Current Economics and PSERS

Just a quick note to say that I am sort of caught up in the historical nature of the past week. I'm trying to wrap my head around the implications of a bailout/no bailout vote for my personal, professional, and school board functions.

My personal feeling is that yesterday was panic and those that needed to make a point, did so. Whether you agree with the bailout or not, nobody can tell you that it is certain to work. Nobody can tell you that it won't work. The question on my mind is, how much do we have to give up. Not just financially, but as far as our way of life. As a nation we seem to be on the precipice of a new paradigm. One where we can't simply borrow our way to prosperity. Is the passing of a bailout our one last gasp before the eventual decline? What country out there will give us the $700 billion? Or will we just print it?

I don't pretend to be an expert on these things but I do follow it closely. For those econ nuts out there that want to see where we are and what will happen next, I urge you to read this speech by Ben Bernanke from 2002. The title is "Deflation: Making Sure "It" Doesn't Happen Here". Bernanke is considered by most to be the pre-eminent scholar on the causes and effects of the Great Depression. When he uses that term to describe our current times, I am certain he does not do so lightly. The Great Depression was the greatest deflationary era in United States history. His speech outlines what he would do to avoid a deflation, and then, if we were in a deflation, what he would do to get out of it. The crazy thing is, it's not just Bernanke using this term to describe our current economic state, it's both Presidential candidates as well. Let me also point you to one of the best articles I have read that deals with this crisis. Click here.

Bernanke lists about 8 actionable ideas in his speech. From my count, he has done six of them. The last two appear to be fixing treasury yields and intervening in currency markets. I think yesterday, he may have actually intervened in the currency markets by more than doubling the cash available to banks around the world.

Current events have me concerned on a lot of fronts. I run the finances for my household, decide how to spend money for my business, and decide how to spend money for the school district. What is happening out there will have profound effects on the decisions I make in all three capacities. Think about this for a second. In 2000-2003, we had a major stock market sell-off. The PA Public School Employee Retirement System is scheduled to come collect for those stock market losses in 2012 (check out the last slide in this presentation). Yes, this is a full TEN YEARS after the fund had bad returns. Since 2002, the Fund has put more and more money into private investments such as hedge funds and real estate partnerships. Great timing, eh? Given the current crisis and its implications for a large number of hedge funds, I cannot begin to fathom what kind of losses pension funds like this are taking this year. Please see this article in the New York Times regarding hedge fund shakeups. Keep in mind that hedge funds don't have to report performance the same way that stocks and mutual funds do. I went through every hedge fund/private investment company listed in the teachers pension and I found information on maybe TWO of them out of over 50 private equity partners. Check out the roster for yourself here.

PSERS had almost $63 billion in assets on June 30, 2008. That is DOWN from $67.2 billion in June 2007. According to their website, the Fund returned -2.82 percent for the fiscal year ending June 30, 2008. We have seen this movie before. It doesn't end well.

The recently passed State budget doesn't address any of these issues. Instead of slightly increasing school district and/or employee contribution rates to make up the funding shortfall from the last stock market decline, the budget LOWERED how much we must allocate to this fund. Now we are destined to have a massive increase in 2012 that will blow many school district budgets out of the water.

The current situation is fluid. As things change, I am sure my view will change. There are a lot of macro-level issues (national debt, deficit spending, tax rates, etc) happening as I type this that will wind their way down to the micro-level (household finances, school district budgets, etc.) in a very short period of time.

These are historical times- times that will be written about in the history books of my grandchildren.

Thanks for reading.

James

Pittsburgh Real Estate Update

I heard a story on NPR this morning and found the local news link here:

http://www.pittsburghlive.com/x/pittsburghtrib/news/s_590186.html

Following is an excerpt from the story:

There were 2,516 home sales last month, compared with 3,364 a year ago. The median sales price declined 4.9 percent, said RealStats, a South Side-based real estate information company. The report covers Allegheny, Beaver, Butler, Washington and Westmoreland counties.

It's not just California, Florida, Nevada, and Arizona any more. While we will most likely not be subjected to 25-50% house price declines as some of the other higher growth areas have been, deteriorating home prices are decreasing wealth. Deflation has no friends.

Let me point you back to an article I linked to on August 9th. I point out a number of issues with the overall economy and severely reduced tax receipts by government bodies. The Center on Budget and Policy Priorities released an update the information I quoted here. Here is a quote from the updated release:

New gaps have opened up in the budgets of at least 13 states just two months after they struggled to close the largest budget shortfalls seen since the recession of 2001. These 13 states make up a significant share of the 29 states that have already moved to cut spending, use reserves, or raise revenues in order to adopt a balanced budget for the current fiscal year, which started July 1 in most states. Now, their budgets have fallen out of balance yet again.

I don't want to beat on an already beaten drum when it comes to the economy. Clearly, this week alone we are seeing a lot of news with Congress trying to pass some kind of bailout/stimulus program to make sure banks can continue to lend money. But I do want people to understand the impact that is already starting to hit home to local governments. Counties from New York to California are reeling from the fallout of the crisis on Wall Street. Much like the home price declines, I expect that Pennsylvania will not be impacted as severely as other places, but make no mistake, the crisis will eventually hit Western Pennsylvanians. It will have an effect on tax receipts to all local governments at some point. It will have an impact on the ability of some local government agencies ability to borrow. While no one can predict the exact effect it will have on us locally, we do need to keep this in mind when thinking about future budgets.

