Category: Economics

Texas Local Government Sales Taxes Are Flat

.Reading time 11 minutes.

One always has to remember that you can drown in a pond that only averages being 6-inches deep. I’ll get back to you on that one.

For the most part, local governments (cities, counties, transit authorities and special districts) take advantage of the maximum sales tax rate of 2-cents. That amounts to just over $8 billion each year. The state collects their 6.25%, so it is easy to see how significant this revenue source is in Texas. They also collect on auto and boat sales while the locals get none of that slice. Sales taxes are one of the major ways we keep from having an income tax in Texas. It is usually either the number one or number two largest revenue sources for the cities’ General Fund, often trading places with Property Taxes. Sales taxes are the Property Tax Rate Equivalent of about $0.35-$0.45.

When you look at sales tax data that is seasonal, while also being tied to the economic cycles (two different factors), it is hard to make sense of it unless you view the data on a Rolling 12-Month basis (R12). That way you are always looking at a year’s worth of data. As you can see in the chart below, the trend has always been to the upside except temporarily during recessions. Texas is not immune from hurting badly when the consumers (70% of the economy) decide to slow down their spending, willingly or unwillingly. There is also a significant amount of business-to-business (B2B) sales and use taxes that make up this important revenue base.

Interestingly, you can use this data to identify the exact month that it was clear to the chart reader that we were entering into the Dot Com recession as well as the Great Recession. We can also see the exact month we had a confirmed bottom. The depth and length of the recessions and the rate of the recoveries are also critical to understand. Part of the understanding of recessions is simple: they happen! Economic cycles are treated as an injury that demands all kinds of rescue efforts and major surgery. Hence the Federal Reserve as well as the Political Machinery jump into action and sometimes do dumb things to prevent a natural economic cycle from playing out as it should.

As a whole, the local governments in Texas have collected $8,040,691,221 in sales taxes for the 12 months ending May 2016. However, the amount collected for the 12 months ending May 2015 totals $7,966,819,038! That’s almost perfectly flat. In fact, we are in our 15th month (it really went flat in March 2015) of almost zero growth.

Even more revealing than the absolute dollars is the R12% growth rate, the red lines. This is a more sensitive indicator and announces a slowing and changing of a trend quicker than can be seen just looking at the blue dollar bars. There are several stories in the red lines. Since 1992, the average has been 6.14%. That is a very robust number that takes into consideration 1) population and business growth; 2) inflation; and 3) a “wealth/debt” factor. We are a relatively wealthy state, but we have also been as foolish as the rest of the nation with consumers spending more than we have via HELOC loans, credit cards and any other kind of money we could borrow.

As a rule, as the historical data proves it, any time the R12% growth rate has even approached 9-10%, a recoil soon follows. The recoils can be ugly and as deep as the preceding rises were steep. This makes sense in that the third factor listed above cannot be sustained for a long period of time without bursting. If the consumer lived with their means, there would not be as many booms and busts. Also, full-employment has the unwanted and unsustainable pay increase pressures that breakdown at some point.

So, where are we? The most recent R12% peak was at 8.02% in March 2015. If you are studying the chart below carefully, you should be asking about the previous recent spike that declined to the average and then rose again before the current roller-coaster dip started. The answer is that we were recovering from the Great Recession just fine, peaked and then were pulling back when something happened. Gasoline prices plunged giving the consumer a few extra bucks to spend. Wal-Mart keeps metrics and can actually tell when tax laws change or some event gives or takes away $20 per week of people’s spending money.

But in Texas, cheap oil and gasoline is a double-edged sword. Hence, the downward pressure of the economy overwhelmed the state. An extra $20 per week for the majority can’t offset $30,000 to $100,000 jobs being lost by the thousands. The interconnectedness of our state started showing up in a big way 15 months ago.

The R12% growth rate peaked and has declined in 14 of the 15 past months. That statistic dropped to a brutal low of +0.93% in May 2016. It is possible that it could stay near-flat for months, but there would be every reason to believe we could go negative in the R12 and the R12% as early as next month.Yes, it is possible the sales tax levels could rise again. But I’ll let you make the call.

Today there were several stories in the news about some of the major bellwether retail companies suffering big declines. The job market has been softening for several months at both the national and state level. Fitch came out today with a report that housing prices in the North Texas were 15-20% too high. My goodness, we have learned absolutely zero from the causes of the Great Recession!

So if this is statewide information, how are individual regions, sub-regions and cities doing? Well, that’s why the 6-inch drowning comment was made in the introduction. While the state as a whole is grinding to a stop, some cities are getting killed. Mostly in the oil patches and where local economies heavily support the oil & gas industries.

See the TML Regional Map following the chart. Most of the regions have been falling steeply for months and have been negative for at least a few months. As of May 2016, these are the following R12% results:

TML Region 02: -2.10%. (Amarillo area)
TML Region 03: +0.65%. (Lubbock area)
TML Region 04:-5.90%. (Midland-Odessa area)
TML Region 05: -1.58%. (Wichita Falls area)
TML Region 06: +3.88%. (Abilene area)
TML Region 07: +0.40%. (San Antonio area)
TML Region 08: +12.28%. (Fort Worth area)
TML Region 09: +4.53%. (Waco area)
TML Region 10: +7.24%. (Austin area)
TML Region 11: -2.97%. (Corpus Christi area)
TML Region 12: +4.62%. (Rio Grande Valley area)
TML Region 13: +17.96%. (Dallas area)
TML Region 14: +18.29%. (Houston area)
TML Region 15: +8.13%. (Tyler-Longview area)
TML Region 16: -1.39%. (Beaumont area)

Yes, North Texas and a few other regions of the state don’t know what everybody is talking about regarding slow growth. There have been some huge corporate moves in motion that don’t stop until  done. And remember that these TML Regions are quite large. Region 14 is doing well, but Houst0n itself is down -2.71%.

Here is what I do every month, and I invite you to dive in and see for yourself. First, look at the state as a whole. Then look at the 15 Regions. Appreciate the economic diversity across the state. Then look at any of the 1,600+ individual entities.

You can train your eyes fairly quickly to just look at the shapes and directions. Then with the roll of the wheel on your mouse, you can spend just a few seconds on each chart to size up the magnitude and direction of sales taxes. A dozen people looking at 50 charts are highly likely to arrive at the same conclusion regarding the overall direction and health of this key metric.

Appreciate the fact that sales taxes are just about as early of a warning system as we could have. The sales tax checks we received last Friday are for the actual business activity through March 31, 2016. Imagine that. Buy an iPhone on March 31, and the sales tax is in the local government’s bank account about 40 days later. That is dang near real time.

The collection of charts can be found at this link. It is a large file that may take a few minutes to download. I can download on my iphone and iPad, but it is best downloaded to your laptop or desktop. For those of us who like real data in addition to charts, a recap of the last 25 months can be found at this location.

Let me know if you have any questions. LFM

ScreenHunter_03 May. 12 16.40

TMLREGIONSmap

You can go to http://www.tml.org/regions to see the exact counties in each Region.

Will The Real Population Numbers Please Stand Up!

.Reading time 8 minutes.

Dear Santa:

All I want for Christmas is a good clean set of official population estimates by year. From one official source. I know. I said by year, but it’s not that easy. Population numbers “by year” come in at least four flavors. As of April for Census purposes. As of July for intra-census years. By fiscal year that usually begins in October. And let’s not forgot the good old calendar year! Oh my. I just don’t care. Just make all of the “years” be consistent, please.

Is there a way, Santa, for it to be against the law for any agency to put out population estimates except for the one designated and blessed by you, and only you, to be the official estimator? Also, is there any way that you could require that central agency to let the city officials see the estimates first. Or better yet, have the city submit their estimates and the basis for their estimates to the official high order of population estimators that report only to you? If there is a difference, one party or the other has to agree to one number. If you have to be called in to be the sole arbiter, then so be it.

If the numbers that become the official estimate are averages, please do me a favor. Don’t footnote that it was averaged or that the median was used. I don’t want to know. The official number must be the official number. Yes, it must take into consideration that there is a vacancy rate assumed. Until satellite imagery tools are available to compute an exact vacancy rate, then make one up. But don’t footnote what it is. If it’s from your anointed pop estimating laboratory, then keep it secret. I don’t want to know. It won’t matter, because there can be only one number.

One last favor, Santa, would you please check over my compilation of all Texas cities since 1990 that can be found at this safe and secure Adobe site? I worked very hard to combine all of these files.

