Tomorrow will bring us the second broadcast of “Manzi in the Morning” on WCAP 980 am, starting at 10:00 am. I am delighted to be interviewing Sebastian Arcelus, who plays Washington Herald editor Lucas Goodwin in the Netflix series “House of Cards”. I have seen all 13 episodes on Netflix, and look forward to the second season. The series is really a revolutionary change in the way Americans watch TV, and it looks like with this success companies like Netflix will produce more original programming, and possibly hasten the day when consumers are free to (gasp) abandon their cable hookup. Amazon appears to be moving towards original content delivered via the internet, another major player willing to take on the networks and the cable providers.
Of course the success of this series is not guaranteed for future efforts. The quality of this programming is terrific, with Kevin Spacey’s portrayal of Majority Whip Frank Underwood a tour de force. Netflix is spending liberally, with production values the same or better than those found on network or cable programming. Is it time to start selling the stock of the networks short? Not only is new programming coming from the internet, but cable shows like AMC’s “The Walking Dead” are routinely beating the networks in their time slots. A new wave in TV being led by Netflix, and a terrific show that you should check out in “House of Cards.” Have a question about the show you want me to ask? Post it here, or drop it to me via Twitter @billmanzi, or by email at billmanzi1@comcast.net. I will try to ask it. Tune in tomorrow at 10:00 am for some insight into “House of Cards.”
Sebastian Arcelus as Lucas Goodwin in House of Cards on Netflix.
Detroit’s problems have been a long time in the making. Detroit has experienced severe population loss, going from 1,850,000 residents in 1950 to 714,000 in 2010. Property values have plunged, wide swarths of the City are vacant, with declining revenues constraining the ability to deliver services. In addition Detroit has been subjected to serious cuts in aid from the State of Michigan, which has had its own serious financial issues. The fiscal issues have been boiling for some time, with the City in the grip of a fiscal death spiral, with cuts to the budget leading to less services, more problems, and then more cuts. But the reality is that the locals have turned in, from my distant vantage point, an abysmal performance. No matter the municipality, no matter how bad the fiscal situation, there is always a very strong political force advocating no change to the status quo. No different here. The locals have turned to budgeting tricks that are transparently bad, and have created the showdown with state government. There is no question that state government is not entirely blameless here, but the locals have not been profiles in courage. The state report that led the Governor to issue his call for an emergency manager shows us some of the ugly truth in Detroit’s budget numbers. Some of the lack of local action was highlighted by the State, in the prior mentioned report:
For example, for the year ending June 30, 2010, the human resources apprentice training program exceeded its budget by over $2.3 million, the insurance premium line item exceeded its budget by over $12 million, and the police operations line item exceeded its budget by $15.8 million. Consequently, the general fund had line items that exceeded budgeted amounts, in the aggregate, by almost $58 million. Unaudited 2011 figures indicated that line items amounting to $97 million exceeded their budget, including an excess of $25 million for fire and $44 million for police.
A couple of quick notes: The City appears to have routinely allowed budgeted allocations to be overrun by Departments. They also have included revenue estimates that are largely fictitious. And as annual deficits pile up the corrective action taken has been to simply borrow the funds to paper over the budgets. Not a good idea. Lets look at some of the annual deficits, and the corresponding borrowing:
I don’t care what Party you represent those are not only some bad numbers, but some terrifically bad financial practices. Using capital borrowing to paper over operating deficits is as bad of a budgeting practice as there is.And those operating deficits are pretty hefty, indicating that fair or not budget adjustments MUST be made. In this case either the locals do it, or the State will do it for them. What did the City propose?
