New York State’s Executive Budget

Every year the Governor publishes the Executive Budget, the starting point for further negotiations with the State Legislature that results in a finalized state budget.  Rarely – if ever – does the Legislature reduce the size of the budget.  I am positive that this year will not be any different.

The Comptroller’s office is required to review the budget and provide opinion (but not authority).  Comptroller DiNapoli’s analysis reveals that the budget is unrealistic, relies on questionable assumptions, balances this year’s budget by moving even more debt (mainly, your state tax refunds) into next year’s budget, and over the next four years has a projected structural imbalance of $61 billion.  And that’s just the first page.

• The Executive’s anticipated growth in revenue from the Personal Income Tax and other sources is based on an economic recovery, the timing of which remains uncertain.
• The lingering recession adds to fiscal stress by increasing the demand for programs and services such as Medicaid.
• Several revenue producing measures (sugared beverage tax, wine sales in grocery stores, Video Lottery Terminal and Quick Draw expansions) have similarly been proposed in the past, but not enacted.
• Numerous programmatic cuts have been proposed previously, but either were not enacted or were not fully realized. School aid, higher education and health care reductions are notable examples.
• Tax audit recoveries, new Medicaid audit recoveries and abandoned property transfers are budgeted aggressively at $1.1 billion.

Debt Service is the largest-growing budget category. It is growing even faster than both Medicaid and Education.

The growth in spending outpaces the growth in revenue, 7.7% to 2.9% – indicating that little if anything is being done to reduce the state’s structural imbalance.

On the upside, the state does plan to trim its workforce from 196,375 to 196,701 – a reduction of 674 positions (I’m being sarcastic).  And under current law, our long-term debt cap cannot exceed 4% of our residents’ combined income.  This won’t cause problems until the 2012-2013 time frame when our collective income is expected to fall and we exceed the cap.

The 34-page report is a pretty easy read.  Recommended if you have an hour to spare in your busy day and prefer something like this over hitting yourself with a hammer.

The Executive’s anticipated growth in revenue from the Personal Income Tax
and other sources is based on an economic recovery, the timing of which
remains uncertain.
• The lingering recession adds to fiscal stress by increasing the demand for
programs and services such as Medicaid.1
• Several revenue producing measures (sugared beverage tax, wine sales in
grocery stores, Video Lottery Terminal and Quick Draw expansions) have
similarly been proposed in the past, but not enacted.
• Numerous programmatic cuts have been proposed previously, but either were
not enacted or were not fully realized. School aid, higher education and health
care reductions are notable examples.
• Tax audit recoveries, new Medicaid audit recoveries and abandoned property
transfers are budgeted aggressively at $1.1 billion.

How to Fund a Waterfront Project

Read this article; it’s about the $148 million that New York City and the state will spend to renovate two piers along the East River.  It creates 400 new jobs in Gotham.

That’s about $370 thousand per job created.  All it takes is David Paterson, Sheldon Silver and the mayor of a great city to pull it off.

Well, we have all three, right?  This means that Buffalo will be next, right?  We need some state-funded jobs like that.

Small Business Week in Buffalo

This past week was Small Business Week in Western New York.

• Monday:  UB’s Center for Entrepreneurial Leadership (CEL) annual meeting
• Tuesday:  Small Business Innovative Research grant writing seminar specifically targeted to small businesses and start-ups
• Tuesday Night:  Buffalo Niagara Partnership Endurance All-Stars event.
• Wednesday:  CEL Class of 2009 graduation ceremony
• Thursday:  UB Business Partners Day

Before you say “Small business, so what?  Who gives a crap?” know that small businesses account for half of all employment in the U.S., and since the mid-90s have created 60-80% of net new jobs.  A very recent NPR report cited that small businesses accounted for 100% of all new hiring in 2009 so far.  Small business is Western New York’s future, for God knows that until New York State’s government is overthrown changes we are not going to be attracting any large companies to this area despite the best efforts of the Buffalo Niagara Enterprise and our local politicians.

Some big corporations were represented at most of these events, too:  Moog, National Fuel, Greatbatch, M&T and others are sponsors of many of these programs, in part as a giveback to the community in which they operate.   I am grateful to the big guys who probably get little in return, other than some friendly PR.