I have some other questions, but I don’t want to distract you until you have time:

  • Why was Uncertain, TX uncertain about the name they wanted to give themselves? That one is really bugging me.
  • Also, once a city has a name, is there any way you could make it illegal for another city to put North, East, South or West in front of it and them claim it as their own? That’s just not right and makes it so confusing. Make everybody be original.
  • I believe in the punishment fitting the crime, Santa, so would you permit a public flogging of the person who allowed a city to have the same name as another city in another part of the state? That’s just wrong! Putting the county name in parenthesis is not a fix. I want my pound of flesh on that goof.
  • Does the Town of DISH regret they changed their name for free TV service? Is that like a tattoo that you just have to live with for the rest of your life? Did they think that one through and realize it had to be all caps? Do they yell DISH when someone asked them where they are from?
  • Why did Tool, TX let that happen? Was that a positive term at some time in the past or was there a Mr. Tool who decided to gather all of the little Tools and start a town? I’ll bet it never gets misspelled like Balmorhea.
  • Could Cut and Shoot not decide, so they used used both suggestions? I’ll have to look that one up in the Texas Almanac. Perhaps there was a tentative name until they had their first council meeting that didn’t go so well.

It looks like things are going fairly well in Texas, Santa. There were 26,956,958 of us as of July 2014. Adding about 400,000 to 450,000 a year is pretty impressive! I estimated the numbers for 2015 and 2016 using the most recent five-year average. I could get 2015 from another source, but then I would have to worry about reconciling numbers, and I’m flat worn out from putting together what I have now sent you.

Oh, I forgot to mention something else, Santa. I know you are expecting us to provide services to an additional near-half-mil people every year at no additional cost. Sorry Santa, that ain’t gonna happen. However, most are coming with jobs and equity from their California homes, so we will be okay. Just in case you belong to that Tea Party, Santa, I couldn’t resist.

I am about to release this compilation of population numbers to my blog and CityBase readers, Santa. I’ll let you know when I get a landslide of mail telling me the numbers I am showing for them are wrong. Some will use colorful Texas adjectives about how wrong they are.  That’s why I put the source on the bottom of my report. I hope they don’t go probing around the Web to learn there are only about a dozen “official” state and federal agency population numbers available. Most are not sufficiently generous to include much history. The more history, the greater the potential for arguments. We don’t talk to each other here in Texas, Santa. It’s not in our DNA. We’re flexible. We are also optimistic. Our population would be 100 million by now if it weren’t for those dang Census folks.

There are also several agencies that provide future estimates, way past 2050. The problem with some of those official sources, even those used to forecast water demand, is that they apparently don’t have logic checks built into them. Some state agencies estimate cities to have a certain population by 2050. The only problem is that a few of those cities were at those population levels 10 years ago. Others are projected to be way larger than they are now even though they are nearing build-out and are landlocked. Guess we will see some 100 story housing units in Texas someday.

Anything you can do to help is greatly appreciated, Santa.

Your Faithful Analyst,

Lewis

Is Your Capital Project Management Headed Toward a Forensic Audit?

.Reading time 36 minutes.

Capital Project Management

Do it right on the front end or suffer the forensic audit process on the back end
by Lewis F. McLain, Jr, Executive Director, GFOAT
Written July 2000; Tweaked April 2016

“EVERYTHING IS THE RESPONSIBILITY OF EACH ONE OF YOU UNLESS I SPECIFICALLY SAY IT IS NOT!”

It has been almost a quarter of a century since I heard those scathing words as David Leininger, Fiscal Services Director, had his finance director, internal auditor, purchasing agent and budget director (yours truly) sitting side-by-side on a long sofa in his office like school boys waiting to be called into the principal’s office to take our licks.

A $30 million sewer treatment plant project was in trouble. It was over schedule and over budget, but that was not the worse part. Change orders had been approved by a utilities director. Some had not been approved at all. Paperwork was not centralized. In fact, it was a mess. As the partial story was being told to us, we found ourselves pointing to someone else on the sofa or in the general direction of the engineering department downstairs or the utilities department across the street. Before we could get the flimsy words of excuse out of our mouths, we were blasted with the caustic words that are still scorched on my backside.

Since the project was 75% grant funded, an audit by the feds was about to occur and every one of the fiscal players in this large city of 100,000+ assumed someone else was in charge of the project and communicating the details to upper management and the council. I think that is when I first learned that “assume” means “making an ass out of you and me” when applied to big-ticket matters like capital projects.

Every file cabinet in the utilities department was confiscated and placed in an empty room in fiscal administration about the size of a double garage. Any other files or correspondence between a dozen players (EPA, the contractor, the city, etc.) held by anyone in the city was ordered to be brought to the room. A secretary then spent several weeks building a file system with information labeled, classified and put in chronological order. It then took several more weeks of review before our boss, David Leininger, figured out the story to the best of his ability, realizing there were a number of holes that still existed in the information. Some were never sufficiently answered.

Just about every problem that could be imagined had become part of the story of sloppiness in controls and absence of communication. Every player in every responsible department, in addition to the fiscal departments, failed to do their job. Even the most basic things were not covered. Copies of legal documents, signatures, briefings and authorizations were incomplete. All of the questions that had never been asked became obvious as they were being asked in the context of the aftermath of a train wreck that left a pile of administrative and fiscal rubble.

And the Beat Goes On

 What is even more amazing as I think back over this nightmare experience of 25 years ago is that I can read about at least a half-dozen similar stories making the headlines in today’s papers as I write this article. And it has been that way all these years. I addressed a city council the other night after they had heard a forensic audit report on a golf course project, one that paralleled my sewer story of long ago. It occurred to me that I actually know of very few cities that would lift up their capital project management control and fiscal reporting systems for peer scrutiny without some trepidation. Those cities with good capital project management systems, I said, are probably those cities that have experienced one or more project blunders of the magnitude this forensic auditor had just unveiled.

When did “Forensic” replace “Fraud?”

I’ve asked two forensic auditors just exactly when did the word “forensic” start being used as an adjective to describe an audit or auditor. Neither was certain. One jokingly said, “It means we audit dead bodies.” I turned to the dictionary, which broadened and deepened my understanding of the word, “forensic.” Merriam-Webster says this adjective comes from the Latin forensis or public – where we get our word forum. Forensic is not a new word. It dates back to 1659 and means: belonging to, used in, or suitable to courts of judicature or to public discussion and debate. It relates to or deals with the application of scientific knowledge to legal problems <forensic medicine> <forensic science> <forensic pathologist> <forensic experts>. And now we add <forensic audit>.

So it does not mean fraud necessarily but is the piecing together and story-telling of just exactly what happened. It is somewhere between a mystery novel and the product of bond attorneys when you sell bonds: what they call a “transcript of proceedings” that has every legal and procedural document and detail from the authorization to sell the bonds to the signatures on all of the final disclosures and the delivery of the money into the proper accounts.

The product of an in-depth forensic audit is the documentation of the story of how budgeting and capital project management goes wrong. Even if there is no malfeasance found, it is the report card on the basics of the very business that public finance officials are called to participate in if not lead! It may support the probability of recovering money from someone who owes the city some of the money lost, wasted, or stolen.

The remainder of this article will be a review of the role finance officials should play in capital project management. It will cover some of the procedures and reports that should be the products of the finance officials. The term finance officials includes in some form, depending on the city size and organizational structure: the finance director, the capital project accountant or budget analyst, the purchasing agent and the internal auditor. There are several public works type players, of course, as well as the legal department that should be part of the Capital Project Management Team reporting to city management.

General Ledger and Project Management Accounting Incongruities

One of the first things a finance official learns is that capital project budgeting and accounting do not fit into the same accounting system and cycle as you might otherwise desire to mold it. Some things are similar. Both capital project funds and operating funds can include moneys from other sources such as grants or impact fees that supplement the primary source of revenues.

However, the primary source of funds for capital projects is usually long-term debt or bond funds. Bond funds are often authorized by the voters. There is usually a need to account for the “bonding authorization” from the receipt of the proceeds to the complete spending on the intended purpose. Impact Fees have to be accounted for by type (water, sewer, roadway) and even by geographic area in some cases. Capital projects do not fit well into the annualized segmentation of spending as the operating funds do.

Most capital projects span a period of two or more years. Many capital projects are phased for contract award and scheduling purposes. Almost all capital projects have major cost components, all of which need to have some level of budget and accounting control by component: Right-of-way acquisition, engineering and design, utility relocation, site preparation, construction and other key components that will be enumerated later.