The City’s deficit elimination plans and proposed budgets proved to be unrealistic. City officials either had been incapable or unwilling to manage the finances of the City. For example, the 2008 fiscal year deficit elimination plan reported $58 million in expenditure reductions in the general fund and $69 million (excluding debt proceeds and revenue sharing) in revenue enhancements for 2010. However, the 2010 general fund balance ended in a deficit condition of over $155 million and would have been much greater if not for $250 million in new debt. Again, the 2009 deficit elimination plan certified in November of 2010 projected a 2011 surplus while the actual fund balance for the general fund ended with a deficit estimated at close to $200 million. City officials had promised restructuring and consolidation, including hiring freezes and improved tax collection. Finally in mid-2011, City officials submitted a deficit elimination plan for the 2010 deficit which included revenue initiatives of over $200 million and expenditure reductions of over $300 million, most of which were to take place in future periods and were
questionable, such $10 million from selling Windsor tunnel rights and $50 million in improved income tax collections. One version of the deficit elimination plan estimated that the City would be able to realize an additional $154 million annually from collecting income taxes from residents who work outside the City. Projected expenditure reductions relied heavily upon union concessions which had not historically materialized.
I realize that the City has a different point of view than the State, but those facts are pretty damning. What about the City’s bond rating? Not much good news there either. They have fallen below BBB, which is junk status.
Nov 28 (Reuters) – Moody’s Investors Service lowered Detroit’s debt ratings deeper into junk territory on Wednesday and warned there was a higher risk the cash-strapped city could default on bonds or file for bankruptcy.
The credit rating agency, which placed Detroit on review for possible downgrades in June, assigned a negative outlook to the lowered ratings, citing “the rising possibility that the city could file for bankruptcy or default on an obligation over the next 12 to 24 months.”
Moody’s also pointed out that oversight of the city’s finances by the state of Michigan was weakened when voters earlier this month repealed a 2011 law that beefed up the state’s power to aid financially struggling local governments.
Another factor playing into Detroit’s rating woes is its “ongoing inability to implement reforms necessary to regain financial stability,” Moody’s said.
Detroit’s city council has resisted certain reform measures supported by Mayor Dave Bing, state officials and an oversight board. Last week, the nine-member council rejected a contract with law firm Miller Canfield to work on the city’s financial stability deal with the state, which had set the contract as one of the goals Detroit must meet to obtain a $10 million cash infusion this month.
Bing subsequently said the city, which was on track to run out of money by the end of December, would turn to unpaid temporary leaves for workers and other cuts to stop that from happening.
All of that borrowing to pay day to day expenses has of course left the City with a major debt problem. Debt service payments, in 2010, were $597 million, and long term debt, not including unfunded pension and OPEB obligations, total over $8 billion. I dare say that the data show that the Mayor and the City Council have to take some share in the responsibility for not coming forward with a short term stabilization plan, as well as a longer term recovery plan that would include major economic development and growth. I have given short shrift to the City’s position because even with cuts in state aid and some of the other problems involved they could have, and should have, done a better job.
Detroit presents the Governor with a unique set of governance challenges. Taking away responsibility from elected officials, even where some level of malfeasance has been shown, is a serious matter. It is, by definition, undemocratic. Detroit has a resurgent auto industry, and a few other positives to build on. Success will be difficult, but not impossible. Working for an Emergency Manager in Detroit, to produce positive results for the City and its residents, would be a unique opportunity for anyone that loves municipal management. As the state looks to impose financial controls on the City the ball is in the Governor’s court to produce a plan that just does not slash and burn, but produces economic growth and opportunity for Detroit and its people.
Addendum: Today’s New York Times had a story on the poor financial condition of Detroit that reflects on the poor performance of the locals.
Congressman Steve Lynch and Congressman Ed Markey are making a joint appearance at SEIU this morning in Dorchester. The live feed of that event is here.
The third installment of the first “Manzi in the Morning” on WCAP 980 AM had Methuen City Councilor Jamie Atkinson on the show. Councilor Atkinson announced that he is a candidate for re-election, and talked about some of the important issues facing Methuen, including Information Technology. Thanks to Councilor Atkinson for taking the time to call into the show.
Rep. Diana DiZoglio joins the show for some conversation on the state budget, local aid, and the feedback she is getting from constituents on the Governor’s tax proposals. My thanks to Rep. DiZoglio for taking time out of her busy schedule to come on the show, and I look forward to having her on to discuss the many important issues this session of the Legislature will be dealing with.
