This week I was able to find time to volunteer for a statewide political campaign. Since we are non-partisan here at Strong Towns I'll refrain from mentioning which one, but it was an experience I had not had before. It was kind of fun. My job was to call volunteers and line up people for events taking place the final week of the campaign. I've been on the radio nearly weekly for the last ten years as a commentator on Minnesota politics (I say that because it thereby is assumed -- right or wrong -- that I know something about Minnesota politics), but still, volunteering in this way gave me insights into campaigns that I had not had before. For anyone passionate about a candidate or a race, I highly recommend the experience.
Enjoy the week's news:
- MPR's Insight discussion forum riffed this week off Monday's blog post on how to create jobs. They do a great job with Insight and it is always especially interesting to me when they pick up our stuff and start a thread around it. There are some smart minds that contribute to the discussion, so if you want some engaging follow-up to Monday or you want to chat about other topics that are of import, check out the MPR Insight discussion forum.
- Industry insiders have scoffed at the notion that municipal debt is anything but AAA-worthy. I've taken criticism here for suggesting otherwise, but there are more and more credible places joining us in raising the possibility of widespread municipal bankruptcy or default. The Wall Street Journal recently ran an article outlining why municipal defaults are inevitable, unless some other mechanism is put in place to reduce or transfer local obligations.
State and local governments—which employ more workers (19.5 million) than manufacturing and construction combined—have promised over $3 trillion in retirement benefits, more by some estimates. Their pension assets are at least $1 trillion shy of that, according to the Pew Center on the States.
"It doesn't seem like the current path is sustainable without a dramatic jump in economic growth," says Randal Picker, a University of Chicago bankruptcy-law scholar. And the odds of that are slim. Property and sales-tax revenues aren't likely to grow rapidly enough to solve the problem.
- Indeed, the market is also starting to factor in the risks of municipal debt, which (like real estate in 2007) is not zero. Would you feel more secure loaning money to Microsoft or to the quite fiscally conservative state of Utah? If you picked Microsoft then you agree with purchasers of debt who have priced the software giant's obligations as having less risk than Utah's. The article that reported this discussed how municipal financial disclosures are different -- and more opaque -- than the private-sector, how accounting practices and standards are far more lax for municipalities and how many large, public liabilities are not carried on a balance sheet. This is all uncertainty that is not being factored in by people who assume municipal debt is absolutely solid.
As things stand, investors rely on credit ratings and muni issuers' audited financial statements. Neither is foolproof. The financial crisis showed credit ratings can be flawed. Plus, the size of the muni market is a challenge. Moody's, for example, has "120 professionals" focused on municipal finance, maintaining ratings on 29,000 issuers.
And financial statements in muni-land aren't reviewed by the Securities and Exchange Commission, unlike those of public companies. In fact, the SEC is legally precluded from overseeing issuers' statements. And disclosure isn't timely: Investors often wait six months or more to get numbers.
What's more, while the Public Company Accounting Oversight Board oversees public-company auditors, that isn't so for auditors of muni financial statements. Instead, muni auditors engage in the kind of peer-review process scrapped for public-company auditors in the wake of Enron's collapse.
State and local governments receiving more than $500,000 in federal assistance must file an annual, so-called single audit with the Federal Audit Clearinghouse. There is no formal review process, however. And in June 2007, the President's Council on Integrity and Efficiency randomly surveyed 208 "single audits" with a focus on reporting relating to internal controls. Only 55% were deemed acceptable.
Accounting standards also differ from those used for public companies. For example, governments don't include pension deficits on the balance sheet. "So all the numbers in terms of the liabilities are understated," says Ed Ketz, an accounting professor at Penn State University.
- And besides not factoring in pension liabilities, few are factoring other pending obligations that will limit, or prevent, municipalities from making good on their debt payments. The NY Times reported how water scarcity is going to impact whether or not a municipality or local utility can repay their water bonds. The ratings on these instruments do not take into account whether the debt is for a place with a secure water resource like Minneapolis or a vulnerable one like Atlanta, where water shortage is a major issue.
“Municipal bonds are bought and sold on the basis of their credit ratings,” the report said. “Yet today these ratings take little account of utilities’ vulnerability to increased water competition, nor do they account for climate change, which is rendering utility assets obsolete.”