So there needs to be separate funds established and the account coding structure that allows you to separate water projects from road projects. The projects themselves need to have the ability to provide a breakdown in the major project cost components. In addition, the projects may need to capture city labor and material costs as well as direct payments made to contractors and others.

Reports

There should be several reports:

Capital Budget Reports: The capital budgeting process itself should be compiled with sufficient detail to provide each member of the Capital Project Management Team, as well as city management office and city council, the ability to ask questions. The capital improvement budget should have an individual form for each project. The budget form should include as a minimum:

  • The title of the project and account number assignments.
  •  The name of project manager or city department and the name of key players such as architects, engineers and contractors.
  •  A description of the project and a small locator map to orient the reader as to the part of town the facility is to be built or the starting and ending point of roads or utility lines.
  •  A cost breakdown by key component:
    •  Administration/Debt Issuance.
    •  Land acquisition (including ROW, legal costs of condemnation and outright land purchases).
    •  Architectural/Engineering Fees.
    •  Utility relocation.
    •  Site Preparation and drainage improvements.
    •  Construction costs.
    •  Lighting.
    •  Landscaping/Irrigation.
    •  Equipment, furnishings, signage.
    •  Other.
  •  The source of funds.
    •  Current funds.
    •  Bond funds.
    •  Impact Fees.
    •  Grants.
    •  Other.
  •  The sources and uses of funds broken down by year for the next several years, usually at least five years.
  •  The general status of the project, including chronological and authorization information.
  •  Contract award dates.
  •  Expected completion dates.
  •  Reason and expected remedies for any delays or complications.
  •  Affirmation of any future bond issue needs.
  •  Affirmation that project is progressing as planned if that is the case.
  •  The capital improvement budget details should be summarized in front of the compiled document:
    • By project types (i.e. water, roadways).
    • By funding sources (i.e. bonds, grants).
    • By fiscal year.

Capital Project Accounting Reports. It is equally imperative that the city provide good monthly accounting reports to show the sources of funds and the spending of money:

  • At the project cost component level.
  • This detailed information should be summarized at the project level as well as the fund level.
  • There should also be a good comparative horizontal time and status segregation of information on the capital accounting reports.
  • The original bond authorization by the voters, if applicable.
  • The original budget approved by the council appropriating the funds to individual capital project funds.
  • The official revised budget that has been approved by the city council.
  • The projected budget that is going to be needed to finish the project, subject to council approval.
  • The expenditures for the monthly period.
  • The life-to-date expenditures.
  • The remaining budget authorization (the difference between the council approved revised budget and the life-to-date expenditures).
  • The remaining funds needed to be authorized to finish the project (the difference between the projected final budget and the council approved revised budget).
  • A reference column to notes and comments that can be located at the back of the accounting report.

So, What Are We To Do With The Reports?

The answer is to use them as the centerpieces of timely project review meetings and improved communication. The lack of good and timely capital project management reports is a universal weakness in cities across Texas. The larger shortcoming, however, is in something even more basic: communication. There is often minimal dialogue between the finance department and public works or parks department. The legal department is brought in only when there is a problem. The planning department is often not a player at all except in big-picture capital planning. Moreover, the busyness of the city management office hampers systematic reviews. Rather the involvement is in the form of injections into the capital project management process that are event driven, such as a roadway project that has suddenly become a hot topic with the council.

Wait a minute! We must pause to really look at this aspect of capital project management. The city has millions of dollars tied up in dozens or hundreds of projects. Each project has multiple steps, most with a medium to high degree of technical or political complexity. The duration of a project can be from months to years. In addition, the Capital Project Management Team is perhaps only an ad hoc gathering at best and a phantom committee at its worst. The financial players are off worrying over monitoring a few thousand dollars of travel accounts and office supplies while millions of dollars in capital projects are left unchecked. What’s wrong with this picture?

The answer is that everything is wrong, and it shows up in the forensic audit. In the golf course example mentioned earlier, the project manager was the city manager! The public works director wasn’t involved and neither was the parks director or a golf course manager. The finance director paid whatever the city manager sent him to pay without question. Nobody asked questions and nobody knew where the project stood financially. One of the saddest pieces of evidence I have ever seen was the handwritten notes of a city manager trying to figure out the basic arithmetic of determining how many dollars had been spent and how many were still available for change orders.

Statesmanship skills are not very helpful once a forensic auditor has held up the mirror to the fundamental process of control and reporting. As one of our senators said in another matter, “If you can put a pretty face on this deal, then you ought to be a mortician instead of a politician!”

Systematic and Timely Review of Project Status.

The finance official should be highly involved in capital project management. The involvement should extend well beyond just selling the bonds to fund projects and writing the checks to pay for the projects. Finance people can blend their natural levels of healthy skepticism with much of the same talents of logic acquired from their training and, most importantly, their innate drive to maintain the integrity of numbers to be good team players on the Capital Project Management Team. They can even lead the team in some cases!

The following is a list of suggestions and comments that can help the Capital Project Management Team be more effective:

  • The city manager needs to deputize the Capital Project Management Team with the responsibility to be accountable to each other and to be given the weight of team responsibility. In other words, “Everything is the responsibility of each one of you unless I specifically say it is not!” There is certainly a practical limit or differentiation between public works and the finance departments, but the point is to let everybody know that you are authorized and expected to ask questions of each other and to report to the city manager those items in need of his or her attention.
  • Capital project review meetings need to be held regularly. These should at least be quarterly in terms of a big-picture overview, monthly for specific project progress reports, and perhaps even weekly in the case of projects in trouble or when indications are that they are about to be in trouble.
  • Each project needs to be assigned to someone in the organization, and that person need to be in on meetings involving their projects.
  • Don’t be afraid to invite the city attorney into the process. Weigh the cost of problem preventive as opposed to the time and effort to rectify a project in trouble.
  • There needs to be an agenda for these meetings to include either a project-by-project review or a categorization:
  • Those in the planning stage.
    • Under design.
    • Right-of-way/Land acquisitions.
    • Utility relocation.
  • Those under construction.
  • Those in final stages of completion.
  • Those completed and ready for finalization.
  • Those projects in the planning stage need to be reviewed for completeness and accuracy in terms of timing and financial analysis. It is all too common for there to be a complete ball field built with the bleachers left out. Or a parking lot to be built without lights. Or landscaping and irrigation to be left out. The bad part is when cities have ignored or underestimated the cost of meeting their own landscaping ordinances. Ouch! The finance officer should be a part of reviewing bids and, in some cases, comparing to other cities’ recent experience. Why would you be surprised if library bids were 25% over expectations (or bond election authorization) if the bids you received are in line with two comparable libraries in the region that have been built or awarded in the last six months?
  • Projects in the design stage can provide the red flags of budget problems that will be fully revealed within a few months. If the city’s plans were to build a sewer line along a route that required hundreds of trees to be cut down, and now you realize that’s not going to happen due to environmental protests and city tree ordinance violations, what is going to happen to the project? Another longer route or a much more expensive process of tunneling under trees is likely to raise the ultimate budget significantly. You don’t need to wait for the design to be finished or surely not have to wait for the bids to come in to know that the original capital budget for a project is woefully deficient. You may not be solely responsible for asking every question, but you can contribute to the team appointed to ask those kinds of questions.
  • Many projects are put on hold while land acquisition and right-of-way issues are involved. Without trying to always be throwing cold water on capital project management, someone needs to be asking about the progress of those decisions that virtually stop a project dead in its tracks until resolved. It is not unusual for bond money to be provided for a construction project that doesn’t occur for up to three or more years after original expectations. This is often due to some fundamental initial step, such as right-of-way acquisition being impossible to accomplish within the original unrealistic time frame. Remember, a forensic audit is taking a problematic result and working the problem backwards. A golf course opening isn’t going to happen until there is grass, so when you miss the intended grass maturation season, it’s not too hard to figure out that some of the big operating costs are going to begin, but the projected revenue for the delayed period is zilch.
  • The construction phase is when the big bucks start going out the door and many of the problems start to surface. Bad designs or missed points or a lack of firm decisions or bad contractors translate into delays, change orders, confrontations, finger pointing and lawsuits. Our “low-bid” environment exacerbates the problem. I was once told that ship builders intentionally bid projects below their costs, knowing that the profit will be in the numerous change orders when the owners finally start thinking through amenities and structural changes that never got addressed in the planning stages. Everyone who has ever built a house from the blueprint stage to the move-in date without experiencing a hitch of some kind, often very costly, could meet in a phone booth! Why would we think that a multi-million dollar, multiyear project could be built from start to finish without an enormous amount of oversight and end up within schedule and within budget?
  • The completion stage is not usually easy and requires that everyone on the Capital Project Management Team double their efforts to reach closure without letting something fall through the cracks. Checklists are helpful here. Before you release retainage money that has been withheld, do you have all of the as-built plans? Are all of the performance bonds in place (actually a first step that should have been accomplished long ago)? Do you have operating manuals for building equipment? Has a complete punch-list been rectified? Has all of the clean-up work been accomplished? Is all signage in place? Has the City formally taken action by the council to accept the project?