UB Business Partners day was an unequivocal success.  Attendance was probably twice last year’s, and it will continue to grow.   UB and the CEL both recognize that entrepreneurialism is the seed by which business will blossom in Western New York.

Not Riding the Bus

A couple weeks ago my wife and I were returning from an evening party at the Buffalo Convention Center to our car, parked in the Convention Parking Ramp one block away.  During that very brief walk we watched four NFTA buses go by.  There were two passengers, total.

Running a regional bus service like this does not appear to be very cost effective.  But with all the available surface parking in Buffalo, maybe there’s no other way.

I wonder if the decentralization of the bus system – doing away with the hub-and-spoke model that forces every bus to the central bus terminal, and replacing it with smaller, more localized shuttles – would make more sense.  It’s hard to believe that 50-person buses only filled to 2% capacity could ever be profitable.

The Next GM Pension Plan

Because of its long term pension liabilities, GM is worth more dead than alive.  I doubt any automaker or wealthy investor (other than the U.S. Government) will touch it prior to its evenutal bankruptcy.

The company’s crazy pension commitments are just crazy.   As of last year they were costing the company $1,300 per car.  With GM sales down something ridiculous – over 50% in February from the year prior – pension costs this year will cost over $2,000 per vehicle.

What’s a GM pensioner to do?  Well, nothing, really.  The pensioner can sit on his or her ass all he or she wants and will still collect until the company is sucked dry.  After that, who knows?  For some reason I think I’ll be helping to pick up the tab.

Here’s my suggestion after the bankruptcy:  Offer up a pension amount fixed at some amount per car.  Let’s say the company agrees to put $1,000 per car into the pension account.  Take the total car sales for the year, multiply by $1,000 and divide by the number of pensioners; that’s the amount each pensioner will get the following year.

This has some real advantages over the current scheme, mainly that pensioners could make out really well in good years, and they have an incentive to help GM make sure it has good years.  And I won’t have to subsidize them through some government support package.

Just a thought.

$300B Treasury Bond Purchase

When the Fed buys Treasury bonds with money it doesn’t have, isn’t that the same as taking out a loan on a loan?

Wall Street is cheering right now.  Maybe they understand in some perverted way.  I don’t.

Wal-Mart and the Internet Cheapen Everything

The fill valve on my toilet broke for the third time in two years.  I blame the Internet.  And Wal-Mart.

Our refrigerators used to last 12 or 15 years; today they last 7 before the compressor burns out.  We shrug as if this is how it has always been.  It has not.  Our collective desire for cheap is an enabler that allows Wal-Mart and others to trade off quality for price and in the process lower our standards of acceptance.  Likewise, thirty years ago our highly competitive newspapers were thick with articles and quality writing because, well, because they were competing on a level playing field with other newspapers.  Today they are vacuous and on the verge of extinction, unable to beat free no matter how much they cut their overhead.  A major paper is shutting down nearly every week.

The creep toward cheap was relatively slow and insidious.  So was the decline in the resulting product quality.  It is our acceptance of this decline that chews at me.

Wal-Mart and the Internet have led this race to the bottom.  It’s a disease.  The first symptom was the societal shift toward diminished quality because it made products more economical.  Cheaper plastics.  Thinner metal.  Smaller sizes.  Fewer parts.  The Internet forced the print media to compromise as well.  Less research.  More opinion.  Fewer sources.  Poorer writing.  We sat back as the competitors to these low-cost suppliers lowered their costs – and reduced product quality – in a futile effort to remain competitive.

In the end, the only fill valve that I can get for my toilet is from the same manufacturer that made the last two.  I don’t expect the next replacement to last any longer than the others.

There will always be a few boutique stores and BMW-like merchandisers that put quality first; some of us will be willing to pay for that quality.  But for Everyman, Wal-Mart and the Internet will reign, churning out product that would have been unacceptable a generation ago.

Born-Again Savers

Wednesday night’s Daily Show blast of Jim Cramer and CNBC exposed how so many of us were duped by frenetic Wall Streeters who parlayed our money into something worth half of what it was a year ago.

We listened to people no smarter than we who were tantalized with 30 percent returns and conveniently forgot to mention that there is a difference between Savings, and Investments.

Now that financial advisors have found Jesus, they’ve once again started preaching about that difference; but only because they’re jobless if they can’t obtain more of our money.  They need us to be reformed investors, and born-again savers.