Consequently, the study warned, “investors are blindly placing bets on which utilities are positioned to manage these growing risks.”
- Another reason why I think municipalities are headed for financial disaster is that we have no personal ethic to maintain the infrastructure we have. When push comes to shove, I want my road fixed so I can get to work in 20 minutes, but don't waste my money on that road over there. Ken Orski this week wrote a brilliant analysis pointing out that, while there are absolutely some huge pending problems with maintaining infrastructure, nobody outside of the choir cares. In a changing body politic, our top down approach to every local infrastructure expenditure is going to come to an abrupt halt.
It may be impolitic to suggest it, but dire warnings about the sorry state of the nation’s infrastructure seem to come largely from organized interests — stakeholders and advocacy groups. That is not to say that the nation’s transportation infrastructure has not been neglected or that America does not need better roads and transit systems. But rightly or wrongly, congressional lawmakers often discount cries about “crumbling infrastructure” as self-serving demands for more government money, often for projects that yield small economic return.
- This week it was reported that Fannie and Freddie will need even more money to stay afloat and continue their role as the chief enabler of the American Delusion (formerly the American Dream). It is a race to see if the Federal Reserve can create enough inflation to artificially prop up housing prices before another big drop in the housing market can happen. Like the rest of us, Fannie and Freddie need inflation to melt their debt away. Notice the spreads on how much support they need assuming growth and assuming recession. Ouch!
The troubled mortgage companies are likely to require about $19 billion in additional federal aid over the next three years, according to a projection by the Federal Housing Finance Agency.
If the economy recovers more quickly than expected, the projections show that the companies could need as little as $6 billion in new aid. By contrast, if the economy falls into recession, the companies could need another $124 billion.
- Spending money to undo the damage of earlier expenditures is certainly better than doubling down on a failed model. So, a Federal grant to tear down highways is a grant program I may be able to support. Apparently the Mayor of New Haven is excited about it too.
Perhaps the most eye-catching winner is the New Haven, Conn., Downtown Crossing, which gets $16 million to remove the limited-access Route 34. Residents and planners hate how it blocks foot-traffic and streetfront retail and separates the city's Union Station and the Yale-New Haven hospital complex from the rest of downtown. Now it'll be replaced with two walk-bike-transit-friendly boulevards
"We think this is a big f---ing deal," New Haven Mayor John DeStefano Jr. said.
- I find the work of Steve Mouzon to be absolutely beautiful. I choose the word "beautiful" intentionally - there is a certain something about his architecture, the photos he takes, the cadence of his writing and the observations he makes that are comforting to me. If I suddenly came across an unlimited amount of wealth, I would hire Steve to design everything around me. Until then, I'll just share this wonderful blog post. Please read it.
- Andres Duany and Jeff Speck had a letter published in the Washington Post last week that was a mashup of our development pattern, oil dependency and public health issues - a very good read, especially for newcomers to these issues, and thus a good article to share with your friends.
But the debate has changed now that sprawl has been identified as a contributor to some major challenges to our well-being: oil dependency, climate change and skyrocketing health-care costs. These crises have causes beyond sprawl, but sprawl may be the only one they all share.
- Duany and Speck's collaborator on the Smart Growth Manual, and friend of STB.org Mike Lydon, was interviewed about his work to promote biking as a viable alternative to automobiles. I've followed Mike's work since we met last spring at CNU and have found it quite compelling. And effective. Read the interview and you'll get a sense of how his persistence, passion and positive attitude are making a huge difference in how people view their towns and neighborhoods.
- And finally, the world lost a true genius last weekend with the passing of mathematician Benoit Mandelbrot, the father of fractal math. While scientists and mathematicians have spent millenniums trying to bring order to chaos, Mandelbrot saw the order that existed within the chaos itself. His insights were truly brilliant -- a man with a beautiful mind -- and I am convinced that his thinking will someday become the cornerstone of how we understand physics, cosmology, biology, economics and even the power of social networks. Here are a couple of videos of Mandelbrot, the first explaining his work on fractals and the second on his thinking applied to economics.