Terrific Post on the PSERS Crisis

A school board member in Northwestern Lehigh School District runs his own blog, Pride and Promise. I was going to do a lengthy post on the House Bill that is set to address the PSERS issue but this blog beat me to it. I don't think I could have done a better job explaining this myself.

Please check out Paul Fischer's post on the PSERS crisis here:

http://prideandpromise.com/2010/06/11/the-psers-crisis-kicking-the-can-further-down-the-road-with-hb-2497/

The idea here is that the HB actually kicks the can down the road again. It has the short term effect of slightly lowering employer contributions but in the long term it will cost taxpayers billions ($52 billion according to some)more than simply sticking with the bad plan we already have.

Thanks for reading.

James

Rising Government Debt is a Ponzi Scheme

The Economist magazine has a terrific article titled, "Repent at Leisure". It's important because it is the first mainstream article in The Economist that I have read which takes on the problem of increasing government debt in order to stimulate the economy. I wrote way back in January 2009 about the Aftermath of Financial Crises and was hopeful that this day would come. Here is a quick snippet:

The point of this is to say that the large majority of economists that are prominent today come from the Keynesian school of economic thought. When we hear people talk about a huge majority of advisers and academia folks agreeing on the best way to get us out of whatever malaise we are in, it is because most are believers in the Keynesian school of thought. Those that follow the Austrian school of economic thought were proven to be correct about a lot of the causes of the Depression. Those that are Keynesians believe that we can stimulate demand (and therefore employment and production) by embarking on massive government spending programs. While these programs may make us feel good in the near term because we can see that our government is trying to do something, the long-term consequences of such programs is astounding.

I am hopeful that the Austrian school of economic thought will start to make its way into the mainstream in 2009.

It took a little longer than I had hoped but it seems like the mainstream media is now starting to focus on the effect that deficits have on future production. That The Economist magazine has printed an article about the downfalls of Krugman/Keynesian fiscal stimulus and debt is no small deal.

Here is a piece of the article:

Rising government debt is a Ponzi scheme that requires an ever-growing population to assume the burden—unless some deus ex machina, such as a technological breakthrough, can boost growth. As Roland Nash, head of research at Renaissance Capital, an investment bank, puts it: “Can the West, with its regulated industry, uncompetitive labour and large government, afford its borrowing-funded living standards and increasingly expensive public sectors?”

The problem with debt, of course, is that it needs to be paid back.

The Wall Street Journal also just published this editorial titled, "The Keynesian Dead End". Here is an excerpt:

The larger lesson here is about policy. The original sin—and it was nearly global—was to revive the Keynesian economic model that had last cracked up in the 1970s, while forgetting the lessons of the long prosperity from 1982 through 2007. The Reagan and Clinton-Gingrich booms were fostered by a policy environment for most of that era of lower taxes, spending restraint and sound money. The spending restraint began to end in the late 1990s, sound money vanished earlier this decade, and now Democrats are promising a series of enormous tax increases.

One of my favorite economists is Ludvig Von Mises (1881-1973). Here is a pertinent quote from him:

There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.

Kudos to The Economist and WSJ for letting these articles fly.

Thanks for reading.

James

State Budget Update

After a long trip to China, its good to be back and have access to Blogspot. The government in China chooses to block access to a number of sites- hence the long break between my blog posts. Scribd and Blogspot being sites I use quite often, it was frustrating trying to keep up on things back home through other sites.

On to the post...

I received an email from the PSBA today with a rather bleak assessment of where we are with the Commonwealth's budget.

Full text of the email is below:

State Budget Update: Chances Growing Dim for Agreement by July 1

Going into this past weekend, optimism was high that a budget agreement could be reached by the June 30 deadline. However, following a weekend of meetings among the four legislative caucuses and Gov. Edward Rendell, it appears that an agreement will not be in place by the deadline. Instead, Senate Republicans will likely present a budget plan that $27.8 billion budget and take a floor vote on Tuesday or Wednesday of this week. Meanwhile, the other three legislative caucuses appear to have an informal agreement on a budget that is closer to $28 billion.

