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Wednesday
Apr212010

In a different world....

Local bankers have been some of the biggest supporters of the current pattern of development. I've seen many advocate for public investments that are ridiculous - projects that, if they were private-sector, the bankers would never participate in. The incorrect assumptions of our development pattern are so pervasive, the incentives so wrong, that even those with seemingly the greatest financial knowledge reflexively support it. This reality has often made me wonder what a conversation would be like if a city had to go to the local bank, instead of the federal/state government or the bond market, for their loans.

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Scene: Quimby walks into bank, removes hat, sits down at conference table opposite Baily. 

Baily: What can we do for you, Mr. Quimby?

Quimby: We need a loan. As you know, we have run into a little bit of a tough time. Revenues have stagnated. Expenses continue to climb. We face some pending difficulties with the potential loss of a major revenue stream. Our board has decided we need to make some major investments and get back to growing.

Baily: Sounds interesting. Let me ask you a few questions so I understand what you are asking for. How much of a loan are we talking about.

Quimby: Oh...about $3 million. 

Baily: And what is your operating budget right now? What type of revenues do you have to work with?

Quimby: We're sitting at around $1.6 million, give or take a little.

Baily: Huh? You said that was stagnating? Elaborate a little bit on that.

Quimby: Well.....after years of robust growth in revenue, it has kind of slowed down. In fact, our revenue stream has declined about 20%. To stay level we've had to really squeeze expenses and raise our rates somewhat.

Baily: Raise your rates? Are you worried about losing some of your business? How much more upward room do you think you have in terms of rates?

Quimby: Well, theoretically, we've got a lot of room. In practicality, there is a limit to what can be done. Right now I'm actually more concerned about some losses in our AID sector. We could potentially lose all of our revenue there.

Baily: What are we talking?

Quimby: It would be another 20% of our budget. That's why we need to get this growth plan in place. We need this loan to get that going.

Baily: Okay, let's talk about this growth project. Is this some kind of new venture?

Quimby: Kind of. It's really just more of what we do now, but we are extending it and looking for more growth.

Baily: Okay, but I thought you said your revenue was declining.

Quimby: Yeah, that is why we need more growth.

Baily: I'm not following you. You are going to take what you are doing now, which is in decline, and just do more of it? You want a loan from us for this?

Quimby: Precisely. We add more capacity and we get more growth.

Baily: So is your capacity maxed out right now?

Quimby: Not exactly, but it is a little difficult. A new market would be much easier.

Baily: I see. You still have excess capacity. You must be generating more revenue than your expenses there.

Quimby: No...you are not understanding. We need to expand because we are not generating enough revenue. We've got some big, looming maintenance expenses coming up on our current operation. We can't fund those on our current revenues without a major restructuring. This expansion is going to bring growth and the revenue we need for that.

Baily: So the existing operation has more expenses than income? You want a loan to grow and that new revenue will cover your shortfall?

Quimby: Yes, now you have it.

Baily: Okay. So how is the new expansion different from the current operation again? 

Quimby: It's not. It's the same thing, George. We're just expanding it.

Baily: Yeah, but you're operating at a loss today. Won't doing more of the same just compound that?

Quimby: No. We need the money to induce growth so we can cover these shortfalls. This is what all of our competitors are doing. We're really no different.

Baily: Let's assume we agree to this loan. You must have new revenue streams lined up and ready to go. What do you have?

Quimby: We really don't have anything right now.

Baily: Nothing?

Quimby: Come on. We need the loan so we can make the investment so we can generate the growth so we can solve our revenue problem. We can't get additional revenue until we make the investment. We're in a competitive market. We need to be out there leading the way on this stuff.

Baily: I thought you said the market was depressed? Revenue is down?

Quimby: It is. Yes, that is our problem.

Baily: So what is the likelihood of getting the additional revenue from this investment? How likely are you to actually get any new growth?

Quimby: Well, we're going to offer some incentives to make sure that happens.

Baily: Will that eat into your bottom line?

Quimby: In the short-term, sure. Long term, it will work out well for us.

Baily: But if your model now is not generating sufficient revenue to cover your expenses, how is expanding that same model and giving away incentives on top of it going to help you out? 

Quimby: Okay, I see where you are coming from, but I have to answer to shareholders right now. They're uneasy as it is, times as tough as they are. If I go back to them and say we're not going to invest in more growth, they are likely to throw me out.

Baily: Have you thought about trying to squeeze a higher return out of your existing operation? You already told me you have excess capacity there. Seems to make more sense than just adding more to a failing system.

