiscent of the partisan bickering coming out of Austin and Washington — and we see where that’s gotten us — Self shamelessly throws salt on the wound by blaming Parkland’s CEO, Dr. Fred Cerise, for the hospital’s dilemma.

“If he’s got very liberal policies — I’m not going to comment on Parkland hospital policies that give more generous health care,” he said.

This is what happens when you’re a blue county in a red state: No do-good deed goes unpunished.

Parkland Hospital slashes 300 jobs amid budget cuts

What the Republican judge fails to acknowledge, however, is that this is far more complicated an issue than Parkland being too generous with taxpayers’ hard-earned money.

About half of Collin County’s 110,921 uninsured residents are eligible for indigent care. And it’s true, as Self mentions, that Collin isn’t the stingiest of counties in Texas when it comes to taking care of the indigent.

But the county simply doesn’t have a big enough safety net. And its health providers still can turn away people who don’t qualify for the network of services it offers.

That’s why so many out-of-county patients end up in emergency rooms — mostly Parkland, which happens to boast some of the best trauma care in the nation.

To be fair, not everyone in Collin County shares the judge’s harsh, if not downright ungrateful, judgment.

Some, like Rick Crocker, head of a homeless shelter in McKinney, understands the critical role that Parkland plays in saving lives. And he agrees that that Parkland “can’t bear the entire burden of this” alone.

It’s a “shared responsibility,” he said.

It sure is. And what we need is a regional partnership coupled with a cost-sharing strategy that takes into account the special role that Parkland plays in North Texas.

More pointedly, we need our suburban neighbors to step up to the plate. And, for once, they need to leave partisan politics out of the mix.

Last I checked, Parkland’s ER doctors don’t ask any of its patients whether they’re “liberal” or “conservative” before treating them.

They simply want to know where it hurts.

For Dallas County taxpayers, we know the answer: That would be the pocketbook, followed closely by the condescending rebukes from suburban politicians who should know better.

I Got My Answer On The McKinney MUDs

The question was posed in a previous blog.  Who is monitoring McKinney Utility Districts? Exactly one year later I got my answer. I knew the City Council and Staff weren’t asking the right questions when they entered into a consent agreement in 2012. That decison set a bond issuance cap of well over $200 million on a relatively small parcel of land in Trinity Falls that put them into the big-league of indebtness. Last Monday night Trinity Falls came back to the Council asking for the debt ceiling to be raised to $318 million!

Bad decision. Bad timing. Bad presentation.

Four new Council members are now asking questions. Good questions. The right questions. Common sense questions. If you have $262 million authorized and you’ve only issued $38 million, what’s the rush? And, by the way, let’s better understand who allowed this beast and why?

If you want to see my nominiation for the Presentations Gone Bad Award, see the video of last Monday night’s meeting at http://mckinney.granicus.com/MediaPlayer.php?view_id=5&clip_id=3930 at the 1:39:13 mark. First, note the rate of speed in which the speaker is talking. It’s close to those disclosures at the end of ads on TV or radio.

It might also be a tip-off to the validity of this request.

Note first that he says the MUD is not in the City limits of McKinney. That’s a true statement, but stick it in your back pocket for a minute. We will come back to this little jewel.

Note that there is mention of 5,000 rooftops, but the speaker can’t answer a basic question about the amount of expected commerical property. And the 4-5 suits sitting behind me failed to come to his rescue. But I can attest they were squirming.

Then wait for the slow-motion train wreck when the Mayor starts reading an excerpt from a letter written by a homeowner inside the MUD.

Oh, it gets worse. The Council starts playing tag team with simple questions. Questions like where does the MUD board post notices of their meetings? Well, they are posted at the Collin County Courthouse. Yep, you heard correctly. In case you don’t know, you don’t go by the Courthouse on your way to get a loaf of bread. It’s a destination trip, but not in the vacation sense.

Where are the meeting held? At the MUD engineers’ offices in Frisco. FRISCO??? Strangely, there is no place to have a meeting in Trinity Falls. They don’t have a community center, and they don’t have the money to build one. Wrong answer to a Council being asked to bump a debt ceiling from a gigantic $262 million to an interglactical $318 million.

Then comes the biggest goof of the night. The Trinity Falls representative was asked about why notices were not posted online? The response was that the MUD did not have a Web site. And then he turned into a lawyer and started giving reasons why a Web site invoked all kinds of burdens. However, assurances were given that a Web site would be available sometime in the future.

May we take a break here and ask that you go to http://www.trinityfalls.com? Dang if there isn’t a Web site! It appears to be fairly mature. None of those “under construction” icons.

