"History is the lie commonly agreed upon." --Voltaire
"What you do in this world is a matter of no consequence. The question is what can you make people believe you have done." --Arthur Conan Doyle, A Study in Scarlet
Every so often, I post about a topic that reaches far beyond the confines of Minooka CCSD 201 but nonetheless affects the district and the people that live in the district. The current federal government shutdown, the debt ceiling debate and the trajectory of federal debt are issues that affect all of us. No matter where a person stands on the issues, it is always a good idea to approach the issues without any myths or misconceptions about what has come before (i.e., the past).
Numerous leading political figures have been making statements about the untarnished credit history of the United States. The following is a sample:
"There is no magic wand that allows us to wish away the chaos that could
result if -- for the first time in our history -- we don't pay our
bills on time." --President Barack Obama
"No Congress in 224 years of American history has allowed our country to
default, and it’s my sincere hope that this Congress will not be the
first." --Secretary of the Treasury Jack Lew
"There is precedent for a government shutdown. There's no precedent for default." --Lloyd Blankfein, CEO of Goldman Sachs
The facts, however, seem to intrude upon this narrative of an untarnished U.S. credit history. The United States has defaulted on its obligations many times in its history (for a sampling of articles discussing previous defaults, see here, here, here, here, and here).
The list of U.S. defaults include the following:
1. 1814 - Under President James Madison, U.S. defaults on debt payments for a few months in the wake of the War of 1812.
2. 1862 - Under President Abraham Lincoln, U.S. defaults on "greenback" demand notes by refusing to redeem them in gold as promised.
3. 1933 - Under President Franklin Roosevelt, U.S. defaults on the "gold clause" in its debt contracts and pays in paper dollars rather than gold.
4. 1968 - Under President Lyndon Johnson, U.S. defaults on "silver certificates" by refusing to redeem them in silver as promised.
5. 1971 - Under President Richard Nixon, U.S. defaults on the Bretton Woods international currency arrangement and ceases to exchange dollars for gold.
6. 1979 - Under President Jimmy Carter, U.S. defaults on certain debt obligations due to back office "glitch" at Treasury.
So, let us debate the issues regarding the shutdown, debt ceiling and the trajectory of debt. But, let us do so without the myth of a default being unprecedented in U.S. history.
Showing posts with label debt. Show all posts
Showing posts with label debt. Show all posts
Wednesday, October 16, 2013
Monday, June 17, 2013
Get Ready for the Largest Municipal Bankruptcy in U.S. History
In his book The Sun Also Rises, Ernest Hemingway penned a classic exchange regarding bankruptcy. "How did you go bankrupt?," asked one character. "Two ways. Gradually, then suddenly." was the reply.
Well, the same can certainly be said of Detroit, Michigan. Detroit is getting ever closer to declaring bankruptcy (see here). If Detroit does declare bankruptcy, it would be the largest municipal bankruptcy in the history of the United States.
What does this have to do with Minooka CCSD 201? Well, most of us know that the State of Illinois has financial trouble of its own, including the worst underfunded pensions in the nation and pension contributions that are increasingly eating into current services. Well, if you follow the link above and read the article, you will notice that the Detroit emergency financial manager, Mr. Orr, is contemplating a plan where, among other things, retirees will receive less than 10% of their promised benefits under the current pension plan. I am quite sure that this is going to cause a great deal of financial hardship for those retirees. One lesson that we can learn from Detroit's example is that when a municipality (or perhaps a state, in the case of Illinois) gets into serious financial trouble (and by all accounts Illinois is already there), the "promises" that were made pursuant to a pension plan become negotiable.
Now a state is different in at least one important respect: under current law, states cannot file for bankruptcy protection. They can, however, renegotiate "promises," and you can be sure that they will. States after all go bankrupt (or become insolvent) just like any other entity . . . "[g]radually, then suddenly."