Thanks for reading.

James

Vote on Construction Manager Tabled

The Board has tabled the vote for the Construction Manager until a later date. Final negotiations are still ongoing and the expectation is that final competitive contracts will be in front of the Board in a matter of days, not weeks.

I know it is frustrating for people. It's frustrating for the Board as well but it is in the best interest of everyone that the right decision be made here. It can only be made when all the information is on the table.

Thanks for reading.

James

Audit/Finance Committee Update

Last Thursday the Audit Finance Committee covered a few topics. There were as follows:

1) Funding of the Retiree Health Care Trust- The District needs to fund a Retiree Health Care account. With over $2 million in surplus funds from the past fiscal years, it makes sense to use some of those funds to fund this new account. After our discussion, it sounds like the Committee will recommend that the Board fund the new account with two-thirds of the total surplus. The rest of the surplus would be directed to the high school construction project.

2) Non-electoral debt- I had asked the Administration to prepare an estimate of the District's borrowing ability over the next few years. Our non-electoral debt limit is 2.25 times our three year average annual revenues. As we pay down our existing debt and increase revenue, this limit changes. For discussion purposes, I feel it safe to say that any project over $110 million would require voter approval via a referendum. That number is not exact because it will be calculated again once we are ready to move forward on the project and will undoubtedly change a number of times before all is said and done. The point that I tried to express to the Committee was that I wanted to make sure we did the bond float in ONE float, not in multiple floats. Otherwise, I fear that we might approve a project only later to have a referendum not pass after we have started down a certain path on the project. Let's get it out there, see if the voters approve it and move on. Along those same lines, I asked the Committee to consider NOT approving the exception to Act 1 next January unless we are certain to float the bonds for the high school project by that time. Mt Lebanon was part of a minority number of schools that decided to get the Act 1 exemption last year.

3) District Budget Priorities- The Committee discussed the need to start the budget process earlier this year than in years past. This will give us a head start in letting the Administration know where the Board as a whole stands on certain budgetary issues. With recent class size discussions in the District, I would expect that to be a major part of any type of early budget meetings

There was an additional meeting on Thursday night that I attended which dealt with class size issues at Washington Elementary. Four Board members, Superintendent Allison, and the Principal at Washington met with approximately 30 parents that were concerned about the District's priorities regarding class sizes. In particular, they were parents of students in classrooms that had 26 and 27 students respectively. The forum was set up like a Q&A and I think I learned quite a bit along with the parents in attendance. I am not certain if there is any short-term solution here but I do look forward to hearing about and reviewing any recommendations that come from the administration.

I'd also like to remind everyone that the Board will be holding a meeting tomorrow night at 7pm in the library to finalize the selection of the construction manager for the High School Project. This is a continuation of our last meeting that was recessed in order to get the final details of each proposal. I expect the meeting will be quite short.

Thanks for reading.

James

September 15th Meeting Update

We had our regular voting meeting last night. Here is a summary of what happened:

1) The vote on the Construction Manager for the High School Project was delayed to next Tuesday at 7pm. We are in negotiation with the final two candidates and expect to have those negotiations wrapped up late this week. After negotiations with each CM are complete, the Board will evaluate the two proposals and vote on awarding the contract on Tuesday. In fact, the meeting from last night was not adjourned, it was simply put into recess until Tuesday in anticipation of this decision.

2) A number of policy changes were adopted including one that will allow the Board to direct surplus budget funds into a special retired teachers healthcare fund. This fund had typically been part of the District's general budget but because of a change in law, we now have to carry this fund outside of our general fund budget. I posted earlier about the benefits of this decision here.

3) Class size at Washington again was talked about. There is a fourth grade class that has 27 students in a single classroom. This is the largest class size in the District this school year. There is a meeting currently set up for this Thursday to talk about ways to address the issue. After the meeting last night I told Mr. Allison to not be afraid to bring to the Board any proposal he thinks is necessary to help our students in that class. In this case, this particular group of kids have been in classrooms with an above average number of students in every grade so far.

That's all for now. I will post again once we hire the construction manager.

James

State Supreme Court weighing Wettick Decision

Last September, Judge Wettick ruled that the County Base Year assessment system was unconstitutional. You can see the PG article on that here.

The State Supreme Court took up the case last week. This decision has wide ranging implications for every school district in the State. If the Court decides to uphold the Wettick decision then it would likely force a reassessment in most, if not all, counties across the State. That forced reassessmet would have implications on the real estate taxes paid to each and every school district since we all rely heavily on local real estate taxes.

The PG article with the update can be found here.

I'll be keeping an eye on this case as it.

James

Area School District Construction Plans

There was a good article in the Almanac a few weeks back that summarized some of the construction projects that will going on in the Districts around Mt Lebanon. You can find the article here. The article also gives a curriculum highlight or two from each of the Districts.

Here is a summary:

Bethel Park- New high school in the works. Bethel Park is a little farther ahead in the process than Mt Lebanon.

Canon-McMillan- Currently doing construction for an elementary school

Mt. Lebanon- I hear we have something going on with the high school

South Fayette- Pushed back construction plans for a new school pending further information. The article on this decision can be found here.

Upper St Clair- Plans to renovate both middle schools as well as the high school stadium and bus garage are being vetted.

James