Wednesday, January 26, 2011

State of the Union, Austerity, and Palm Bay

If you had tuned into President Barack Obama’s 2011 State of the Union, you may have some mixed feelings about the speech and setting. The “Reagan-esque” speech and the appearance of unity of both Republicans and Democrats sitting together were uplifting and hopeful.

But for some of us who understand the history of the rise and fall of nations are able to clearly see the stitches on the fastball. First there is the false claim of higher wages:

“Thanks to the tax cuts we passed, Americans' paychecks are a little bigger today.”

Laughable but not really funny; especially after many hard-working moms and dads have lost their jobs, or after months (and in some cases years) some are still looking for jobs. The most recent “average wage per job” numbers by the U.S. Department of Commerce’s Bureau of Economic Analysis does illustrate a $453.00 increase from 2008 to 2009. However, the same years show us a significant drop in “wage and salary employment” by 494,623 jobs. (See graphs below).

What this means is most low wage workers (i.e. the middle-class and poor) lost their jobs and the high wage workers (i.e. the upper-middle class and affluent) maintained employment. In some cases, some high wage workers lost their jobs while some of their responsibilities were piled on to low wage workers for a couple of bucks more in their paycheck (i.e. attrition and reorganization). These are some measures taken in corporate America to deal with declining business that makes overall wages seem stable (or increasing a little) but only at the cost of more jobs being lost.          

Nevertheless, tucked away within the good feelings and positive talk of the State of Union, I was able to find the most relevant excerpt of the speech that will help me determine the future of my City (as well as my Country). In case you missed it, here it is (I’ve emboldened certain words to emphasize its significance):

“Now, the final critical step in winning the future is to make sure we aren't buried under a mountain of debt… we have to confront the fact that our government spends more than it takes in. That is not sustainable. Every day, families sacrifice to live within their means. They deserve a government that does the same. So tonight, I am proposing that starting this year, we freeze annual domestic spending for the next five years… reduce the deficit by more than $400 billion over the next decade, and will bring discretionary spending to the lowest share of our economy since Dwight Eisenhower was President. This freeze will require painful cuts. Already, we've frozen the salaries of hardworking federal employees for the next two years. I've proposed cuts to things I care deeply about, like community action programs. The Secretary of Defense has also agreed to cut tens of billions of dollars in spending that he and his generals believe our military can do without.”

The words you should especially take note of are: “not sustainable” and “... frozen the salaries of... federal employees...” This is called “austerity” and Americans for the first time will experience this very soon.

It is unlike the “Great Depression” of the 1930’s, when Americans experienced a collapsed economy due to the stock market crashing as a result of margin calls; thus causing businesses to shut down due to a lack of investments and credit. Many Americans were not living in major cities and dependant on government for jobs, and many citizens were not receiving a pension, either. Most people were still living off the land, and they knew how to skin and gut a buck or at least catch a fish. However, FDR’s “New Deal” policies and World War II - assisted by President Woodrow Wilson’s Sixteenth Amendment and the Federal Reserve Act (of 1913) - brought about the growth of the federal government in ways that were unimaginable to most Americans. More federal government jobs and programs were created over the years. Soon, the State and local governments would follow suit at the pressure of its constituency who, after decades of seeing the feds hand out jobs with ease, thought they can mimic the unconstitutional beast from Washington. However, as I explained in my last blog and best said by Governor Chris Christie of New Jersey, “We are not the federal government; we can’t print money out of thin air.”