Quimby: That's easy for you to say. My shareholders are not interested in steps to increase efficiency. Nobody else is doing that. If we commit to that, we're going to lose what revenues we have to our competitors. No....we have to have that loan.

Baily: $3 million.

Quimby: Yeah, $3 million.

Baily: Aren't you just borrowing the money to improve your near-term cash flow, making your long-term situation that much worse? How can you even repay this loan?

Quimby: I'm going to let the next CEO worry about that one. For now, we need the growth. After all, if we're not growing, we're dieing.

Baily: Amazing. I'm just glad people that think like you are not running this country.

 

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Reader Comments (3)

Nice conservative diatribe.

Let me suggest an alternative description:

Baily: What can I do for you?

Quimby: We need a loan. We have been cutting costs by deferring maintenance on our facilities, on employee training, and our financial controls. The only thing we have been fully funding in security. And its starting to catch up to us.

Baily: That doesn't sound good. At some point that kind of operation is going to catch up to you with reduced revenue.

Quimby: Well it has. We thought we were doing pretty well growing our productivity, but it turned out we had overbuilt our inventory, so a lot of what we thought we had isn't worth much. And we have been over-contributing to our pension fund, but we borrowed back the money and now it looks like we are going to have to start repaying it since more people are retiring.

Baily: So is there a plan to get out of this hole/

Quimby; Some of our partners think we should make more cuts. But I think what we really need to do is invest in the future and that means spending more money not less.

Baily: So what do you want to invest in?

Quimby: Well, we need to replace our communications infrastucture, the current one is getting really outdated and we are falling behind our competitors. And our employees need to be brought up to speed with better training, they are talented people but their skills are out of date. In fact, we probably need to overhaul the whole training program, we used to only have to provide basic training to most employees but the whole operation is a lot more sophisticated. We need to start earlier and its going to take longer. And we have a bunch of people who are often out of the workforce because they have health problems and aren't covered by the health plan. Our external security is fine, but we have had a lot of losses to internal fraud - that's part of what happened with all the excess inventory.

Baily: Well the key issue for me is how secure is our loan. So what kind of assets do you have?

Quimby: Several hundred million acres of land that includes timber,mineral and recreational uses. We have hydro-electric facilities that generate billions of megawatts of power. We extensive port facilities. We have transportation facilities. Its a big operation, that's part of why it costs so much to run.

Baily: Do you have any savings?

Well yeah, we have deferred a bunch of payments over the last 30 years that people have invested. We are owed a portion of the investment and any earnings. Those will come do over the next 40 or 50 years, but its hard to tell what they are worth.

Baily: OK - then how do you repay the loan? Do you have any way to raise more revenue.

Quiimby: Sure. Our customers have nowhere else to go and those investments will help them make more money too. But in the short term, they are hurting because of all the cuts we made.But our revenue potential is really unlimited. We are our market's leader, the danger is that we will lose that lead if we continue on our current path.

Baily: Sounds to me like you have a lot of potential. You just need to believe in your future.

Quimby: That's what I think. But we got some older guys who are comfortable and close to retirement. They don't seem too concerned about the future. And they have a lot of clout.

April 22, 2010 | Unregistered CommenterRoss Williams

Quimby (on the way out the door): One last thing, those comfortable old guys have some of the younger people convinced the company is going out of business. They have them scared and squirreling money away instead of investing in the operation. The young folks are the future, we know we are in trouble if they aren't more productive than our current workforce. But we won't get that productivity if they don't believe in our future and aren't willing to invest in making themselves more productive.

April 22, 2010 | Unregistered CommenterRoss Williams

Ross,

You are reading the wrong blog for what you are trying to debate. That's not the discussion we are having here. Before you read Strong Towns, read the sports or comics sections first to clear your mind of all the political angst. Mine was not a conservative diatribe.

The reality is, whether you think taxes should go up, spending should go down or both, the way we build our cities and towns in the modern, auto-centric, low-density, segregated-use pattern costs more to maintain than it produces in revenue. Lots more. Lots, lots, lots more. We're not even close. And as this dialog was meant to illustrate, if a small town were a business asking a bank for a loan to essentially double down on the same failed strategy, it would sound ridiculous. That is because it is. We need a new pattern for growth.

Whether you are partial to conservative diatribes or liberal diatribes (or simple thoughtful discussion), you would hopefully take issue with a development pattern that systematically weakens our country financially while at the same time being environmentally destructive and offering little of redeeming social value. If you do, then you'll appreciate Strong Towns.

Either way, glad you're reading us.

-Chuck

April 22, 2010 | Unregistered CommenterCharles Marohn
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