Well, the same can certainly be said of Detroit, Michigan. Detroit is getting ever closer to declaring bankruptcy (see here). If Detroit does declare bankruptcy, it would be the largest municipal bankruptcy in the history of the United States.
What does this have to do with Minooka CCSD 201? Well, most of us know that the State of Illinois has financial trouble of its own, including the worst underfunded pensions in the nation and pension contributions that are increasingly eating into current services. Well, if you follow the link above and read the article, you will notice that the Detroit emergency financial manager, Mr. Orr, is contemplating a plan where, among other things, retirees will receive less than 10% of their promised benefits under the current pension plan. I am quite sure that this is going to cause a great deal of financial hardship for those retirees. One lesson that we can learn from Detroit's example is that when a municipality (or perhaps a state, in the case of Illinois) gets into serious financial trouble (and by all accounts Illinois is already there), the "promises" that were made pursuant to a pension plan become negotiable.
Now a state is different in at least one important respect: under current law, states cannot file for bankruptcy protection. They can, however, renegotiate "promises," and you can be sure that they will. States after all go bankrupt (or become insolvent) just like any other entity . . . "[g]radually, then suddenly."
Thursday, March 21, 2013
Our Very Own Fiscal Cliff
I hope everyone in Minooka CCSD 201 is prepared for our very own "fiscal cliff." Yes, the school board and the superintendent have set up a situation in which the district is purposely spending more than its revenue. And when the district runs out, they are going to go to the taxpayers for more money. The school board and the superintendent are going to tell the taxpayers that unless the taxpayers give the district more money, educational programs and/or athletic programs will be hurt and it will be the taxpayers' fault if the district goes over the cliff.
In the meantime, the school board and the superintendent are going to act like they are doing something about the current operating deficit (which is in excess of $2 million per year). The latest deficit reduction plan, passed at last month's board meeting (see here), consists mainly of "smoke and mirrors." If you read to the end of the deficit reduction plan, you will see a projected savings of $768,000. Two-thirds of that number (the $500,000 "Health Insurance Fund" surplus), however, consists of savings that have already been realized and are already accounted for in the calculation of the current deficit.
You see, the "Health Insurance Fund" is part of the Education Fund. And even though there might be a surplus in the "Health Insurance Fund" (which is not a fund recognized by the state for school budgetary purposes), there is a deficit in the Education Fund as a whole. It is as if you decided not to spend the $100 in your left pocket (which you counted as a saving, which of course it was at the time) and later transferred that $100 to your right pocket (counting it again as a saving, which of course it is not). You see, it is not just politicians in Washington D.C. and Springfield that engage in "smoke and mirror" games. Local entities are just as adept at these type of shenanigans. So, the real number is closer to $268,000 (though even that contains more than a little wishful thinking).
As you can see, the latest deficit reduction plan at best represents a mere 10% of the current deficit. Within two or three years, the balance in the Education Fund will be depleted and it will start going "into the red." Rather than trying to significantly reduce or eliminate the deficit, the school board and superintendent are choosing to run the district right up to the cliff. Then when we are at the cliff, they will try to convince the taxpayers that the taxpayers will be responsible for going over the cliff unless the taxpayers give the district more money by passing a referendum to increase the tax rate.
In the meantime, the school board and the superintendent are going to act like they are doing something about the current operating deficit (which is in excess of $2 million per year). The latest deficit reduction plan, passed at last month's board meeting (see here), consists mainly of "smoke and mirrors." If you read to the end of the deficit reduction plan, you will see a projected savings of $768,000. Two-thirds of that number (the $500,000 "Health Insurance Fund" surplus), however, consists of savings that have already been realized and are already accounted for in the calculation of the current deficit.