We have been repentant – kind of – and are saving again.  America’s savings rate grows with every recession, then plummets when the economy improves.   It has risen dramatically (see the little blip at the far right of the graph) after falling essentially to zero since 2005.  To ZERO.

Even in this worst of times we are not close to putting away enough of our income to avoid a cat food-based retirement.  The erosion of the Social Security net might persuade us to save more, you would think, but hi-def TVs and Starbucks are just too tempting.  We suck at saving but we’re great at believing our government will bail us out when the sky falls in 2020.

I still have many years before reaching retirement age and have a pretty good chance of getting there with enough savings to be comfortable.  I’m not so sure about my 64-year-old friend, who can no longer retire at the end of the year.

Back to the Future with High-Speed Rail

If I hear one more article about the promise of high-speed rail in New York I think I’m going to gag.

Does anyone remember the promise of the Buffalo subway system?  That service to nowhere cost the government somewhere around $500M back in the early ’80s.  Ridership never came close to justifying the cost.  You think high-speed rail across the upstate region is going to suddenly make Buffalo, Rochester, Syracuse, Utica and Albany chic destination spots? Amtrak with all its millions in government help couldn’t do it, not while it shares the same rails with slow-moving freight trains and dilapidated stations.

And until you solve the problem of obtaining easy last-mile travel once you step off the train, city-to-city high-speed rail will remain unattractive.   So far, that last-mile discussion hasn’t even begun.

While construction of a rail line may have some short-term (very short-term) benefits to a few laborers scattered across upstate New York, rail’s life cycle costs are enormous.  We have spent the past 30 years proving that such rail service can’t exist without subsidies; why would we want to subject ourselves and our children to that kind of future penalty?

Let’s get real.

Innovate Buffalo Niagara

The Innovate Buffalo Niagara awards luncheon was held today at the Buffalo Convention Center.  The Buffalo Niagara Partnership’s now-yearly event highlighted 66 companies in 5 categories, from Advanced Manufacturing to Professional Services.  The winners got a nice plaque and a chance to bask in the limelight for about 10 seconds.

The place was full of optimism in spite of the current economic climate.  In a period where many businesses are shrinking, companies like Geico, Multisorb and Roswell Park Cancer Institute are adding to staff.  Granted these are companies whose business products are in most cases far removed from the heavy industries that made Buffalo great in the 50′s and a failure 20 years later, but that’s the point here:  This area will survive this economic downturn and grow far more quickly by having a diverse business environment than by relying on a few big players.  The 66 companies in the competition represent just how far, how quickly, we’ve come in terms of economic diversity.

We need more of these businesses.  Keep them coming, please.

Resumes

Since December I have received more unsolicited resumes than I can shake a stick at.  Some make for a great read but I cannot help these people right now, especially when most are asking for work in fields that we, a software development company, don’t offer.  I just don’t need to add a bridge inspector or statistician or tech writer to our staff.

Last year’s job losses nationally came in at around 3.1 million with the manufacturing, professional business services and construction sectors taking the biggest hits, and January hasn’t been kind either.  In just the past week eleven companies alone announced 76,000 jobs cuts and we have not hit the bottom of the layoff barrel.  Worse is the number of underemployed – it was 11% in October, and it’s growing and adding to our collective distress.  We are closing in on the 1982 unemployment numbers.

The strongest companies will survive – by working hard, sacrificing, focusing, by evolving and in some cases by sucking at the National teat.  (By the time the proposed $900 Billion stimulus package is finalized I’m sure every congressional district will contain at least one teat-sucker.)

I will work my ass off to make sure that my company successfully adapts to these times.

Energy Indpendence in Our Lifetime

(courtesy CNN)

John Hofmeister, former president of Shell Oil and now head of Citizens for Affordable Energy, spoke at WNED studios last Friday.  Parts of his speech were covered by the Buffalo News as well as the local television media.  An oil insider, Hofmeister made some great points that the media covered well.

That morning, John also spoke at the Buffalo Niagara Partnership’s Movers and Shakers series, making quite a few comments that didn’t make it into the paper or TV.  One of them was about the run up of oil prices this past summer.