To better explain this in layman terms, imagine a couple and their baby boy. These parents make good money and have great credit. As the baby grows up to become a toddler, then a big boy, then a teenager, then a young man, the parents never weaned their child off of being dependant on them. They never taught the child how to be independent and self-sufficient; always providing everything the child ever wanted, which only progressed and became more expensive as the child grew older: it begins with toys, video games, eating out every night, the latest fashion outfits, tuition to the best ivy-league school in the State, the flashiest sports car, and even rent money for his decked-out bachelor pad. Then life happens, one of the parents is laid off from a high-paying job, and the once affluent life style enjoyed by this couple and their spoiled child comes to an abrupt end. They try to hide the situation and make it seem everything is fine. The bills keep coming in and they start paying off debt with debt, in the hopes that a miracle will happen with the prospect of a high-paying job, and everything will go back to normal. But reality sets in, and they break the news to their precious boy. Needless to say, their college educated dependent doesn’t understand what’s happening. He still expects the checks to come in, the car note as well as the rent to be paid. After all, he is entitled to it, right? Finally, the bank account is cleaned out, the credit cards maxed out, and the bank refuses to lend anymore money to the well-meaning parents. They only have enough income for the essentials like food and mortgage. Realizing their spending habits are unsustainable (there’s that word again); they are forced to readjust and stop paying for their son’s luxury. Unbeknownst to their young stud, living on cloud nine, he wakes up one day and find the sports car gone after being repossessed by the bank, then to make matters worst, he goes to his apartment one night after partying all evening and finds an eviction notice posted on his front door. The young man takes a bus back to his parents’ house with the few dollars he has in his pocket, and walks in to an almost empty home – since most of the furniture was sold in a garage sale – and for the first time in his life he hear words coming from his parents that seem foreign to him, “son,” Dad says with a cold look in his eyes, “if you want to stay in college, drive your own car, and live in your own place, then you’ll just have to work and make your own way.” A reality that always has been, but never experienced due to the false sense of security the lad was living.

Sadly, most of us having lived like the young man in the story above, will experience the same kind of austerity, as well. Simply put, when there isn’t anymore money… there just isn’t anymore money.

Merriam-Webster Dictionary Online defines “austerity” as “enforced or extreme economy.” Currently, several nations are imposing austerity measures in countries like Cuba and Ireland; firing hundreds of thousands of government workers and even telling them to create their own businesses, as well. Municipalities, here in the United States, are shutting down services and cutting pensions. U.S. legislators are considering passing laws to allow States go through bankruptcy. Whether it happens or not is irrelevant, what is relevant is that both the feds and the States are broke; and many local governments enjoying relatively low taxes, big government, and exorbitant pensions, with the caveat of federal and State handouts to meet budgets, will be shocked when they simply don’t come, at all.

Then… as I mentioned in my last blog, “The biggest test for our City Council Members is about to face them, and their decision can mean more money in our wallets or more money out of our wallets.”

Friday, January 21, 2011

Crunch Time for Palm Bay

The biggest test for our City Council Members is about to face them, and their decision can mean more money in our wallets or more money out of our wallets.

It’s no secret that our national economy is the worst it’s ever been since the great depression and with more real estate foreclosures on the horizon, oil set to rise well over $100 per barrel (with some analysts conservatively predicting almost $200 by the end of the year), and China’s tyrannical dictator Hu Jintao calling for the end of the Dollar and its replacement of the Chinese Yuan as the new world’s trading currency reserve, it’s only a matter of time until hyperinflation hits the store shelves and gasoline pumps.

Although our national woes are great and inevitable, there is a double-whammy when considering the local woes. First there are the massive pension problems in the State of Florida as well as “… cities paying close to 70 percent of their overall budget on pensions” in many of Florida’s crippling municipalities Many City Council Members are forced to come face-to-face with this reality, as our own Mayor John Mazziotti said, ". . . All employees, union and non-union, and all citizens, owners and renters, must understand that these are different and difficult times, that we are entering a period that will be known as the 'new normal,' and that we must be willing to restructure how we provide services, how we pay for those services and how we compensate our employees."

We are not alone, as many states are facing the same problems. But behind the declining government revenues, there lies another looming problem: The Municipal Bond Problem! Let’s face it, like Governor Chris Christie from New Jersey said, “We are not the federal government, we can not print money out of thin air.” With China and the rest of the world threatening to dump the dollar at the first chance they get, the U.S. Congress has suddenly become more fiscally conscience about spending and raising the debt ceiling in order to keep the dollar attractive in the international trading market. Of course, less money from Washington will soon leave us with only two alternatives here at our municipality: cut government spending or tax the people more.