You see, the "Health Insurance Fund" is part of the Education Fund. And even though there might be a surplus in the "Health Insurance Fund" (which is not a fund recognized by the state for school budgetary purposes), there is a deficit in the Education Fund as a whole. It is as if you decided not to spend the $100 in your left pocket (which you counted as a saving, which of course it was at the time) and later transferred that $100 to your right pocket (counting it again as a saving, which of course it is not). You see, it is not just politicians in Washington D.C. and Springfield that engage in "smoke and mirror" games. Local entities are just as adept at these type of shenanigans. So, the real number is closer to $268,000 (though even that contains more than a little wishful thinking).
As you can see, the latest deficit reduction plan at best represents a mere 10% of the current deficit. Within two or three years, the balance in the Education Fund will be depleted and it will start going "into the red." Rather than trying to significantly reduce or eliminate the deficit, the school board and superintendent are choosing to run the district right up to the cliff. Then when we are at the cliff, they will try to convince the taxpayers that the taxpayers will be responsible for going over the cliff unless the taxpayers give the district more money by passing a referendum to increase the tax rate.
Tuesday, March 12, 2013
Our Children's Future
A recent article in the New York Times about the plight of Detroit (click here) got me to thinking. I sure hope that our children take better care of their children's future than we have taken of our children's future. You might ask, "what does the plight of Detroit have to do with my children's future?" Well, the quote from John Boyle at the end of the article sums it up nicely: “Detroit is a microcosm of what’s going on in America, except America can still print money and borrow." Detroit is indeed a microcosm of what is going on in America. From coast to coast and from local government on up, we have made promises that were unsustainable. We should have known that they were unsustainable when they were made. After all, a little basic mathematics, including an understanding of exponential functions, is all that is necessary to know that continuous growth in public sector wages, pensions and taxes cannot be sustained. That was then, and this is now. Now it is time to pay the piper.
We have created a society which our children cannot afford. And, what is worse, we continue to make the same mistakes at every level of government.
We have created a society which our children cannot afford. And, what is worse, we continue to make the same mistakes at every level of government.
Friday, February 1, 2013
Is This The Future Of Illinois?
This blog is about Minooka CCSD 201, but sometimes I post about happenings in other places in order to illustrate a point. (Also, because the school district is affected by happenings on the state and federal level). This is one of those times. It seems that Harrisburg, Pennsylvania is sinking, not only financially but literally (see here). You see, they spent money unwisely and took on too much debt. As a result, the city is on the verge of bankruptcy and is having difficulty getting a loan. Over the years, they neglected the maintenance of basic infrastructure like sewer and water pipes. Now, sink holes are opening up all around the city due to the sandy soil and the leaking pipes. The city not only neglected this maintenance but now is having trouble even making its payroll. The State of Illinois, meanwhile, had its credit rating recently down graded (again) by one of the major rating agencies (see here), leaving Illinois with the worst credit rating of any state in the nation. As a result, Illinois recently shelved plans to issue $500 million in bonds for school and transportation projects (see here). Now, Illinois may eventually issue these bonds, but the state (and, therefore, ultimately the taxpayers) will end up paying more in interest on the bonds due to the state's poor credit rating. This is a classic debt-spiral, which I have written about previously (see here and here). Harrisburg is merely farther along down the spiral than Illinois.
So, what causes a debt-spiral and how does a state, city, school district (or nation, for that matter) avoid one (or, if it is already in one, how does it get out)? If you boil it down to its root cause, a debt-spiral is caused when an entity (state, city, school district, etc.) refuses to live within its means. Public sector entities are supported by taxes on the private sector (even money printing by a central bank like the Federal Reserve is ultimately a tax). However, there is only a certain level of taxation that the taxpayers (the private sector) are willing or able to support. It is sometimes difficult to determine what that level of taxation is for any given public sector entity since it depends on a multitude of factors. As is all too typical, once a public sector entity starts to bump up against that level of taxation and has trouble raising current revenue it enters the debt markets and floats bonds in increasing amounts to obtain current funds in exchange for future taxation. (Long term debt financing for necessary and prudent capital projects is one thing, but debt financing for current consumption is a clue that you have entered debt-spiral territory.) The interest payments on these bonds, of course, just make the current problems worse and the public entity finds itself going to the debt markets with increasing frequency just to pay for current services. (This is very much like a family that lives beyond its means and starts to use mortgage debt or a home equity loan to pay for day to day expenses.)