Hofmeister pointed out that the dramatic rise in oil prices had nothing to do about speculation but about Asian aviation fuel demand and China’s preparation for the Olympics.  In its attempts to reduce smog, China demanded a change from burning coal for power to burning oil.  They basically bought up all the diesel fuel that they could, and this was principally responsible for the sudden increases.  Just as suddenly, demand pressure on diesel fuel started to drop shortly after the Olympics.

Interesting.   Since diesel is a middle distillate and gasoline is an upper distillate, one would think that as the world’s demand for diesel increases, a glut of gasoline (as a byproduct of the distillation process) will appear on the open market, depressing gasoline prices relative to diesel fuel.  This might make one question whether or not it is wise for the U.S., one of the few countries not fully converted to a diesel transportation infrastructure, to ever do so.

Hofmeister made a few other interesting comments:

• Without a huge improvement to mass transportation there is no way that dramatic rises in gasoline prices won’t strain many American budgets beyond their limits.  And suburban sprawl makes the mass transit solution untenable.  Because the U.S. has no infrastructure available to support alternative energy transportation in more than a niche manner, there are no short-term alternatives to the internal combustion engine through at least the next decade.
• When the U.S. was importing 35% of its oil from foreign countries the Nixon Administration, in 1973, declared that the U.S. would be oil independent in 5 years.  35 years later, 65% of our oil is imported and over that time no policies have been developed to reduce that dependence.
• You would think that the Department of Energy determines – or at least implements – energy policy in the U.S.  Nothing could be further from the truth.  There are 13 Executive branch agencies and 26 Congressional committees that determine policy, plus the courts.  Energy policy is determined politically.

Hofmeister was animated about his last point.  Unless Congress adapts the same model for energy policy as they do for monetary policy – an independent board modeled after the Federal Reserve – no solution to our energy woes will be found.  After 35 years, Congress has proven itself incapable of fixing the problems, and needs to relinquish policy control to an Energy Resources Board with teeth.

Big Business’ Dirty Little Secret

Several years ago my company’s average net receivable – the amount of time our customers wait before paying for our services – was just over 30 days.  Around 2002 that average started to rise, first to 45 days, then to 60.  Two years ago one of our largest customers – a big gorilla of a company – unilaterally raised their payment terms to 90 days.  Other companies followed their lead.  (So much for a contract being a contract.)

Last month the big gorilla sent us a letter indicating that they were again changing payment terms on our contracts to 120 days.  Any work we perform for this company today will generate payment to us in March.  To get payment we hope they survive that long, and that they don’t change the payment terms yet again.

Businesses that delay payments ruin our cash flow in order to preserve theirs.  The big companies are essentially using their suppliers as piggy banks to get cash – essentially for free – for which they would normally have to go to the banking industry to obtain.  Today’s tight credit markets will inspire many other companies to follow suit.  Picture yourself being told by your employer that your next paycheck will be delayed by a month.  Good luck staying atop your mortgage and utility bills.

With terms like this some companies are no longer potential clients of ours because we can’t justify the risk of their bankruptcy within that time frame.  Four months is too long in today’s economy to risk doing work in some teetering business sectors.

We’re just a tiny player in the game but luckily the big gorilla is only a small fraction of our business.  Pity the cash-poor companies dependent on a big gorilla for the bulk of their revenue, receiving the same letter as us.  Their cash flow is going to tank.

This is an artificial boost to the bottom lines of the S&P companies at the expense of everyone else.  Payment delays are a one-shot method to inflate the corporate balance sheet (and therefore the stock price) without addressing any underlying business problems.  Other than providing executives a way to hit their bonus targets I see no business upside to this practice.

So the stock prices of the Dow and the S&P are being silently buttressed by the small businesses being forced to subsidize them; and the small business community – still the heart of American capitalism – has its back to the wall because of it.

La Mancha Negra, Part 2

So the answer to the question “What the heck were you doing in Caracas” is “Enjoying myself”.  I worked for a telecommunications company in the early 90′s and we had to make a trip – several trips – to support an installation of wireless units used by the banking industry.

And Caracas was a trip.  Really.  I went in the middle an attempted military uprising, and there were soldiers with guns, everywhere.  And lots of distant shooting at night – sounded like fireworks.  Since we were working with the banking industry it was especially tricky, what with private security forces and the military exchanging wary glances at each other as we would pull up to an ATM machine, electronic equipment in tow.