Meetings last week and through the weekend appeared to be productive in all sides moving closer towards agreement on an approximately $28 billion budget proposal. Budget negotiations on Sunday were expected to determine how much of an increase the agreed-upon budget would provide for basic education funding. However, issues such as a proposed Marcellus Shale extraction tax and continued funding for the Department of Community and Economic Development prevented an agreement from taking place.

Additionally, as part of the original conditional agreement, House and Senate Republicans agreed to consider a Marcellus Shale extraction tax by Oct. 1 if a budget is enacted by the June 30, 2010 deadline. Although the details of that tax have yet to be negotiated, PSBA has continued to work to secure a portion of an oil and gas severance tax to be dedicated to local school districts.

Another issue is what to do if federal legislation on Medicare payments is not passed. The failure of that measure would be mean an $850 million hole for the commonwealth's budget and would all but eliminate any increase in education funding and create additional layoffs both on the state and school district levels. Reportedly, the sides are discussing who gets to make the additional cuts and how they are agreed upon.

Caucus leaders and the governor are meeting this morning to see if the budget can be put back on track. Regardless of the results of those discussions, education funding is in dire trouble and legislators need to be reminded of its importance in the 2010-11 fiscal year. Please contact your members of the Senate and House of Representatives now to express to them the importance of basic education funding. Here are talking points you can use:

-- As a result of Pennsylvania's commitment and investment in basic education, students in the commonwealth have demonstrated academic gains. Nearly 75% of Pennsylvania students are testing on grade level in reading and math, an increase over the more than 50% who were performing on grade level in 2002.

-- It is vital to the future of Pennsylvania's students to maintain the state's commitment to the basic education funding formula, as established in Act 61 of 2008.

-- Almost all school district expenses continue to increase. Therefore, the difference between state funding and increased costs must be made up by increasing property taxes or slashing programs and services to students, neither of which are acceptable.

-- The PA School Funding Campaign, which includes PSBA as a member, recently released detailed information on the cuts being made by school districts statewide. The coalition reported that almost a quarter of districts have already approved cutbacks in teaching positions, transportation, technology, and extra-curricular activities. Funds for full-day kindergarten, special education services, foreign languages and alternative education programs also are being cut. Further cuts to state funding will only require deeper cuts on the local level. Click here for details on cuts being made by districts around the state.
Thank you for your continued advocacy efforts that will help to ensure Pennsylvania's commitment to adequate and equitable education funding for our school districts. Please call your legislators today!

Note two things. First, the PSBA points out that in order to close a budget gap there are only two alternatives. Slash programs or raise taxes. The PSBA thinks neither of these alternatives is good. Second, note that there is no promise that the Federal government will pass another stimulus for this budget year. This action (or non-action) would likely result in a further $850 million hit to the state budget. The PSBA believes that if another stimulus does not pass then the basic education subsidy provided by Pennsylvania to local school districts will not be able to grow. Is it sacrilege for me to tell the Feds to keep their money?

It is the season for belt tightening all across this country. State budgets are in shambles. Borrowing and spending money has done nothing but put our budgets further in a hole than anyone ever imagined. It's time to get real and cut costs so that government (local, state, and federal) budgets can all live within their means.

Thanks for reading.

James

Eyeing the 2012 Allegheny County Reassessments

One of the things that has many homeowners on edge here in Mt Lebanon and all around Allegheny County is the 2012 Reassessment. In an effort to have our residents better understand what this will mean to them, I decided to try to tackle the topic at the May 27th Audit Finance Committee Meeting.

Perhaps the most important take away from the analysis is to understand that just because your assessment increases, your taxes do not necessarily increase along with it. As you will see in the Powerpoint slides below (or available here), how the reassessment impacts you will be determined by how much your reassessment changes in relation to the Mt. Lebanon mean change.