Whoa! Look at this on the front page: “Trinity Falls is a 1,700-acre master planned community in McKinney, Texas.

Now reach back in your hip pocket where you saved that earlier comment from the speaker, the correct one.

Trinity Falls is not in the City limits, but it is being marketed as if it is. No wonder people living there are confused.

As a side note, look at their monthly newsletters. I checked a few, and I don’t see any notices about Board meetings, agendas or minutes. I did find a huge splash encouraging residents to check out the shopping in Plano. How interesting. Could you please come begging to catapult a debt ceiling from the McKinney City Council and then promote shopping in another City!

Do you see anything wrong with this picture?

What I do see is that the New Council is not going to be the Rubber Stampers of old. Trinity Falls was told the item would be continued at the regular Council meeting on Tuesday, the next night. I watched that meeting and the item was pulled from the agenda by Trinity Falls. “Indefinitely.”

As is Wooden-Stake Indefinitely? We shall see.

And I am guessing that whether Trinity Falls comes back or not has no bearing on this Council’s desire to dig deeply into MUDs. The inquiry isn’t over. It’s just getting started.

What is of great importance is that Trinity Falls residents don’t have a vote in McKinney. But they do have a voice now. LFM

Why Search for Restaurant Ruse When You’ve Seen This?

McKinney is full of mysteries. And they just keep piling on. How could the City Council possibly be entertaining spending money looking for a place to put the infamous Restaurant Row when they have a place right in front of their faces? Even Councilman Day spoke to it in a public meeting. He said there are only two viable places: 1) Downtown McKinney and 2) Gateway.

Gateway is where the City has already invested untold $millions. How many $millions? A citizen compiled a list totaling over $70 million, and I’ve yet to hear anybody say her numbers are wrong.

Ask any City official who ought to know. If they don’t know, why haven’t they asked? If they do know and won’t say, why would they take that position? If they do know and tell you, then why would they invest so much in one property and then pretend they aren’t sure if it is a good spot for Restaurant Ruse after making such an investment? Have they decided it is a money pit and don’t want to keep throwing good money after bad?

Here is why I point out the need to question the rationale for pushing a Restaurant Row, especially if it is to compete with an already presumably good property.

Please download and look at the Gateway Project plan that was being prepared by Lincoln Properties. Placed adjacent to the Emerson Campus, the Collin College Center, the Gateway Hotel and Conference Center are the following:

Office Site: 5.50 acres.
Office Site: 4.95 acres.
Office Site: 6.30 acres.
Office Site: 6.83 acres with 4 story building.
Office Site: 4.94 acres Class A, 10 stories with parking garage.
Restaurant Pads: 3.32 acres for two restaurants.
Restaurant Pads: 4.31 acres for three restaurants, making a total of five – IN A ROW!
Office Site: 7.44 acres with two Class A buildings, one 6 stories and one 8 stories.
Park Site: 2.03 acres.

There is a mystery as to why Lincoln Properties got this far to prepare a brochure with a plan and expected availability of Spring 2017 (the brochure is dated in September 2015) and then pulled out. I understand a key person at Lincoln Property passed away about this time. But I also heard that the numbers just didn’t work out for them to be able to develop a profitable project.

And why would that be the case? No market demand? If so, then how could that be with 74,401 people within 3 miles and 180,898 people within 5 miles? How could that be with daytime employment being 25,650 within 3 miles and 63,495 within 5 miles? How could that be with Average Household Income of $96,991 within 3 miles and $102,973 within 6 miles? How could that be with 103,000 vehicles per day coming down US 75 and 30,000 vehicles per day coming down Eldorado Parkway?

Nevermind that you can’t see this property when driving north on US 75. Nevermind that if you exit Eldorado Parkway when you when you do get a glimpse of the property, you can’t turn onto the property. But tall buildings will help with the identity some day, and it is not the worse location in the region with sites near clover leafs.

Or is it? Has anybody fessed up to this being the worst location in McKinney after sinking so much money in the property?

More mysteries. So many mysteries. Why won’t anybody come forth and tell the citizens? We can handle the truth. We just can’t handle mysteries and the reasons behind the mysteries.

But let’s go back to the brochure you’ve downloaded.

Why aren’t we starting with this plan and moving forward? If we are going to spend money (more money), what would it cost to rule out this site first before we looked elsewhere? That would make more sense.

Better yet, why wouldn’t we spend a little pocket change in relation to the money already spent to have a valid market study done – or for existing marketing studies to be updated? Why isn’t the MEDC on fire to turn this into a big winner given they own all or most of the property?