I loved the exotic nature of the city, and would go back in a heartbeat.  But it was especially frustrating because I was a runner, doing about 5 miles a day, and at that time no one ran in Caracas unless they were guilty of something, and those suspected of being guilty of something were often shot first, questioned later.  So I resorted to running up and down the 8 floors of stairs in my hotel.  It was not nearly as satisfying but it provided a workout.

I worked in a 26-story office complex with one working elevator.  People packed into it like sardines in spite of the weight alarm going off at every floor.  I took the stairs.

Caracas was (and still is) a typical large, third-world city, and is a great example of a middle-classless economy:  You end up with the filthy rich and the shantytown poor.  Just down a ways from the Gold District is a stream about the width of Tonawanda Creek, only it’s an open sewer.  You can smell it from blocks away.  Sanitation systems were and are not a high priority to the Venezuelan government.  Beggars with deformed body parts were everywhere.  And where they were not there were beautiful women and handsome men in fancy clothes.  If you had beauty – especially if you were a woman – you had a path to a great job; if not, you cleaned hotel bathrooms for a pittance.

It was obvious from La Mancha Negra that road construction, too, was not a high priority for the government.  Nor did there seem much in the way of decent health care or, for that matter, good educational facilities; though the Venezuelan government does have a pretty well-funded military.

While the U.S. has a long way before tumbling into such chaos, it is to our country’s advantage that we not let our middle class erode to the point where climbing back up becomes an exercize in futility.

Why is Gasoline so Expensive in Buffalo?

At the Buffalo Gas Prices website you’ll find this graph (or one very similar to it):

It is difficult to understand why, one year ago, Western New York gas prices were roughly 5 cents per gallon above the national average, yet today they are 47 cents above the national average.

If you’re from Buffalo, doesn’t this just stick in your craw?  I dug around trying to understand the price differentials and came up with a number of unsubstantiated answers, all speculative:

• Supply and demand factors
• Lack of local refineries
• Distance from pipelines and refineries
• State formulation requirements
• State taxes
• County taxes
• Local greed

I thought that reformulation was an issue, as New York is one of those states that 1) must use reformulated gas to reduce pollution in its major urban center; 2) forbids use of MTBE, leaving only ethanol as the oxygenator of choice and potentially raising the cost of gas.  But that doesn’t explain why Western New York has the most expensive gasoline in New York State.  New York City prices (as of 10/20) averaged only $2.94 per gallon.  The Upstate average is $3.20 per gallon.  And here we are at $3.31 per gallon.  None of the factors above lead to a rationalization of the huge price differential that we’re paying at our end of the state.

Of course, there is one plausible explanation as to why the oil companies charge us more than in other areas:  Because they can.

And no amount of writing to my State Assemblyman will change that.

So, What ARE the Fundamentals?

I have been intrigued by the use of the phrase “The fundamentals are strong”.  It’s been used often by the Bush Administration until recently, and just a few weeks ago by John McCain to indicate that our economy is still strong, without ever defining what the fundamentals are.  Ironically, the person who originally coined the equivalent phrase is none other than Herbert Hoover.  Whoa boy.

I don’t believe that the fundamentals have been strong for so time, but I wasn’t sure and so didn’t know whether or not to believe either the Bush Administration or John McCain.  So I dug back to my college economics texts to get an idea of what the economic fundamentals are.  To Samuelson, they include

• Inflation (or consumer price index) – the lower, the better
• Economic growth (or gross domestic product) – the greater, the better
• Wages – Higher is better
• Unemployment – the lower, the better
• Industrial production – growth is good
• Worker productivity – more is better
• Balance of trade – Positive is good
• Strength of the dollar – stronger is better

Respectively, in the past 12 months these indicators are up, flat, flat, up, down, up, negative, weaker.  Six of the eight are pointing in the wrong direction, one is neutral, and one (worker productivity) is positive.

I thought so.

“The fundamentals are strong” might not be the wisest of political statements to make, in light of where the economy’s been going.  Nonetheless, the Presidential candidates might be better spending their time talking about it, since all the rest of us are.

The House Bailout Bill

The House of Representatives added to and otherwise modified 34 sections of H.R. 1424, the so-called bailout bill, passed by the Senate two days ago.  They then voted on and passed it and the President signed it into law about two hours after that.  It took $150 billion in earmarks to sweeten the deal enough for 59 Representatives to change their votes between Monday and Friday.