Documentation and Authorizations

The forensic audit highlights what happens when there is inadequate documentation. A big part of the documentation is in the previously mentioned budget and accounting reports or items related to the preparation of the reports. But there should be a very clear paper trail among the public works, city secretary, city attorney and finance departments that includes:

  • The bond authorization documents, including the literature that was used to promote the bond election that contains any listing of the specific projects that are being promised or suggested to be build and their associated costs.
  • Bid documents that include a great deal of specificity about how the bid estimate was compiled, such as the square yards of concrete, number of light standards, acres of landscaping, area of irrigation coverage, number of manholes, length and size of pipe and depth of pipe to be buried – and all of the unit costs.
  • All contracts fully executed, many of which will include detail budget accounting information, such as an aggregation of the bid quantities just mentioned. Also, the contracts will include the number of allotted days, rain day allowances, penalties for contractor delays and other important information to turn to when something goes wrong.
  • Change orders, with all of the supporting information to explain the purpose.
  • Correspondence between architects, engineers, contractors and the city that include references to contract interpretation, notifications of problems or events that are occurring that are signals of a conflict carrying a potential negative fiscal impact. Each member of the Capital Project Management Team should be duty-bound to keep each other advised and to communicate clearly and timely to the city management office well before little problems turn into big project overruns.
  • It is very important to have proper signatures and council action taken on all matters of bid awards, contract change order authorizations and budget amendments. Further, there should be a trail of briefing memos and/or council minutes that reflect the council’s knowledge and understanding of events as well as directives for staff actions.

Closing Thoughts.

Almost every capital project that turns into a “train wreck” can be shown to be an avoidable situation. The forensic audits are teaching lessons on how simple it sounds when the breakdowns are often tied to issues that should never happen. Here are a few thoughts.

  • You must have public works, finance (budget, accounting, purchasing), risk management, legal and other personnel associated with capital projects in the city who are willing to communicate with one another. They don’t have to be the best of friends, but there should be some healthy respect for what the others can contribute and what they all need individually and collectively to keep themselves and the city out of trouble. It is my estimation that communication does not exist in many cases, leading to symptoms and results that are not much different than those found in a dysfunctional family. If there is a potential team player that, in fact, shows an unwillingness to communicate, cooperate and participate, then I suggest there may need to be some staff changes in the city.
  • There needs to be sufficient staffing. In addition to being a team player, there should be a great emphasis placed on sufficient staffing. Why would we initiate a $10 million or $50 million capital improvement plan and not think there is going to be some added management and accounting requirements and costs involved? This issue particularly grieves me when a forensic audit eliminates malfeasance as a factor and then points to a seemingly noble excuse: a desire to save the city money by having the work done by a fatigued staff that is already too thin to manage all but the normal day-to-day fiscal operations, not to mention a sizable capital program! Why would a city manager be acting in the role of a project manager for a golf course that ended up with almost a $3 million overrun or 50% greater than the original estimates?
  • There needs to be good project accounting software in place to assist with controls and reports. Capital project management and reporting cannot simply be integrated into many of the general ledger systems. A great deal can be done with some creative account numbering if there is the flexibility to custom design the reports produced from the accounting system. If that is not the case, the city may be well served to look at modules within their own software vendor packages that are geared toward the characteristics of capital project management.

Conclusion.

Capital project management involves controlling and accounting for huge amounts of public moneys. There should be several key players on the Capital Project Management Team, including the financial officers. In most cases, there should be a dedicated capital project accountant or budget analyst who is freed from operating budget details to focus on the capital project side of the house. That person needs to be in constant communication with public works personnel and others in the city handling some aspect of capital project management. There should be regular reports and meetings with early warning signs of project problems that reach the city management office and the city council in a timely manner.

The finance department can not only be a team player but may actually be able to provide some needed leadership, depending on the size of the city and the organization and communication skill level of other participants on the Capital Project Management Team. It is very clear that the finance officials cannot stick their heads in the sand by saying that capital project management is the responsibility of someone else in the organization. If that were the case, I would advise you to get written authorization freeing you from the fiduciary duties that are the underpinnings of basic financial management and control. I can’t imagine you getting that authorization nor can I imagine you wanting to work for an organization granting you that exemption. It certainly becomes the centerpiece of analysis when the forensic audit is conducted. The better advice is to be properly staffed and to insist that you be involved – perhaps even to take the lead in good capital project management.

Here is a test. The City Manager calls in key department heads, including finance, public works, parks and every department involved in a capital project of almost any size. The City Manager has only these questions:

  • What is the status for all of the projects we know we are having troubles with
  • What are the projects heading for trouble you haven’t told me about yet?
  • What are the projects headed for trouble even you don’t know about right now but should? LFM

 

 

Another Project for the McKinney Suckers

.Reading time 11 minutes.

This is the way it starts out. Unfortunately, the story sounds good:

Resort hotel coming to McKinney?

By Marthe Rennels
Community Impact
April 20, 2016

Craig Ranch could soon be home to a new resort hotel if David Craig’s plans come to pass.

Craig of Craig International and developer of Craig Ranch presented a plan to McKinney City Council during a work session April 18 that included plans for a 250-room resort hotel.

The proposed resort-hotel would include 15,000 square-feet of indoor meeting space and an additional 3,000 square-feet of available meeting space at the TPC clubhouse. Plans also include two ballrooms, two or three breakout rooms and one boardroom.

“We desperately need hospitality near the McKinney Corporate Center,” Craig said. “This is an opportunity to bring one of the essential developments and attractors to the corporate center in the form of a hotel that brings many of the amenities required by corporate America: meeting space, dining and overnight stays on campus.”

Craig said the occupants of the hotel would have access to the TPC Golf Course in Craig Ranch, an added bonus that he said would encourage weekend stays and help provide additional sales tax revenue in McKinney. On-site restaurants are included in preliminary plans, and the hotel’s future management firm, Aimbridge Hospitality, said it is open to amenity requests from the city and public.

According to the presentation, the estimated construction cost is roughly $68.75 million. Craig requested the city council allow the city manager’s office to speak with Aimbridge Hospitality in hopes of establishing some type of partnership with the city in terms of McKinney Community Development Corp. or McKinney Economic Development Corp. funds.

“I do think this is an opportunity for all concerned,” Mayor Pro Tem Travis Ussery said.

The timing is uncanny. There are two enormous projects in McKinney that have turned into a money pit. The first and most significant is Craig Ranch. The second is known as the Gateway Project. The Gateway Project has been a series of nightmares with lawsuits, project delays and investors jumping in and pulling out.

I have made a Open Records Request to try to obtain documents that would allow me pull together the total dollars the City of McKinney has spent on both. There has been cash, infrastructure improvements, impact fees and other fees waived and … well, that’s just it, I don’t know just how much more. That’s what I wanted to find out. You can ask for records, but the first thing you are told is that the law doesn’t require the City to answer questions. How interesting.

On April 1, 2016, I made a request for two things:

  1. “I would like to request records that would show the total costs incurred by the City for the Gateway Land and All Related Projects, irrespective the name of the project or payee.
  2. I would also like to request records that will show the total costs incurred by the City for any aspect of the Craig Ranch project, irrespective of the name of the project of payee.”

Anticipating a clarification letter I often get, I try to add some explanation to my request:

  1. “I am seeking to determine the entire financial investment the City of McKinney has made in the ‘Gateway Project’ as well as the ‘Craig Ranch Property’ irrespective of the names of the payees or conduits. For instance, if money was paid for a parcel of land but was wired through an attorney, then those items would be included in [the] ORRs.
  2. While I emphasize ‘total costs’ this is meant to convey all costs. However, I am requesting detail check payments, wires or any kind of transfers of money by fund: Capital Projects, Bond Funds, General Funds, Utility Funds, MEDC/MCDC funds.
  3. The definition of ‘total costs’ includes any direct or indirect payments, reimbursements, infrastructure expenditures, land purchase, and any waivers of building permits, impact fees or other waivers. It should also include any city in-kind payments or services other than administrative costs. For instance if the city paid for any surveying costs related to a land transaction, those are costs that should be included in my ORR.”