So, how does a public sector entity avoid a debt-spiral? The same way that an individual or a family avoids a debt-spiral: it lives within its means. For a public sector entity, that means that it must keep its expenses below (to be safe, well below) that level of taxation that the relevant taxpayers are willing or able to support. This is the crux of the matter since most people spending public money do not spend such money as if they were spending their own money. They tend to spend it much more freely. Once a public sector entity finds itself in a debt-spiral, how does it get out? There are really only two ways out: some form of debt restructuring (such as bankruptcy) or a bailout from a public sector entity higher up the food chain (also known as "kicking the problem upstairs"). In order to avoid going back into the debt-spiral again, the public sector entity must live within its means.
Calvin Coolidge (one of the most underrated Presidents of the United States) once stated the following: "I favor the policy of economy, not because I wish to save money, but because I wish to save people. The men and women of this country who toil are the ones who bear the cost of the Government. Every dollar that we carelessly waste means that their life will be so much the more meager. Every dollar that we prudently save means that their life will be so much the more abundant."
So, what causes a debt-spiral and how does a state, city, school district (or nation, for that matter) avoid one (or, if it is already in one, how does it get out)? If you boil it down to its root cause, a debt-spiral is caused when an entity (state, city, school district, etc.) refuses to live within its means. Public sector entities are supported by taxes on the private sector (even money printing by a central bank like the Federal Reserve is ultimately a tax). However, there is only a certain level of taxation that the taxpayers (the private sector) are willing or able to support. It is sometimes difficult to determine what that level of taxation is for any given public sector entity since it depends on a multitude of factors. As is all too typical, once a public sector entity starts to bump up against that level of taxation and has trouble raising current revenue it enters the debt markets and floats bonds in increasing amounts to obtain current funds in exchange for future taxation. (Long term debt financing for necessary and prudent capital projects is one thing, but debt financing for current consumption is a clue that you have entered debt-spiral territory.) The interest payments on these bonds, of course, just make the current problems worse and the public entity finds itself going to the debt markets with increasing frequency just to pay for current services. (This is very much like a family that lives beyond its means and starts to use mortgage debt or a home equity loan to pay for day to day expenses.)
So, how does a public sector entity avoid a debt-spiral? The same way that an individual or a family avoids a debt-spiral: it lives within its means. For a public sector entity, that means that it must keep its expenses below (to be safe, well below) that level of taxation that the relevant taxpayers are willing or able to support. This is the crux of the matter since most people spending public money do not spend such money as if they were spending their own money. They tend to spend it much more freely. Once a public sector entity finds itself in a debt-spiral, how does it get out? There are really only two ways out: some form of debt restructuring (such as bankruptcy) or a bailout from a public sector entity higher up the food chain (also known as "kicking the problem upstairs"). In order to avoid going back into the debt-spiral again, the public sector entity must live within its means.
Calvin Coolidge (one of the most underrated Presidents of the United States) once stated the following: "I favor the policy of economy, not because I wish to save money, but because I wish to save people. The men and women of this country who toil are the ones who bear the cost of the Government. Every dollar that we carelessly waste means that their life will be so much the more meager. Every dollar that we prudently save means that their life will be so much the more abundant."
Tuesday, December 11, 2012
Tax Rates Set to Rise With or Without Referendum
Sometime in the next few years, the taxpayers of Minooka CCSD 201 will be asked to raise their own property tax rates. Yes, it's coming. If you attend the Finance Committee meetings, you can already here talk of it. Oh sure, there will be talk of deficit reduction, but the real plan in the end will be to ask the taxpayers for more money (it seems like this is always the plan whether the government body be federal, state, or, in this case, local).