Here is the presentation (click here if the presentation below does not show):



Basically, here are some highlights:

Slide 2- The Allegheny County real estate tax system is based on a 100% of assessed value model. Other counties determine market value and then base their assessed value on some ratio of the market value (Washington County does this). There is no inherent advantage or disadvantage to using any particular method. Personally I prefer the Allegheny County system since there is no calculating ratios to figure out what it is you owe. The thing that made Allegheny County out of compliance with the Pennsylvania Constitution was the "Base Year" Model. Tying market values to what your home would have been worth in 2002 meant that, as a home on one side of town appreciated in value and a similar home on another side of town depreciated in value, after ten years these homes would still have the same tax. That is a violation of the Commonwealth's Uniformity Clause and is what is forcing the 2012 reassessment.

Slide 3- There will be a parcel by parcel reassessment in 2012. The plan for reassessment uses County employees to perform the reassessment.

Slide 4- The Anti-Windfall provisions from Act 1 restrict school districts and municipalities from gaining any revenue due to reassessment over and above Act 1 limits. Act 1 limits have been very small the last few years due to very small CPI increases. As long as CPI stays in check, the maximum increase in revenue to the school district will be less than 3%. The school board will have an opportunity to determine whether they want to gain any additional revenue or not.

Slide 5 and 6- These slides try to mathematically show the impact on real estate taxes for fiction town. The important thing to realize here is that in the two slides you see that the revenue to the town is the SAME before and after the reassessment. This is because the millage rate is lowered to compensate for any increased assessments. The other point to take away is that homes that have their assessment increases more than the average for the community will have their taxes increase. Homes that have their assessment increased less than the community average will have their taxes decrease. And homes that have their assessed values increased the same as the community average will see no change in tax.

To further understand this point, let's look at a Mt. Lebanon home assessed at $120,000. This same home was purchased in 2009 for $180,000. If collectively assessments in Mt Lebanon increase by 50%, then in theory this home should have the same exact tax as before the reassessment. If instead the collective reassessed values of all properties in Mt Lebanon increase by less than 50%, then this home will have increased taxes due to reassessment.

The problem here is that nobody will know how much assessments will change until they actually happen. Suffice it to say that any home that has had significant upgrades to it that has not been reassessed recently will have an increase in taxes. Since the school district cannot see an increase in revenue due to reassessment (or a very small increase) this necessarily means that some other home will have their tax bill reduced.

In conclusion, the reassessment is an attempt to more fairly assess homes across Allegheny County. This will most definitely mean a change in the tax bill makeup of Mt Lebanon. There will be some homeowners that will be shocked to see their new tax bill and this shock will be from both those that have an increased tax bill and a decreased tax bill. The best way to determine the reassessment impact on your individual home is try to think about how your home value has changed versus the rest of the homes in Mt Lebanon since 2002.

The last page of the presentation has the sources I used for the meeting. They are listed below:
* http://www.youcontrolyourmoney.org/ (search for “real estate assessment process”)
* http://money.cnn.com/magazines/moneymag/bplive/2007/snapshots/PL4251704.html
* http://pubs.cas.psu.edu/FreePubs/pdfs/ua308.pdf
* http://www.alleghenycounty.us/munimap/profile.asp?muni=73
* http://www.klgates.com/newsstand/Detail.aspx?publication=5381
* http://www.post-gazette.com/pg/09339/1018698-455.stm
* http://www2.county.allegheny.pa.us/realestate/Search.aspx
* http://www.city-data.com/housing/houses-Mount-Lebanon-Pennsylvania.html

Please take a look at some of the links above. The PSU document is a great one and is where much of the information for my presentation came from.

Thanks for reading.

James

Budgets and Lancings

Lance: To Mt. Lebanon. Its school board approved a staggering 10.5 percent increase in taxes this week. That's to pay for a poorly executed high school renovation project and to cover teacher pensions. And, apparently, there's a little something in there for a new contract with teachers, now being negotiated. The school tax bill on a $200,000 home will soar to more than $5,300 a year. And that great sucking you're soon to hear won't be the straw at the bottom of an empty cold coffee.