I guess I failed in trying to be explicit. I received a clarification letter anyway. I didn’t explain the term “All Related Projects” in my first request. Okay, mea culpa. These projects have boundaries. Money Pit 1 and Money Pit 2 have lines on maps encircling the projects. How much has the City put into those two Money Pits? I’ll try to rephrase and improve on my ORR later today.

The second clarification has to do with the specific documents I am asking for that reaches into development agreements, contracts and a litany of things. I am forewarned that these documents may be voluminous and entail significant staff time to locate and compile. Okay, I’ll work on that one today, also. I think know I am convinced that I want everything. I was told before I requested the information that the City won’t be very happy to dig into the amount of money that has been spent just on the Gateway land.

However, this brings me to a complaint I have made to both the Mayor and Interim City Manager as well as the City Council. Everything I am asking for is what THEY should be asking to see. Maybe not detailed documents. But as of April 22, 2016, do THEY even have a clue how many dollars have gone into these two projects since they pulled up to the City’s Money Pumps?

Why am I the one having to ask? THEY are telling me this information hasn’t been asked before! If so, you would just point me to the link on the City’s Web site where that information has been compiled and made public already. Oops! Apparently that’s not what they mean by transparency.

So, here’s the deal. I want to know, but THEY don’t apparently. So THEY are going to make me pay to get some of the most profound information that has ever come out of the City of McKinney! Information that would likely be a citizen’s first question to ask when David Craig came calling yet AGAIN!

Mayor Pro-Tem Ussery thinks this may be a good opportunity for “all concerned,” but I’m not so sure. And some others may be wanting to get a little better educated before making that bold statement. There is no doubt in the world that this is a good opportunity for David Craig.

Mr. Mayor and City Council, at one point in time, the City had invested zero on these two projects. How much has been invested as of April 22, 2016? You say you treat the City’s money like it was your own in an attempt to convey stewardship and fiduciary responsibility. Why aren’t the new council members asking for an independent forensic audit? Would someone go in an shake the members of the City’s audit committee and tell them to wake up. Oh wait, I think it is chaired by Mayor Pro-Tem Ussery.

Any project works as long as there are sufficient subsidies to build it and make a profit for the developer.

By the way, what is the capacity and the utilization rate of the Gateway Hotel? Where is the demand study for a resort hotel in Craig Ranch? What will the room rates have to be? Or do you plan to pump $millions into another project and just hope it works out? An investor using their own funds would never put money into something so large without an independent study showing there is a demand. Well, a smart investor.

Speaking of smart investors. According to the news media, the money behind Craig Ranch appears to be from the Van Tuyl Group, one of the largest auto dealerships in the country. Warren Buffett has now purchased the Van Tuyl Group. Ask Mr. Buffett what the Craig Ranch development is worth at this point and how much more money he is willing to invest in it.

The City of McKinney has put $millions into Craig Ranch. Don’t put another penny into this developer’s pocket. LFM

 

 

 

McKinney Numbers Not Published Until There Is A Problem

.Reading time 9 minutes.

Utility systems have fascinated me my entire career. Water, wastewater, stormwater drainage, electric, gas. Roadways are usually not referred to as a utility system, but they actually are part of utility family as I view it. All of them are expensive investments. Ginormous to use a word from my grandchildren’s vocabulary. A huge part of these assets are visible. However, the majority are not. They are underground. Even a roadway is thought to be visible, but it is the base material and conditions beneath the surface that is where the problems usually start.

The Water System.

There are two numbers I have been urging cities to place in the primary financial disclosure documents, mainly the Comprehensive Annual Financial Reports (CAFRs), for many years. The first is the Water Loss & Unaccounted For. This sounds like an awkward label and bad grammar. It is actually an officially recognized description by the American Water Works Association.

The “Loss” part is mainly referring to leaks in the water system. You can often pinpoint a leak with clarity. That is when the water is spewing 50 feet high from a breakage, and the news cameras are out for the photo-op. Or when water is leaking underground and creating rivulets that call your attention to a leak. Like a sprinkler system leaking, although usually larger. However, there are many leaks where the hole is on the bottom of the big water line creating a cavity that may not be detected until the street cracks open to reveal a huge cavern has been created over time and has swallowed a car.

The “Unaccounted For” includes many of the gallons of true lost water. But it is a bigger and more complicated issues. Water is brought into a city in huge transmission lines. The entry point is usually metered. However, the meter must be checked for accuracy and re-calibrated at times. McKinney receives about 25.3 million gallons every single day from the North Texas Municipal Water District to serve 51,636 connections. Those are published numbers available online.

Interestingly, the numbers not published are the ones most important to me – and they should be to you. The average per water customer use per day is 490 gpd. To put it in context, ten years ago that metric was 673 gpd. What can we make of it? Conservation? Inaccurate data? Actually, to be totally fair, we just start with that number, fill in the middle years and examine more closely to see the trends. There are many significant weather factors that can wreck those numbers. The water intake meters from NTMWD are read on the first of the month. The consumer meters are read on a cycle throughout the month, so one has to do a computation to get a good estimate of the water metered to the customer that matches the calendar month.

But the missing number is this: what is the Water Loss & Unaccounted For number?

It does not get published annually and for all to see. It is the most revealing number I can think of to grasp an understanding of the condition of the water distribution system. A newspaper account reports the City had a 28% loss in 2014. Are you kidding me? That would be about 2.5 billion gallons! That’s 12,500 elevated storage tanks the size on Virginia near Hardin!

Hold on. Let’s try to get a perspective. What was that WL&UF number over the last 10 years. Hmm! We don’t know. If it is calculated, it is not published in a report I can find online. It is generally believed that about the best that value can get for a city is about 7%. The paper reports 12% is the norm.

It depends on the age of the system, soil conditions and, of course, weather conditions. There can be unmetered water for street medians or even ballfields. In most cases, cities have either metered or have good estimating measures for those. Tell me the size of the meter and the water pressure, and I can tell you how many gallons per minute can go through the line. All I need is the hours the sprinklers have been on for the month.

There can be theft. However, I feel quite confident that this 2.5 billion gallons is not about theft. I do know that residential water meters tend to start under-reading when they get into the range of 7-10 years of age or about a million gallons. It would be nice to know the average age of the 51,636 connections. Let’s usage 12 years as an average to be generous. We would be fairly safe in expecting that about 4,300 meters per year are being replaced if we are keeping up with the necessary life-cycle plan. Is that happening?

In fact, what is the average age of 826 miles of water lines, 628 miles of sewer lines and 430 miles of storm drainage system? Most of those items last about 20-35 years, but do the math. Gee, “brand new” Stonebridge, at least the early sections of the 6,250 acres, is in that zone now. Infrastructure deterioration is an exponential curve, not a straight line.

Wastewater.

The key metric here is Inflow & Infiltration. (I&I). Inflow is when manhole covers have popped off from water just pouring into the sewer system. Infiltration is when roots and breaks underground are causing underground water to seep in. Together they make up millions of gallons (gee, I hope it is not billions of gallons!) that McKinney pays to treat that unnecessary part of rainwater. Same same factors discussed apply as with water except wastewater is not metered for all but the largest commercial customers as well as the city as a whole. It is an estimate based on the water usage. But even with estimates, it can be calculated with a fair degree of accuracy.

What we can guess is that the condition of the sewer system tends to be worse than the water system due to the content of the flow and the fact the flow is by gravity more than a forced flow under pressure. Roots don’t generally get into a pressurized water line and could get detected if they did. There are 51,636 checkers of the water quality as we turn on our faucets every day. Not so with the sewer system.

Conclusion.

I’m going to save roadways and other components of the infrastructure for future blogs.

I have a real problem with cities not showing these key statistics on a 10-year trend:

Water Loss & Unaccounted For.

Wastewater Inflow & Infiltration.

Average Age of Roadway Street Miles; Water and Sewer miles; and Water Meters.

In the name of transparency, I challenge the City of McKinney to publish these vital statistics in their next CAFR. Also, the CAFR will have 10-years of annual data. The Web site should show these calculations on a monthly basis as well as the linear feet of replacement or breakage repairs.

No business would operate a $Billion enterprise and not know these numbers and the trends. LFM

Is McKinney A Self-Sufficient Island?

.Reading time 11 minutes.