Or does this fall into the category of “Perfect But Not Now.” Ouch! My guess is that some of the biggest deals in the region have come about because of patience Plano and Frisco officials and developers have had in the past that is a foreign concept in McKinney. What is McKinney willing to sacrifice to have something on a major corner other than grass when the truly big deal is a few years away. We only have so many prime corners in McKinney.

The single biggest economic development tool cities had for years before incentive agreements, EDCs and  CDCs were allowed (worse laws ever created!) was the proper investment in the roadway and utility infrastructure that opened the paths to private investment. Oh wait, that’s not very sexy and is without the ribbon cutting and photo ops. That’s way too basic. Even though that is possibly the biggest way to be investing today to be ready when it’s McKinney’s time at some point in the future. There’s nothing McKinney can do in a grand way to compete with Plano, Allen and Frisco by wearing the change dispenser belt.

Yet, the Highway 5 Corridor, the Airport (the single item no adjacent city has) can be a game-changer. Lots of open land to the north, but the traffic counts are on the southern central side now.

In the meantime, houses can be built, and yes they are – everywhere. Even though no incentives are needed, McKinney has granted some developers with the use of MUDs with little concern about how that is going to play out in the future.

The famous management consultant, Peter Drucker wrote a book in 1954 and then wrote dozens of books that followed a central theme: “Build On Your Strengths!” Don’t waste resources on trying to fix all of your weaknesses.

If Gateway is not one of the handful of our strengths, then McKinney needs to fess up and declare it so, place it in mothballs and wait for a better day. If it is one of the major strengths, then build on it.

And instead of sprinkling money here and there, think about consolidating the resources to be placed into transportation, infrastructure corridors and things that will matter in the future. Think investment. And patience.

Council, MEDC, if you have a clue as to where we are going and how we are going to get there, please declare it so and shine the light so no mysteries exist. LFM

 

 

 

Captain Obvious To The Country of Oblivious: The Math Won’t Compute Forever!

I am approaching my ten-year anniversary of writing about a subject that causes me to feel like Captain Obvious speaking to the Country of Oblivious. Some of us are numbers people, some picture people and others word people. I like all three and try to use every tool to communicate. There are five charts below. Let me see if I can summarize them succinctly.

Chart I shows the US outstanding debt from the early 1980s through September 30, 2016. Think Presidents Reagan through Obama. We now owe $19,573,444,713,936.79 in debts. To place $19.6 trillion into a proper perspective,  I have shown this mountain of debt on a per household basis and then adjusted for inflation. The load has risen from $33,017 to $164,695 per household for 4.99x over the relatively short chart period.

This does not include the present value of Social Security and Medicare, which have estimates of over $100 trillion according to the Dallas Federal Reserve. This does not include your personal debt, nor any state, county, city, ISD or special district debt, including the present value of retirement benefits.

Chart II looks like a portion of Texas. It’s the cumulative amount of debt attributable to operating deficits. Here is a recap (in $millions).

               The Total Deficit as of 9/30/1980              $     907,707.
               Deficit Spending Since                                  $11,822,278.
               Debt Sub-total                                                $12,729,985.
               Debt Outstanding at 9/30/2016                 $19,873,445.
               Difference (Off Books???)                            $  7,143,460.

Yes, the debt has soared. By every President and every sitting Congressional Member no matter the party in control since 1980. Chart II also shows the percentage of overspending on the disclosed operating budget. Right now we are at about 17.98% and have averaged about 20% over the chart period. One way this metric could be interpreted is to say that revenues would need to be raised or expenditures cut (or a combination thereof) by 20% to just breakeven on the disclosed budget and probably about another 10-15% to cover the Off-Books spending. That might stop debt from growing but not pay off a penny of the $19 trillion. Raise your hand if you believe either will happen.

I’m pretty sure my 8th grade granddaughter is working story problems more difficult than this one to figure out where things are heading.

 Charts III and IV give us an idea about how we are pushing the limits on what we can expect to be milked from the overall potential revenue base. All you have to know is that every dollar of our annual Gross National Product totals about $19 trillion. And the US government revenue base is $3.3 trillion. Logic would say that if the federal government is taking in 17.20% of the GNP, that’s big no matter how you measure it. Again, layer the state, county, ISDs and other special districts and … you just have to appreciate reasonable limits.

 Chart V is just one of the fabricated and dangerous aspects to the reason we haven’t collapsed since I started predicting so ten years ago. The inflation and interest rates can be manipulated by the Federal Reserve. It has now been so long that many of the newer families and employees don’t realize what has happened. To control rising Social Security costs and to lower the amount the US government pays on interest toward this staggering amount of debt, Chart V shines the light on the gimmick.