This is at least the third lance Mt Lebanon has received due to the tax increase. We got lanced when we passed our preliminary budget, we got lanced when we passed the $113 spend limit on the high school, and now we get lanced after we pass the final budget.

I can't say I disagree with the lances. It's unfortunate that for years this Board has known the day would come when taxes would skyrocket up in order to pay for the high school. Since the first day I sat down on this Board, I asked how we were planning to pay for it. The answer became so clear on Monday night. We decided to increase taxes to pay for 100% of the cost of the first set of bonds for the project.

I have been convinced over the last few years that it wasn't so much the renovation to the high school that was the problem, instead it was the way in which the District was planning to increase taxes to pay for it. This belief has been verified by the fact that there is a petition circulating the community asking the Board to cap a project at $75 million. Almost 4000 signatures later, it is clear that a we have a large contingent of this community fed up with the taxes the school board is asking them to pay. Our residents understand that the high school needs something done to it. But as they realize Bethel Park barely increased taxes to pay for their high school (3.5% increase in millage from 09-10 to 10-11) and Penn Hills will actually LOWER taxes when they are done with their project, the frustration with how we have managed the tax impact of this project only grows.

Knocking on doors in 2007 in my run for the Board, I met with thousands of residents who at the time said they were taxed enough already. The thought of a 15-20% millage increase for a $120 million new school (the idea out at the time) incensed them. This was before we knew about the tax nightmare that would be PSERS. Upon getting on the Board in late 2007, I worked with a number of members of the community and Board to come up with an alternative plan to fund the high school. It was a plan that would have paid down some of our outstanding debt and put us in position to better afford a project of this exact same size and scope. It called for delaying construction while building up a stockpile of money to move forward with a sizable down payment for a project. The more money we saved to put towards the project, the less our residents would pay in interest on any loan, and the better off they would be in the long run. There were other aspects of this plan that included using the Commonwealth's GESP (Guaranteed Energy Savings Program) and initiating a Community wide fund-raising campaign to go after private dollars from residents and alumni. Unfortunately, this plan received only tepid support from the Board. It was the strength of the message from our residents that convinced me supporting a $120 million project would be detrimental to the long term health of our community. It is the reason I ran a campaign steadfastly opposed to such a large expense.

After it was clear the plan was not going to get traction with the Board, four of us Board members got together to try to figure out how to pay for this thing. After long discussions, I was convinced that the Board majority would take action to reduce the budget in order to offset to some degree the increase in taxes that would be required to pay for the high school. Unfortunately, those reductions to the budget never materialized. Two of us on the Board kept sounding the alarm saying loudly that when this day comes, when we decide to raise taxes to the degree we just have, that it would have devastating consequences to our community. That is the "great sucking sound" referred to in the Lance in today's Trib.

You see, the tax increase we just passed is NOT $18 a month as some people would have you believe. The school district tax bill for a $200,000 home in Mt Lebanon is now $5326 per year or $444 per month. On that same $200,000 home we just increased your taxes $504 per year or $42 per month. That's not chump change. That $42 is a night out at at a restaurant for my family of four each and every month. It's a night at the movies. It's two piano lessons. Measuring the local economic impact of the extraction of more than $5 million additional dollars annually from the pockets of our residents and the private economy will be an interesting exercise. How do we measure it? Number of home sales? Businesses closing? Earned income tax receipts? We won't know the impact until it is too late.

The problem here is that we are not done. There will be a second bond float. We don't know what size it will be yet but we know it will be there. We have PSERS which is scheduled to hit in 2012 unless the state legislature does something about it.

With earned income receipts to the municipality and school district stagnant, our residents will collectively have to either dip into savings to pay for the increase in taxes or they will have to reduce expenditures in some other part of their budget. Well, I guess there is a third option. They could just decide not to pay. They would do this by putting their house on the market and getting out of Dodge before more tax trouble brews.

Thanks for reading.

James