It seems to me that McKinney is just far enough north on US 75 and just far enough east on SRT to be in the right pathways, and a city that could have it all if patience existed. We are part of a vibrant region, but we really don’t want to be a participant unless it is all to our benefit. Collin County Commissioners Court does not set a very good example, either. It wasn’t always that way. It was way before the Tea Party took control. In one sense, we are in a self-defeating mode. There is some inertia going for us, for sure. But we are only getting bread crumbs.

There are many municipal services that are too big for every city to handle. Water and sewer is a municipal service, but the cost of infrastructure and availability of a source is such that most cities had to create or be part of regional services decades ago. Now there are a few major players making sure there are ample supplies. The North Texas Municipal Water District (NTMWD) serves from the McKinney and Frisco Area to the the Garland and Plano area and beyond. Dallas Water Utilities (DWU) takes care of most of the entire Dallas Area. The Upper Trinity Municipal Water District (UTMWD) serves from below Denton to down to Flower Mound and out to areas both east and west of I-35. The Trinity River Authority (DWU) and Fort Worth Water Utilities (FTWU) serve most of west side of I-35 from Grapevine to the mid-cities area through Fort Worth.

The key point I am trying to make here is that some things are too big for single cities. And the infrastructure is so vast and costly that no city could do it by themselves.

Transportation.

The big elephant in the room is transportation. Like with other other major infrastructure systems, especially those that know no municipal boundaries, even the state and federal government can’t easily deal with well over a 1,000 municipalities in Texas. The counties provide some essential services as an arm of the state, such as the judicial system, but even the 254 counties are often too many to be effective to communicate and coordinate the big-ticket items.

So, 50 years ago Texas created 24 planning agencies to do just that – plan, coordinate and communicate. We live in the first and arguably the best and most effective planning agency area, the North Central Texas Council of Government (NCTCOG). The headquarters are located a few hundred feet from the corner where the roller coaster Judge Roy Scream is at Six Flags in Arlington. The entire first floor of the main building (NCTCOG is in three buildings) is for public meeting rooms. Decisions on as much as $200 million in federal and state monies annually are made in those meeting rooms.

NCTCOG serves a massive area that covers 16 counties. From Wise, Denton, Collin and Hunt to the north, Erath, Hood, Somerval, Johnson, Ellis and Navarro to the south, Palo Pinto to the west and Kaufman to the east, it’s all NCTCOG. Denton, Collin, Tarrant and Dallas County are where most of the dollars and attention are spent.

You can bet that county judges are highly involved as well as mayors and council members from both the major cities and many of the smaller cities. NCTCOG has an Executive Board made up of 13 elected officials. But get this, the Transportation Board has over 40 members. Those members are charged with watching out for all 16 counties, but you can be sure that they are watching out for their own.

And They Watch Us.

I have not talked to a single person at NCTCOG recently about what I am about to say. These are my views.  But I have watched the Transportation meetings, both live and recorded, over many years. If you go to the Collin County Administration Building here in McKinney, you will note that it is named after a long time regional player named Jack Hatchell.

Mr. Hatchell was a team player, a former councilmember at Plano. He also was a traffic professional. Literally. When I went to his funeral, the large church was filled with people and overflowing with praise for his vision, his leadership and his appreciation for the fabric of a region and how critical it is woven together. Mr. Hatchell was actually the president of the Executive Board at one time in addition to leading the Transportation Planning Council.

An observer watching our current County Judge would hardly find that kind of regional spirit. While he is protective of Collin County, which is nice, it is hard to see where he is interested in the region. He is tolerated, but he is not a player. He is viewed as arrogant and smug. Perhaps his Tea-Bagger constituency, of which he is a leader, is part of the reason. Here is the deal. The Transportation Staff and the Transportation Board make major decisions on how funds are allocated throughout the entire region.

So, let’s see how I would view Collin County and the City of McKinney if I were on the Transportation Board and Staff. There is a transportation provider that serves McKinney. That board is governed by key elected officials from both Collin County and McKinney. The local agency is providing services at a level that exceeds its income. What do the Collin County and McKinney elected officials on the local board as well as the McKinney City Council do? They bail! They are the captains of the ship that jump into lifeboat first while everybody left in the ship sinks.

NCTCOG comes into the picture and tries to help. They offer some temporary relief and a solution that would cost McKinney a little money every month while everything can be sorted out. The money was mainly to help provide a modest level of service for the handicapped and elderly. What does Collin County and the City of McKinney do? It involves communicating using the middle finger.

I believe DART may have offered some help, too. Again, middle finger.

Consequences.

Here’s the rub. Tea-Baggers don’t care about consequences. They just love the word NO, and the image of their leaders being tough on guv-ment.

I am fairly certain of one thing. The ultimate middle finger will come from the Transportation Board to Collin County and McKinney. Most of us don’t have a clue, but the Collin County and McKinney representatives know full well that there are $millions in discretionary funds controlled by the Transportation Board and Staff. It is very, very easy to help out with a $million here and a $million there since just about everybody has more project needs than they can afford locally. It is just as easy to say, nope, not gonna happen.

It will probably be impossible to document or trace, but I feel very confident in saying that the refusal for help offered by NCTCOG and the relatively few dollars McKinney was unwilling to come up with, pocket change in the bigger picture, is going to cost McKinney $millions. Thanks, Tea-Baggers, that’s being tough. And foolish.

Another Example.

If you really look at the way things have worked in McKinney and continue to unfold, it is easy to predict that we are going to be a community of nice homes first with a modest amount of non-residential property. Quite frankly, I am okay with that. But we aren’t thinking like a commuter community. We have no visionaries who will face the facts. We’ve got a lot, but we don’t have the patience to wait for the best. Developers don’t make money today by waiting until tomorrow.

We have $250 million we have spent without much to show for that amount of money. I am fairly sure that kind of money could have built a commuter line from the DART Parker Station to Bloomdale Road by now. Or our own bus system that would serve all of our internal needs plus just have a Park & Ride from McKinney to Downtown Dallas and to DFW Airport.

Yeah, yeah, I know those are restricted funds authorized by the voters. However, did you know that HB 157 now allows the voters to use the full 2-cents for any purpose the Council deems a priority?

We are 50% built out with all the growth north going to produce traffic going south to SRT or 75.

We should not just be a regional player, but the most impressive regional leader. We are not an island. LFM

Maslow & Municipal Services

.Reading time 9 minutes.

I was fascinated with Abraham Maslow’s Hierarchy of Needs back in college. I won’t use this space to try to fully explain his theory, but I strongly encourage you to explore on your own. It didn’t occur to me then how I would later apply it later in my career and personal life. Before long I had no trouble applying the hierarchy to municipal services and even at other levels of government.

2000px-Maslow's_Hierarchy_of_Needs.svg

Physiological.

Most of us live in good cities measured in several different ways. We can best understand just how good we have life by taking away the first line of government, counties, schools and cities. We generally know we are going to have water brought to us and wastewater taken away from us before we can even build a house. And cleaned before and after. Just those two services allow us to move into a community, but it has to be continued to keep us there. Else we end up like Flint, Michigan. In case we were to get lax or just fussy about spending money for receiving and returning clean water, we have federal, state and local standards. And levels of necessary bureaucracy to enforce those standards.

Actually, it doesn’t matter what the cost is. If you are having to pump water from a lake 100 miles from you, and the lake was built in the recent decade rather than in the 1950s, then it is going to be very expensive. If the water is of a quality that requires above normal amounts of treatment (look up the word “brine” or “brackish), then it is going to cost more. If you move to a city that has charm promoted in the form of “beautiful hills” and terrain, don’t be surprised if your sewer bill is higher due to the dozens of lift stations as opposed to a city where wastewater gets to the treatment plant through gravity flow. Big difference.

My municipal career started right after the Clean Water Act of 1972 was created. The sewer bill was a flat $2.00 a month, as I recall. Up until then the usual phrase was “the solution to pollution is dilution,” but you had to say it with a heavy emphasis on “di” in dilution to sound Texan. Treatment plant were actually by-passed during heavy rains with massive amounts of rainwater inflow and infiltration from aging or shoddy lines going straight into the streams. So, yes, my friend Maslow was correct, there are basic physiological needs that have to be met before we can have a viable community.

Safety.

Let’s face it. If we have to live every day worrying about getting killed or someone stealing our property, we have no focus other than staying home with a gun in our hands. It is easy for jokes to come forth on this one, but this is not a Redneck issue for most of us. Yet it is always on our mind or at least we get frightening reminders when we hear of a home-invasion crime that has occurred close to us. As you get older, this concern increases. So, you are not going to have a good life or a good community if you don’t feel safe. And to know that if you need help, the response is only a few minutes away. But it does cost money. In fact, a response time of 30 minutes for a serious crime call instead of 5 minutes might save tax dollars. Which do you want?