Interest rates on US Debt have been lowered from 8.23% in 1988 to 2.21% in 2016. The eye can figure out quite quickly the impact if we were dealing with true interest rates, rates that took real inflation and real risk into consideration. With an expenditure base of about $3.856 trillion, the interest expense of $0.433 trillion is about 11.22%. What would the 2016 disclosed budget operating deficit of about $0.588 trillion have looked like if interest costs were in the 5% range? Close to double. See the motivation our leaders have to manipulate the numbers?

There is another big issue here. Retired people hoping to make it on their 401k and Social Security benefits are getting shafted. The tendency at that age and stage is to be conservative and safe. And for the last several years that kind of thinking will earn retirees very close to zero. I never thought I would  hear serious discussions and see real actions to drive interest rates below zero. But here we are.

To be fair, many Social Security recipients and almost all Medicare beneficiaries are receiving much more out of the system than they ever put into the system – another faulty math problem that has led to the big deficits and debt.

 Conclusion.

The perfect storm is coming as it relates to the sustainability of gimmicks and outright massive spending to keep things afloat. One of the ways the Federal Government has taken advantage of low rates is to move to shorter term instruments. The problem with that is like having a 6-month mortgage instead of 15+ years. You and the lender come face to face frequently, always with the possibility that the lender doesn’t want to reinvest.

The lenders of the $19 trillion are first the government itself. The Social Security funds temporally on hand, for instance, have been used by the Federal Government to pay for operations. Those funds held by foreign countries are not a small part of the lender base. Yes, we are viewed as a safe haven, but that’s mostly because other countries are worse.

 And isn’t that a sound footing to be on? Especially as we want it all, we want it now, and we want somebody else to pay for everything. Good luck, Country of Obvious. That arithmetic is eventually going to catch up with us! LFM

 Chart I.

charti 

Chart II.

 chartii

Chart III.

chartiiiChart IV.

chartiv

Chart V.

chartv

Looking at Accounting Fundamentals for a Company Called CopSync

Introduction.

There is an Addison-based company called CopSync (NASDAQ: COYN) that has had my attention for the last couple of years. I first got interested because of their connection to AG Ken Paxton. While his world was falling to pieces over securities violations related to a company called Servergy, which appears to finally be going to trial, I got interested in CopSync. Paxton owns or at least owned a sufficient number of shares in CopSync for him to be one of the handful of stockholders disclosed in financial filings. My curiosity was whether AG Paxton was the recipient of shares of CopSync for the same reason he was for Servergy, and that was to be compensated for promoting the firm.

I’m still curious about the Paxton connection, but my attention has drifted to other aspects of CopSync. One has to do with service. However, I cannot find anything derogatory in the public domain regarding their product or services. And I’m glad. That would be my concern if so since CopSync serves local governments, which I do consider to be my bailiwick. CopSync serves a number of local governments, almost all very small.

For instance, a recent press release for CopSync states that the City of Helotes has joined their network of customers. The number of customers appears to be quite large, 530 agencies in fact. That would include thousands of police officers in 15 states across the US. I believe I have seen numbers in previous press releases of approximately 670, so I’ve got some questions about the customer base. However, 530 agencies would be an impressive number.

Yellow Flags.

I have seen some caution signs. The public relations firm for CopSync must be very effective in that I receive a Google Alert multiple times each week. One example states CopSync’s network “is the nation’s only system connecting law enforcement officers and agencies nationwide, and provides access to a national database of non-adjudicated law enforcement information and real-time communication capability to connected agencies, even those thousands of miles apart.” That just seems strange to be the ”only” system in the nation, but I could let that pass my filter. I always watch for words like “best,” but I guess that would be redundant if you are the only one out there.

My curiosity expanded when the news alerts for CopSync included highlights like “The Company is conducting pilot programs with the San Antonio PD and with the Sheriff’s Office for Bexar County.” Whoa, Baby! In my 42 years of working with local governments, the one thing I have grown to appreciate is that tricky little thing called scale. It’s the garden hose vs fire hydrant kind of scale. Nevertheless, I wish CopSync well and hope it all works out.

Although advertising hype is absorbed and discounted in most of our daily lives, that’s not the case when it comes to publicly traded companies. So then came another announcement from CopSync that caught my eye and caused me more worry. The headline in caps said “FIRST MAJOR TEXAS METROPOLITIAN AREA POLICE DEPARTMENT JOINS COPSYNC NETWORK.” Dang! Who might that be?