All told the Bush Administration and Congress have added roughly $1.4 trillion to the national debt since January.  This does not include the 2008 budget deficit, which will add between $200 billion and $400 billion more.  The Dow Jones responded with joy by only dropping another 157 points.

We have crossed the line from Capitalism to Socialism.  Capitalism when the markets are adding to the coffers of the wealthiest institutions, Socialism when taxpayer-funded bailouts are needed to shore up those same institutions because of those markets.  I notice that suddenly, no one is using the term Socialism, but there it is.  Stan O’Neal is probably busting a gut on his yacht right now, laughing at all those Congressional patsies.

One must wonder that a bill, written in a few days with 170 sections and 450 pages, could possibly be cohesive and not swiss-cheesy.  Do you think that big financial companies with leagues of lawyers and accountants will spend a lot of effort to find all those loopholes that will benefit them the most?  I do.

They got their Christmas bonuses early this year.  We got coal.

The Senate Bailout Bill

President Bush’s bailout bill was 3 pages in length.  The one that the House of Representatives defeated was 106.  The Senate bailout bill passed on October 1st is 451 pages.  Historians will note that this is a mental health bill with a few additional provisions.

Only the first 113 pages of the Senate bill are actually related to the bailout.  The remainder are essentially pork barrel provisions attached to get Senators to vote for the plan, including:

• Renewable energy credits
• FUTA surtax
• Alternative minimum tax relief
• Tax breaks for teachers
• Investment in Washington, DC
• Something about wooden arrows and children
• and on and on

There are 101 energy, tax, mental health, Federal land and disaster provisions – something for everyone.  It has essentially become an energy and tax credit plan with an oh-by-the-way bailout attached to the front of it.  This is how we legislate.

Read it here if you’d like.  It’s a PDF document.

Yet the non-bailout riders in the House plan will wildly top this.  I am wildly disgusted and will torture myself by poring through the House bill as soon as I can find it.

Throw the Bums Out

I’ve been trying to come up with the right words to say how I feel about the $700B giveaway to Wall Street.  It is clear that measures to increase confidence in the markets are necessary and that the alternative – hanging all those Wall Street dealers by their balls – would not be civil (although it might make for good reality TV).  It is unclear to me that a monetary bailout is either prudent or effective.

What bothers me greatly is that the issue of a housing market and lending bubble has been obvious for years, yet nothing was done to oversee or regulate those that were taking advantage of it.  Even a television show was created to profit from the hysteria surrounding unsustainable home price escalation.

Wall Street and personal greed notwithstanding, this was a preventable calamity had Congress chosen not to look the other way until the crisis was upon us.  Indeed, it appears that that the U.S. governs by crisis, that politicians have only enough political will to hope the problems away – until they are, too late, already in the belly of the beast (and us along with them).

To make it worse, bailouts create the expectation of future bailouts.  This is an ever-tightening spiral that has us already circling the drain.  We saw it in the 80′s with the S&L bailout and the creation of Resolution Trust; we see it today with Fannie Mae, Freddie Mac and AIG.  Tomorrow it will be the airlines and automotive industries, and then the medical system.

I am so steamed about this because the people who are supposed to be leading this country have contorted the definition of leadership to the very exclusion of it.  They bloviate whenever a camera is rolling, bicker about the other party throwing up roadblocks, pass pork-filled budgets and then have the gall to run for office based on proven leadership.

It’s time to throw the bums out.  All of them.  Every. Single. Incumbent.  Maybe, just maybe, the next group of politicians will get the message that we’re fed up and just won’t take it anymore.

Un-Bailout

Okay, so the Dow is finishing up 485 points after being down 777 yesterday, and the government still hasn’t done anything?

Oh, wait.  The government hasn’t done anything about this pending crisis for the five years that it’s been pending since Wall Street began putting bows on shit.  I’m finding myself in the camp of those who think we should just sit on our hands a little longer and watch the market take care of itself.  After all, if a government bailout is so good for the public, then why aren’t major investors lining up to invest as well?  Maybe it’s because they’re so close the smell is getting to them.  Maybe it’s because they know better.

I understand there is a long line at the Lowe’s near Wall Street for hemp rope.  And that Darien, Ct (median income:  $168K) is really going to suffer from the fallout.