As I mentioned in a previous article we are the second highest taxed municipality in all of Brevard County. We also have the second highest unemployment rate in the county, as well. Palm Bay is also depopulating. I have spoken with some Palm Bay residents either at the last garage sale I had, or neighbors of friends and families, who are moving either to the next town over from Palm Bay or a nearby county to avoid paying a few dollars in their millage rate. I mean what’s a few dollars, right? Well, a few dollars per one thousand dollars can mean a few hundred dollars more in your wallet every year (even a couple of thousand dollars more depending on the assessed value of your home). Nevertheless, in this economy, a few hundred dollars more a year can mean the difference between food on the table or a few hungry nights; just barely paying the mortgage or being behind on mortgage payments; having enough gas to drive to work or calling out of work because there is no money for transportation. Those of us dealing with this economic depression know what it means to have to cut our own spending habits. After all, we don’t have the police power of government to force others to pay us from the fruit of their labors. However, does our local government understand our plight? Will they raise taxes or lower taxes?

Let’s suppose our City Council Members unanimously vote to stay the millage rate or even decrease the millage rate, then that means they have one other alternative: to cut spending. This may sound easy. Some of you may already have some solutions off the top of your heads: 30% cut across the board, or cut this department spending or cut that department spending. I am sure many of us won’t miss a lot of government services if they were hardly functioning or not functioning, at all. A recent poll revealed that nearly 60% of all Americans wouldn’t mind if some essential government services were not provided for a few days out of the week or not provided, at all. But when you’re talking about cutting government spending, what exactly do you cut? What would you consider an essential government service? How much is enough for those services that “We The People” are willing to pay out of our wallets?

There is an interesting way of looking at this situation. Palm Bay has two investors: Tax-Paying Residents and Municipal Bond Investors. As previously stated, we can not print money out of thin air. So, that means, tax revenue and debt will be the only bread and butter of local governments such as ours. We’ve already establish that if we raise taxes (or even leave them where they’re at) we risk putting more pressure on hard-working families (i.e. our primary investors) and further suppressing the local real estate market. That leaves us with the secondary investors, and unlike our primary investors, those secondary investors are not obligated to pay into our local government system. All they have to do is take one good look at our financial statements for the past five years, and they will find two facts that can mean purchasing millions of dollars of municipal bonds or considering them worthless:

1.Palm Bay has been operating in the red for the past four years

2.Palm Bay’s special interest bonds have spiked significantly from approximately 5% of our total outstanding bonds in 2005, to almost 20% of our total outstanding bonds in 2009.

Now, from the municipal bond investor’s point of view, it would make more sense to invest in municipal bonds that pertain to essential services like utilities and public works. Most of these municipal bonds are solid and are looked at favorably by most institutional investors since infrastructure is essential to maintaining a viable City. Not so for pension-backed municipal bonds. If you knocked on the door of every occupied home in Palm Bay, I am pretty sure that 9 out of every 10 home owner will have no problem paying for those essential services, but will be appalled at paying more for pensions – especially during these tough economic times.

You see… the secondary investors know this about the primary investors. And when the federal hand-outs are finally exhausted and the pension fund is running dry, the only people left to buy the special interest bonds, which fund pensions, are tax-payers and municipal bond investors. This is where the rubber meets the road, and all eyes are on City Council.

Care to know what’s in store for municipal workers and municipalities in the United States, Palm Bay included? Take a good look at Greece, France, Great Britain, Tunisia or a little closer, here, at California. Government services will be forced to shut down for days or indefinitely, government programs face imminent shut downs, as well; pensions in jeopardy of being unfunded and retirees living on fixed income are looking at checks with less amounts or no checks in the mail, at all, for an indefinite period of time.

The financial plague bankrupting California is sure to come to the east. As well as the financial plague causing massive riots and government shut-downs over the "pond" will soon make its way on to our beautiful, sunny, beaches. And the real question we must ask of our elected public servants is, what are we doing to bring back solvency to our municipality without hurting our residents or our credit? Its crunch time, and all eyes and ears are on Palm Bay City Council.