The subheading said “CITY OF LANCASTER, SCHOOL DISTRICT POLICE DEPARTMENT BEGAN USING COPSYNC THIS SCHOOL YEAR.”

So, which one is it? The City of Lancaster? The Lancaster ISD? Both? It would appear to be both. Until you read deeper where after a confusing “The City of Lancaster Independent School District,” paragraph (an animal that does not exist) speaks only about LISD. I contacted the City of Lancaster Police Chief to confirm it is LISD but not the City. Honest mistake? Maybe. But strange for a company born in Texas and is being raised in Texas by Texans.

Red Flag.

Being a numbers person is both a blessing and a curse. When a stock price gets too high for some investors, it is not unusual to have a 2:1 or 3:1 split. The reverse is also true. You have to be a certain size stock price to be traded on the primary exchanges or be eligible for the big institutional buyers. However, on October 13, 2015, CopSync announced a 1-for-50 reverse stock split. Wow! Now, that will get your attention.

However, all did not go well apparently. This penny-stock only reached a high of $9.55 between when the CopSync shareholders approved the reverse split and when it became effective. But what happened after the peak of $9.55? As you can see from the chart below, the CopSync stock has steadily declined to a low or $0.70 on October 6, 2016. Since then it closed at $0.7780 last Friday. That doesn’t look very promising.

copsync

Bigger Red Flag.

What do the stockholders know that most people do not know, including the purchaser of CopSync’s goods and services? I was also puzzled by the CopSync news alerts that appeared to be nothing but good news. I saw a headline that said CopSync’s Gross Profit Margin was 29.00%. That’s when I started doing some digging. In fact, I went back to the beginning and started comparing financial statements and SEC filings for the last ten years. I was more than a little shocked. It is not at all unusual for a start-up company to have a few years of losses.

To be sustainable (a “going concern” in accounting vernacular), a business must eventually make a profit unless two things happen: 1) somebody loans them money from a bottomless well and/or 2) stockholders keep putting money in the company in hopes that they will not only get their money back but make a profit.

Since 2008, CopSync has had revenues of $28,989,455 and Cost of Revenues (mostly hardware and software costs) of $21,256,922 for a Gross Profit of $7,732,533. But that is just the first line of value on the Income Statement. Yep, if you are going to choose one number to highlight, there you go.

But wait, as the late night Veggie-Matic commercial goes, there’s more. There are three big other expenses for General & Administrative, Research & Development and Sales & Marketing. These three big guys have totaled $36,292,758 since 2008.

That means the Loss From Operations totaled $28,560,225 since 2008! Another deduction for Other Expenses such as Interest Expense totals $4,139,400 for a total loss since 2008 of $32,699,525.

How does a company that has a Net Loss of $32,699,525 since 2008 stay in business? Especially when the losses from 2012 through 2015 are -$4,287,930; -$3,839,856; -$4,328,467; and -$6,505,422. And then it gets worse as the first six months of 2016 show a loss of -$5,314,063.

The answer to that question is a variety of loans from vendors, owners and spouses of owners. There is even a footnote about a big loan from the Pharr, TX EDC that was later hoped to be turned into a grant. Vendors have apparently been paid in stock.  There is a much larger part of cash that has come from additional stock issues and the stock Uplist, presumably from the reverse split.

Conclusion.

My concern is not about CopSync. I hope they make it, but I personally don’t see how the financial arithmetic is going to work out. If their plan is to sell their base of customers to an outside firm, it would seem to me that income from the sale of equipment and services is going to have to double to break even.

If CopSync is hoping to land the big one – as their PR suggests – then two questions come to mind. Are they planning to price their incremental services to subsidize the current base of small guys? Also, there are absolutely tons of stories in the business world of companies that are doing well (making a profit) at a certain level that then collapse when they jump to a higher scale of business. Are they geared to make that happen? If it happens?

My concern is for the 530 (or whatever the number is) of agencies, mostly in Texas if CopSync can’t continue to get funding. If fact, I can’t imagine what group of knowledgeable stockholders would put $30+ million into a company that is losing money big time – and with losses that are growing.

I actually don’t understand how CopSync has withstood the eye of the SEC and even the NASDAQ? And even the securities’ analysts that supposedly rate CopSync. Are they independent? I read the transcript of a recent earnings conference call and the questions seemed like softballs considering a company that is losing so much money.

In any case, for any of my readers considering CopSync products, kick the tires on their products and services to be satisfied there is a good fit. But also ask about how they are going to turn around multi-million dollar losses year after year. LFM