Governor Deval Patrick has put out a very ambitious agenda for his last two years, with a centerpiece being his proposal to raise $1.9 billion in additional revenue to bring new resources to education and transportation. With Speaker Robert Deleo refusing to take his traditional “no new taxes” pledge and the transportation system buckling under a severe financial burden the time does look right for some deal on revenues. The Speaker appeared “On the Record” this past weekend, and certainly seemed to throw some cold water on the expansive plans of Governor Patrick. The Speaker pointed to the two obvious holes in the transportation budget: the annual deficit at the MBTA, and the financing of the Department of Transportation workforce via the capital budget. He pegged those two combined as being in the $400 million range, saying they needed to be dealt with. He did leave a bit of room for some additional finance beyond that, and although he did not specify I would venture to guess he would allow some growth in local infrastructure assistance.
The Governor has not simply laid out a standard tax package. It has a lot of moving parts, and rather than trying to just deal with ongoing transportation deficiencies the Governor has put forward a package large enough to finance projects long talked about, but stalled due to lack of financing. What are they? South Coast Rail at $1.8 billion, Green Line Extension at $674 million, South Station Expansion at $850 million, a Boston-Springfield rail connection at $364 million, and several other projects. I still believe that the Governor’s proposal manages to flush these transportation issues out, with no funding meaning no projects. We have traditionally managed to do big infrastructure projects without worrying either about construction costs, or ongoing maintenance. As I see it the Governor, at least on the construction cost side, is saying to the Legislature that hard finance choices need to be made. The Speaker seems ready to do just that. In addition to his appearance on OTR he spoke today to the Greater Boston Chamber of Commerce, where the State House News Service reports he will say:
“I’m worried that the administration’s proposal places too heavy a burden on working families and businesses struggling to survive. We want to minimize the pressure on Massachusetts citizens as we find ways to meet our goals. If we are to pass a new revenue package, I believe it should be far more narrow in scope and of a significantly smaller size,” DeLeo plans to say.
Significantly the Speaker looks to be ready to undo the Gordian Knot developed by the Governor by separating a transportation finance package from the rest of the budget, and bringing that forward in advance of the House Ways and Means proposal.
The House appears to be moving toward addressing transportation financing with separate legislation ahead of the April 10 release of the House Ways and Means budget, a path that would require details of the House revenue plan to be released very soon.
Just based on his comments I would be willing to guess that a transportation finance package worth about $500-$750 million will be coming forward. He needs $450 million to just solve existing problems, and a bit of growth beyond that (forward funding for regional transit, Chapter 90) should bump that number a bit. But it will not solve all of the transportation issues facing the State. Where will the money come from, if not from an income tax hike?
It appears as though the Speaker will be looking towards some additional “user fees”, which could be additional fare and fee hikes on users. Will all revenue increases come from “users”? Hard to see how that is possible, but we will have to stay tuned. For now it looks like the Governor can expect a substantially downsized revenue package from the Speaker.
I was very happy to debut a new morning radio show on WCAP, 980 on your am dial, that we are calling “Manzi in the Morning”. My thanks to News Director Todd Robbins, who hung out with me and helped me through, and to my pal Teddy Panos, who has been so kind to me. Of course special thanks to Sam Poulten, who has entrusted me on his airwaves.
Our first guest was Daniel Barrick, Deputy Director of the New Hampshire Center for Public Policy Studies, who was good enough to come on to discuss the new study by the Center on the potential impacts of casino gaming in New Hampshire. We talked jobs, the social costs of gaming and how it relates to the ultimate financial impact on the state, the investment called for by the legislation, and when New Hampshire could realistically expect to realize operational tax revenue from current casino legislation. I did a post on that study just a couple of days ago. The study itself is, in my view, quality work that uses the best data available to assist policy makers as they contemplate this issue in New Hampshire. We will continue to follow this story as casino legislation works its way through the New Hampshire Legislature, and look forward to some additional conversations with the folks at the New Hampshire Center for Public Policy Studies.
Well the sequester has hit and no major disaster has occurred. As those of you that read the blog know I have been very critical of Republicans for their no compromise position on fiscal issues. They continue to warrant that criticism, but there are some signs that the Republican glacier like opposition to any new revenues may be beginning to thaw.