Well, regardless of the outcome of a possible future referendum, Minooka CCSD 201 tax rates are already set to rise. Why? Because of the current bonded indebtedness of the school district and the slow growth (and, in some recent years, decreases) in equalized assessed valuation (EAV). You see, when the school district issued the bonds to build the two new schools (Jones and Minooka Intermediate School), add on to Minooka Elementary School and renovate what is now the Minooka Primary Center, the district and its financial advisors projected that the EAV of property within the school district would increase at a rate of 8% per year for the next twenty years. As it turns out, this was a "pie in the sky" projection. Perhaps this was another instance of "normalcy bias" since the EAV had been growing at such a rate during the housing bubble. Perhaps this was done because it made the resulting bond and interest tax rate appear to remain stable throughout the payback period of the bonds. In either case, projecting such a growth rate to continue for that time period was, at best, wishful thinking.
Unfortunately, reality intervened, the housing bubble burst and the EAV did not continue to grow at the projected rates. In fact, in each of the last few years, the EAV has dropped. As a result, the bond and interest tax rate (only one component of the total tax rate of the school district) must increase in order to compensate. The school district's financial advisors recently issued a new chart of the Minooka CCSD 201 current bond and interest payments based on a revised projection of a 2% EAV growth rate. Even this may be optimistic, since the EAV is projected to drop again next year and may remain flat for a few years after that.
What this means is that, even assuming that the tax rates for the other funds remain the same, the district's total tax rate will increase each and every year for the foreseeable future. This increase will occur automatically since by law the district must levy sufficient funds in the bond and interest fund to pay the then current principal and interest payments on the bonds each year. Based on the projected bond and interest tax rates, the projected implied total tax rates (assuming tax rates for the other funds remain the same) are as follows:
Well, regardless of the outcome of a possible future referendum, Minooka CCSD 201 tax rates are already set to rise. Why? Because of the current bonded indebtedness of the school district and the slow growth (and, in some recent years, decreases) in equalized assessed valuation (EAV). You see, when the school district issued the bonds to build the two new schools (Jones and Minooka Intermediate School), add on to Minooka Elementary School and renovate what is now the Minooka Primary Center, the district and its financial advisors projected that the EAV of property within the school district would increase at a rate of 8% per year for the next twenty years. As it turns out, this was a "pie in the sky" projection. Perhaps this was another instance of "normalcy bias" since the EAV had been growing at such a rate during the housing bubble. Perhaps this was done because it made the resulting bond and interest tax rate appear to remain stable throughout the payback period of the bonds. In either case, projecting such a growth rate to continue for that time period was, at best, wishful thinking.
Unfortunately, reality intervened, the housing bubble burst and the EAV did not continue to grow at the projected rates. In fact, in each of the last few years, the EAV has dropped. As a result, the bond and interest tax rate (only one component of the total tax rate of the school district) must increase in order to compensate. The school district's financial advisors recently issued a new chart of the Minooka CCSD 201 current bond and interest payments based on a revised projection of a 2% EAV growth rate. Even this may be optimistic, since the EAV is projected to drop again next year and may remain flat for a few years after that.
What this means is that, even assuming that the tax rates for the other funds remain the same, the district's total tax rate will increase each and every year for the foreseeable future. This increase will occur automatically since by law the district must levy sufficient funds in the bond and interest fund to pay the then current principal and interest payments on the bonds each year. Based on the projected bond and interest tax rates, the projected implied total tax rates (assuming tax rates for the other funds remain the same) are as follows:
| Fiscal Year | B&I Tax Rate | Implied Total Tax Rate |
| 2013 | 0.5306% | 2.9630% |
| 2014 | 0.5686% | 3.0010% |
| 2015 | 0.5993% | 3.0317% |
| 2016 | 0.6366% | 3.0690% |
| 2017 | 0.6741% | 3.1065% |
| 2018 | 0.7152% | 3.1476% |
| 2019 | 0.7653% | 3.1977% |
| 2020 | 0.8094% | 3.2418% |
| 2021 | 0.8568% | 3.2892% |
| 2022 | 0.9074% | 3.3398% |
| 2023 | 0.9539% | 3.3863% |
| 2024 | 1.0061% | 3.4385% |
| 2025 | 1.0739% | 3.5063% |
| 2026 | 1.1340% | 3.5664% |
| 2027 | 1.2108% | 3.6432% |
| 2028 | 1.2927% | 3.7251% |
| 2029 | 1.0661% | 3.4985% |
Wednesday, December 5, 2012
Ouch! . . . Illinois Makes Forbes' List of "Death Spiral" States
Click here for a recent article which lists Illinois among eleven "death spiral" states. I must warn you, however, that the article is pretty harsh.