And the same response time for a fire or rescue emergency is hardly a choice. Those minutes mean you either go to the hospital or to the morgue. I find it interesting that many of my peers want to retire and move way out into the country. At an age when they may need medical assistance the most. Not me. I want to live in a safe community with doctors and hospitals close and emergency workers who can get me to the care centers quickly. The bottom line is that fire and police workers are expensive and are always going to get priority in budgets. Besides, do the math. There are 8,760 hours in a year. For every worker you need 24×7, it takes 4.2 people to cover – and that is if they didn’t take a single day of vacation, holiday or sick leave. The real number is well over 5 people for every one employee needed for full coverage. Then add the logical team/squad requirement since you don’t send a firetruck with just one person on it.

The Others.

Each of the top three are as important as the first two in my mind if we want to live in communities and enjoy the benefits while also increasing our own personal growth. Linda and I don’t need a huge stadium full of friends, and prefer being homebodies to a full calendar of social events we lived as younger people. But we do need friends. We are more “waving” neighbors than social butterflies, but we like having good neighbors. We like to live where medians are well groomed with a sprinkling of color beds. It is nice to have city (and HOA) people who will enforce codes that keep weeds from becoming a problem. We are grateful for animal control who comes when we call about those obnoxious dogs behind us. We like a community full of churches.

We love going to the nicely groomed, well-lighted sports fields and recreation centers where we live and go watch our grandkids play. I cannot express the joy we feel being around young families and their kids. We get energy from their youthfulness. Our favorite thing to do is to see live entertainment – plays, musicals, dramatic readings, idea forums (like TedTalk) I mentioned recently. We get the benefit of enjoying not just McKinney but also the surrounding cities, Frisco, Fairview, Allen, Plano. We probably go to venues in Dallas every week or two. Our jaunts to Fort Worth and several cities in between have introduced us to some great venues.

I have attended college courses at the local community college and gone to enlightening, though provoking events held for vocational and personal growth. The first thing we did when we moved to McKinney is get our water turned on. The second thing we did is get library cards. The most wonderful sight when we go to the library is seeing a mom walking in or out with three kids, each holding books. That’s community!

Conclusion.

The most vibrant communities nourish the citizen and let them thrive to reach every level of Abraham Maslow’s Hierarchy of Need. Our children and grandchildren can flourish in these kinds of communities. Jobs are available here or nearby. Every need we have is met. We can partake as little or as much as we want. We can give, and we can take.

The real test is whether we can also be a good player in our larger region from which we can give and take? And that is my topic for tomorrow. LFM

McKinney Gateway Project Raises Questions Not Asked By News Media

.Reading time 12 minutes.

Shallow news media coverage is driving me crazy. And I’m also not very impressed with information one can find on the City of McKinney Web site. The real story. The Gateway Project has had a ton of public money poured into it. It is 90 acres that hugs the northeast quadrant of Hwy 75 and Sam Rayburn Tollway, the site you can’t see until you are almost past it due to the highway flyover. Let’s see what we can learn from the City under their Transparency link.

Gateway Update.

Lincoln Property Company, Inc. has notified the City of McKinney that it cannot proceed under the terms and conditions set forth in the Master Development Agreement entered into with the city. It has withdrawn from the agreement to serve as the master developer for the approximately 57 acres at the Gateway site surrounding the current anchor owners, such as Emerson Process Management.

Located at what many refer to as the “gateway” to McKinney, the Gateway site is one of the most visible development sites in McKinney located at the heavily-traveled interchange of the Sam Rayburn Tollway and U.S. 75. Collin College was the first occupant at Gateway, opening the Higher Education Center in January 2010. Emerson Process Management followed by moving the world headquarters of its Regulator Technologies business to the Gateway site in 2013. The Sheraton Hotel and Conference Center opened at Gateway in February 2015. These anchor properties occupy approximately 33 acres of the 90-acre site. The approximately 57 acres surrounding these anchor owner sites is intended to be a mixed-use development including restaurants and office space.

In concert with the McKinney Economic Development Corporation, which owns the land, the city determined the primary developer. Following an RFP and selection process, a master development agreement was signed with Lincoln Property Company, Inc. on May 14, 2015. According to the terms of the agreement, Lincoln had to acquire the first parcel by executing a purchase agreement by February 16, 2016 in order to continue as the master developer.

“We are disappointed that Lincoln has withdrawn from this important economic development project,” said Mayor Brian Loughmiller. “This is a development site that has been years in the making and we remain committed to bringing a robust master development for this highly visible and important Gateway site to our community. The city, MEDC and the MCDC will be exploring next steps for Gateway very soon.”

So Joe Sixpack, the citizen, relies on the newspaper to answer the most basic of journalistic questions: Why did Lincoln Properties pull out so quickly after they made a proposal to the City and entered into an agreement?

So far the Dallas Morning News has not reported on this story that I can find. The McKinney Courier Gazette ran a story yesterday. The story is 563 words long and is a blend of the mostly lifted City’s release of 314 words plus some filler from the same reporter’s story in 2014. It appears the reporter did ask the WHY question and settled for a quote from the Interim City Manager: any real details as to why Lincoln dropped the project “would be more speculation than anything” at this point.

So, Let’s Speculate.

I have complained to the City on more than one occasion that it bothers that I have to be the one asking questions and not their own staff or the Council itself. I extend my complaint to the news media. You have to be fairly bright to understand intricate issues. But more than that, you have to spend time to learn the players and relationships, understand important history and dig, dig, dig into documents and numbers.

I don’t think most reporters are lazy as much as it is they are stretched too thin. If you are covering multiple cities and ISDs, plus Collin County as a reporter, I can pretty much guess how superficial the reporting is going to be. And then with the average tenure of a reporter on assignment being just a few short years or less, you might as well forget it. Don’t they pass on their research files to the next reporter?

Here are a few questions I suggest somebody ask and answer:

Is there anything wrong with this Gateway location? I would think not except for the visual obstruction I mentioned. As you approach Gateway from any direction, I don’t recall a sign announcing it is ahead and how best to approach it.

Is there a demand for anything that would fit on the property? The 2014 news story mentions the competing developers making a claim that they had several letters of intent from potential users of the site. Of course, a big story missed yesterday when they mentioned the competitor is that Wallace Bajjalli Development Partners failed in Amarillo and other places and was linked to Ponzi schemes. Why would a reporter mentioned WB yesterday and miss the chance to tell local McKinney folks something new – and perhaps pat the city officials on the back for not going down that path?

But Lincoln Properties is a big firm with good credentials. Where was the market demand study they or the City provided to indicate there was a convincing attraction to this Gateway site? Collin College being there itself probably wouldn’t be singularly a draw, and Emerson Electric was already in another location of the City. “Build it and they will come” is a movie script, not harsh reality in most cases where something is going to be writing checks.

What are the rent rates necessary to make the numbers work? I am skeptical of the first thing out of a developer’s mouth being that they need this or that to make the numbers work, but I do understand arithmetic. You aren’t going to buy a piece of land and build something on it without knowing both the numerator and denominator. The numerator is going to be the full cost plus profit and the denominator is going to be square feet or some kind of unitized value. The result is a cost and rent rate per square foot. Is that why Lincoln backed out? Are construction costs rising that much or the demand for the products diminishing?

Speaking of the denominator, this is where all cities have gotten themselves in a trap offering incentives. What was being asked of the City regarding taking on some of the infrastructure costs (roadways, drainage, water, sewer)? And this is where you have to look beyond the site in question. What kinds of incentives are being offered in Frisco, Fairview, Allen and Plano? McKinney would do well just to get the crumbs from some of the robust adjacent cities.

What kinds of incentives were offered (or demanded) and paid to the huge commercial developer just down the tollway at Craig Ranch? In fact, I have a huge related question. If Lincoln is out and Craig Ranch or another developer, local or not, comes in to bid on the completion of the Gateway project, will the City offer them incentives that were not offered to Lincoln Properties?

Whoa, baby! If you think the McKinney Two-Step hasn’t been danced around here before, then you don’t understand the McKinney Underground. Do you think this is the first out of town developer who might have backed out or was otherwise urged out by the local movers and shakers?

Or is this just a quirk? I had heard a few weeks back that a Lincoln executive highly involved in the project had passed away suddenly. In that case, it may just be a situational deal where the project champion can’t be replaced with a person with a similar passion or availability. Or it may be a combination of all these things. Do we even know that McKinney is viewed as a 10-foot pole city, as in don’t touch them with one?