Since I have been so hard on Republicans let me take a moment to issue a little criticism to the Democrats. It has been very clear to me that the Republicans were not willing to negotiate any changes to the sequester. On January 8th I posted my prediction that the sequestration, as written, and including defense, would take effect. The idea that Republicans could be moved on that issue was ridiculous on its face. Does that Republican intransigence mean that Democrats should give way? No, I do not believe so. But certainly it appeared to me that the Administration was unprepared for the sequestration end game. The President seemed genuinely surprised that an outside campaign did not work to change Republican votes. If he was surprised by that I can tell you he is in for a rough year. The Administration messaging on sequestration was also, frankly, a mess, with the President himself contradicting earlier Administration predictions of doom by saying that sequestration would not “be an apocalypse.”
The truth of the matter is that a sequestration fix would have been a terrible vehicle to use to close tax loopholes, which is what the President sought. I felt the same way when Speaker Boehner tried to introduce the “closing of loopholes” as a way to raise revenues during the debt ceiling crisis so he could avoid marginal rate hikes for top earners. The closing of loopholes and tax reform should be used as part of a “grand bargain” that may still be possible, despite all the childish behavior that has occurred in Washington. You could raise another $600 to $900 billion in revenues while striking a deal on entitlement reform that could bring Republicans to the deal. Think I am crazy? Listen to Republican Senator Kelly Ayotte of New Hampshire, who broached the possibility on “This Week” in the below attached clip.
If the Republicans took the position that revenues are on the table, but drive a hard bargain (for example the Ayotte demand that new revenue be used exclusively for deficit reduction)they could eliminate much of the upfront criticism. There are going to be serious disagreements even after the Republicans put revenues on the table, but the idea is that real negotiations can begin on solutions that can only happen in a bipartisan way. The Ayotte position is likely the result of the defense cuts contained in the sequester, as her, Lindsay Graham, and John McCain remain strongly opposed to defense reductions. Without a grand bargain the three amigos better get used to even further reductions in defense spending. Maybe the sequester will provide the impetus for real negotiations.
Today’s Tribune has an outstanding story on a new study by the New Hampshire Center for Public Policy Studies on the impacts of gaming in New Hampshire, and the potential impacts on the budget, social impacts, how New Hampshire revenues might be impacted by regional competition, and the jobs and economic potentials. The report details some of the budgetary challenges, including the very important issue of when New Hampshire might be able to realize the potential gaming revenue that could be vital to their budget. (Governor Hassan has included $80 million in licensing money in her current two year budget submission). So what does the report say about when revenues might realistically be expected?
It is difficult to accurately predict when the state would see any new revenue from a license fee or casino operations. Experience in other states suggests that it could take at least two years before any tax revenues from casino operations would be available to the state. While up-front license fees paid by developers might come sooner, that will depend on several factors: the speed with which local communities allow expanded gambling through a referendum, and the state’s ability to set up a regulatory structure, among other factors.
The report will draw some fire from pro-gambling forces, but I think some of the results make good sense. For example the study estimated job creation would be directly correlated to the size of the investment required, which of course seems quite intuitive.
While expanded gambling would result in job increases, the number of long-term jobs depends on the size of the investment. Our estimates range from 540 jobs (at a $100m facility) to 2,700 jobs (at a $500m facility). Further, some portion of these jobs will likely replace other jobs. The extent of this so-called “substitution” will be driven by how many visitors to the casino come from outside the market.
What can we expect from a southern New Hampshire casino by way of investment? I was somewhat surprised to see the investment number in the New Hampshire Senate bill.
Let’s walk through the assumptions in Figure 7. First, we assume that the facility in southern New Hampshire would be a mid-sized investment of $300 million, with about 3,000 slot machines. We arrive at this assumption based on language in Senate Bill 152, the expandedgambling bill that has received the backing of Governor Hassan. While the bill requires that developers of a new expanded gambling facility make a capital investment “not less than $425 million,” the bill allows developers to include the cost of the license fee (now set at $80 million)
in that investment total. It also allows casino developers to include the cost of purchasing or leasing land where the new casino will be located, as well as infrastructure designed to support the site, including drainage, roadways and water contamination issues. Thus, one might assume that the $425 million capital investment requirement might actually result in a facility that is significantly smaller than a casino worth $425 million. Further, accounting for recent declines in gambling revenue in New Hampshire and at other facilities across the country, we estimate a casino of this size could potentially generate $91 million in annual revenues to the state of New Hampshire, at a tax rate of 30 percent on net casino earnings, as SB152 calls for.