Monday, December 3, 2012
Next Minooka 201 Finance Committee Meeting
The next meeting of the Minooka CCSD 201 Finance Committee will be Wednesday, December 5, 2012. The Finance Committee meeting starts at
6:00 p.m. in
the board room (the old library) at the Minooka Primary Center located
at 305 Church Street in Minooka. Finance Committee meetings are open to
the public, so everyone is welcome to attend. The Finance Committee will
be discussing a
new deficit reduction plan to further address our operating deficit.
So, if you want your voice heard during the process, you may want to
attend the Finance Committee meeting. The agenda for the meeting is available here.
As an informational reminder, here is a link to the Minooka CCSD 201 budget for fiscal year 2012-2013, as well as a link to a previous post regarding the financial projections which were presented to the Finance Committee this past January. We now know that the EAV (the property value upon which property taxes are based) in the district fell by roughly 8% in 2011, whereas the projections had assumed that the EAV would be stable. Therefore, updated projections would reflect a bleaker local revenue picture than previously projected.
There are really only two courses of action open to the school district. The first course of action is to make the needed cuts in order to bring our spending into line with our realistic revenues under the current property tax rates. The sooner these cuts are made, the smaller the cuts will need to be since their effects would be compounded over time. If the district were going to opt for this course of action, what would be needed would be a complete top to bottom review of the district budget. Every dollar that is being spent would be questioned. Every opportunity to save money would be explored. The current deficit is approximately 5% of the total budget. Which means that for every dollar that the school district spends, it would have to find a way to save 5 cents. The second course of action is to refuse to make the needed cuts (or make largely symbolic cuts) and hope that the voters in the district will vote in favor of a referendum to raise their tax rates. Of course, if the voters vote down the referendum, then the school board and the school district will be faced with making drastic cuts quickly. If this is the situation that we find ourselves in a few years from now, it will not be the fault of the voters but rather the fault of the school board.
As an informational reminder, here is a link to the Minooka CCSD 201 budget for fiscal year 2012-2013, as well as a link to a previous post regarding the financial projections which were presented to the Finance Committee this past January. We now know that the EAV (the property value upon which property taxes are based) in the district fell by roughly 8% in 2011, whereas the projections had assumed that the EAV would be stable. Therefore, updated projections would reflect a bleaker local revenue picture than previously projected.
There are really only two courses of action open to the school district. The first course of action is to make the needed cuts in order to bring our spending into line with our realistic revenues under the current property tax rates. The sooner these cuts are made, the smaller the cuts will need to be since their effects would be compounded over time. If the district were going to opt for this course of action, what would be needed would be a complete top to bottom review of the district budget. Every dollar that is being spent would be questioned. Every opportunity to save money would be explored. The current deficit is approximately 5% of the total budget. Which means that for every dollar that the school district spends, it would have to find a way to save 5 cents. The second course of action is to refuse to make the needed cuts (or make largely symbolic cuts) and hope that the voters in the district will vote in favor of a referendum to raise their tax rates. Of course, if the voters vote down the referendum, then the school board and the school district will be faced with making drastic cuts quickly. If this is the situation that we find ourselves in a few years from now, it will not be the fault of the voters but rather the fault of the school board.
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