However, what are the lessons learned by the City up to this point?

And just exactly what has the City gotten in return for their investment in both Gateway and Craig Ranch?

Why is Plano and Allen so willing to sit on valuable frontage property until the demand gets right and McKinney is so unwilling to do the same? Why has McKinney had so much pressure to give back commercially zoned property to residential purposes? Why has the current council so loudly proclaimed “property rights” so that it makes it easy for a landowner do whatever they want? What’s next? An alligator farm or a petting zoo for Gateway? How about giant warehouse storage complex? Move over Crepe Myrtle Capital of Texas.

Or do we just wait patiently? McKinney’s time will come. McKinney is only half built-out. But then if we could somehow build out completely in the next 10 years, the question I would have is this: Why in the world would be want to do that? LFM

 

On Pensions & Promises

.Reading time 13 minutes.

Introduction.

Today is when I make a lot of people mad. My preference would be just the opposite. I treasure my municipal family. I am also a taxpayer, as are we all. But mostly I’m a realist – or at least I try to be. In the end, however, I simply respect arithmetic.

From 1973 to 1980, I was an employee of local government, almost five years in the City of Garland and two years at Dallas County. While in Garland, I was part of the Texas Municipal Retirement System (TMRS). The last thing on my mind at that time was retirement. We received a printout each year of our projected retirement pay under TMRS. All I remember is how large the numbers were. To be honest, I didn’t believe them.

It would be years before I would be fully aware of the story behind those numbers. The Governmental Accounting Standards Board (GASB) imposed on governments the obligation to disclosure unfunded liabilities. GASB was formed in that era due to the great embarrassment when the bankruptcy of New York City got largely blamed on the accounting profession.

In recent years here in Texas, Bob Scott, ACM/CFO of the City of Carrollton dug into what everybody considered to be the most conservative and most secure pension fund of them all, TMRS. Bob found a number of things that did not make sense. He inquired, then challenged and before long he was the voice of truth in the eyes of his peers, the finance directors in Texas. However, he stepped on some toes. His city manager, Leonard Martin, was getting some calls from his peer level and some HR directors wanting Bob to keep his mouth shut. If you know Leonard and Bob, you know full well that was not going to happen.

Before long the executive director of TMRS was gone. And so were the actuaries that had been advising for a half-century.

The Arithmetic.

The concept behind the complicated actuarial math is not too hard to understand. Contribute money into a pot that can be invested in things that earn money. And then subtract the payouts to retirees based on the health of the fund. Lastly, stay whole. By that I mean stay up with the current value of those payouts.

Each city in TMRS has their own plan, and plans vary widely. So, let’s tinker with the City of Fiscal Bliss, my imaginary city I’ve used since I taught MPA classes at SMU back in the 1970s. None of the cities started out this way, but let’s assume that the Contribution side was the employee only. The payout wouldn’t be too impressive but, hey, any annuity at a decent earnings rate rolls up into a nice sum of money given several years of dollars contributed.

Now, let’s add a contribution from the city. Let’s start with a 1:1 match, then 1.5:1 match and round out with a 2:1 match. Whoa! Look at that payout. Put the payout on steroids by assuming the future investment rate of return is 5%, 7%, 9%. Hey, it will NEVER be less than 5%, so why not build a minimum guaranteed earnings rate into the plan? Wait, we can do better than that by adding a feature that says the payout will be automatically adjusted for big portion of CPI. And the payout will be until you die. Or your spouse dies.

Lastly, let’s take the retirement age and conditions down. Instead of being eligible after 25 years of service, let’s make that 20 years. No, let’s make vesting at 15 years, then 10 years! Let’s do better than that. Let’s be a little more generous on how we count the years with credit given for other kinds of service.

Now, why would anybody agree to all of those pension features?

First, many of those increases in benefits were vouched for by actuaries in financial models nobody but they understood.

Second, in tough times when a city can’t give pay raises, there are efforts to give something else – something that doesn’t reveal its full impact for years later. Even things like giving all employees an extra day off seem like it doesn’t cost much. However, taking the City of Dallas as an example, one extra day off is the equivalent of the loss of productive for 52 full-time employees! In this case, some benefits were motivated by trying to substitute for other compensation that wouldn’t fly politically.

A third reason involves faulty assumptions. When you promise a 5% investment earnings minimum when a bank CD yields more than that level, it sounds good. But what if the best and safest investment instruments earn virtually zero like they have for several years now? You might be tempted to invest in riskier things that could yield 10-15%. But they could lose by that same magnitude. Maybe even 100%! Also, what happens when you start to slow in population and city employment growth while the number of retirees continues to grow?

Where Are The Risky Pension Funds?

There are 8 State Plans in Texas with an Unfunded Liability of $47.9 billion covering 2.13 million employees or about $22,488 per employee. TMRS is at $20,636 per employee and has a high funded ratio of 85.79%. Also, they have a very good (short) Amortization Period of 17.10 years. The state, county and teachers retirement systems are also relatively under control. These aren’t likely to collapse.

The story is quite different with the 85 Local Plans. You can regularly read negative news stories about the biggest ones in this group. The Unfunded Liability for the Dallas Police & Fire Pension Plan is $213,712 per member and is only 63.80% funded. The Amortization Period is … get this … Infinite. I’ll let you review the spreadsheet recap on your own.

Red Flag. Red Flag. Red Flag.

Out of the 85 Local Plans, there are 12 called Title 109 Plans. They were created under a different state legislation than the other 73 Local Plans. Why is this important to know? Yesterday, the State Attorney General revealed a request for a formal opinion from the Chair of the Texas House of Representatives Committee on Ways and Means.

March 8, 2016

Dear General Paxton,

I am writing to request your formal opinion on a question related to those municipal retirement systems of which some or all of their pension plans have been put into state statute.

As of 2015, Texas has thirteen local retirement systems specifically enabled by state statute, with their provisions located in Article 6243, Vernon’s Civil Statutes (also known as Title 109). Local retirement systems established in Title 109 have “their contribution rates, benefit levels and the composition of their board of trustees set in state statute,” according to the Texas Pension Review Board.

Rising pension and healthcare costs, unpredictable revenues, aging infrastructure, high debt load, and increasing costs for the delivery of city services threaten municipalities’ ability to balance budgets and maintain strong credit ratings. When these challenges put municipalities at risk for defaulting, does the oversight role played by title State Legislature in these specific municipal retirement systems cause the State to assume some or all of the liability? Should one of these specific municipal retirement systems fail to meet its obligation, is the State responsible for ensuring that agreed upon payments are made?

With respect to the size of these pension systems and their impact on city budgets, and the role played by the State Legislature in their creation and maintenance, it is imperative that the Legislature have a clear understanding of the consequences of decisions made in regards to these municipal retirement systems.

Thank you in advance for your consideration of this matter. Please contact me if you need any additional information regarding this request.

Best regards,
Representative Jim Murphy

I could only find 12 of the 12 plans or funds mentioned in the letter to the AG. They are:

Austin Employees’ Retirement System
Austin Fire Fighters Relief & Retirement Fund
Austin Police Retirement System
Dallas Police & Fire Pension System
El Paso Firemen’s Pension Fund
El Paso Police Pension Fund
Fort Worth Employees’ Retirement Fund
Galveston Employees’ Retirement Plan for Police
Houston Firefighters’ Relief & Retirement Fund
Houston Municipal Employees Pension System
Houston Police Officers Pension System
San Antonio Fire & Police Pension Fund

What does this sound like to you? Good luck with cities trying to tell the state these bad boys are their fault. Or maybe it is the state hearing about what is coming and wanting to go ahead and knock out this legal path before the next legislative session.

In Closing.

One of the things I thought I would never see and hear in my career is the decision for a state or local government to declare bankruptcy. Now it is happening all over the country. In my mind, the last state that could possibly declare bankruptcy or to break a promise on a pension is Texas. Now here is what blows me away. We’ve got this Texas Swagger ad nauseam about how robust things are at the same time we FINALLY have some signs like this letter that somebody is trying to figure out how to get out of their financial problems. The City of Dallas recently lost the cherished AAA bond rating. Why? The pension funds. The CFO has lost her job (moved over to another position) and she isn’t even directly responsible for the pension funds.

The reality is that promises were made based on faulty arithmetic. And when confronted with correct math, those in charge of solving the problem are beneficiaries of the numbers that don’t work.

Ah, but the can has been kicked down the road for decades and has finally hit a wall. LFM