The study estimates that the opening of competition at Suffolk Downs in Massachusetts would roughly cut New Hampshire’s revenue in half, and in fact, with the estimate included of social costs, could actually produce a net loss for the State. A controversial proposition in terms of how social costs are estimated, but certainly it cannot be argued that no social costs will accrue. The social cost issue was discussed within the context of the tax rate that would be imposed. As noted above the tax rate of 30% could, in conjunction with social costs, produce a net loss for the state. The report suggests that a 40% tax rate would produce a net positive for the State, even where the casino built was on the smaller size, with the Massachusetts competition. That type of analysis will likely not be warmly embraced by gaming interests.
As mentioned earlier I am shocked by the low level of investment required, and certainly can see some potential for an overall investment (after netting out fee, infrastructure, and land acquisition) that could be as low as $250 million. For the purposes of the study the authors assumed an investment of $345 million, and estimated that would bring 1700 jobs. The report takes a look, in detail, about what types of jobs we might expect, utilizing comparative data from other gaming states. That end of the study is worth a good look as well. The Governor, in the Eagle Tribune story, responded to the report:
“Today’s report reinforces that one high-end, highly regulated casino can generate a licensing fee of $80 million or more the next budget that will help New Hampshire invest in priorities that are critical for building a more innovative economic future,” Hassan said.
The governor faulted the study for overlooking potential benefits from other local and state taxes, as well as economic development opportunities emanating from a casino.
“And while the study appropriately notes the impact of social costs, it fails to recognize that with gambling already taking place in our communities and with Massachusetts moving forward with casinos, costs will be felt with or without a New Hampshire casino,” Hassan said.
The New Hampshire battle lines are drawn, and while it appears that the Senate vote should be in favor of the gaming bill, the House seems a bit more uncertain.
Finally it appears evident that the successful passage of the bill would bring gaming to Rockingham Park, which will have impacts on neighboring Methuen. The proximity of Rockingham Park to Methuen, and the utilization of Methuen and Massachusetts infrastructure for a prospective casino, should bring Methuen to the table for discussions on impacts, and potential mitigations. The impacts are real, including social costs, and we on the Methuen side should not be left with additional costs and infrastructure burdens. I recognize the difficulties involved, but I do believe that the concerns are real, and should be addressed. We will talk about gaming in Southern New Hampshire on my new show on WCAP this Wednesday March 6, 2013 at 10:00 a.m.
Chuck Todd over at NBC has talked endlessly about the sequester, with today being no exception. He made some sense to me with his evaluation today, in which he said that nobody should be expecting a deal anytime soon. You can get his thoughts directly over at the First Read website,and see that the political calculations of all involved make a sequestration deal highly unlikely. But I think he leaves out one important calculation that will be made by the President and the Democrats as they mull their “sequestration options” in the days and weeks ahead. I will get to that in a moment. Let us look at the Todd theories, which in my mind are absolutely correct.
Third, the assumption that the cuts would force a compromise turned out to be incorrect. Whether it was during the Super Committee, the fiscal-cliff negotiations, or now, those spending cuts — especially on defense — weren’t enough to strike a deal. As it turns out, the deficit-hawk wing of the GOP got only larger in both the House and Senate. Fourth, all attempts for a Grand Bargain failed: In 2011, both sides retreated to let the election decide the fiscal fight. And at the end of 2012, they dealt only with the expiring Bush-era tax cuts (and not the sequester or increasing the debt ceiling again). Fifth and finally, that fiscal-cliff deal on the Bush tax cuts created a TREMENDOUS amount of intra-party blowback for House Speaker John Boehner, which only made resolving this sequester standoff even more difficult. (After all, remember that it wasn’t too long ago when the big discussion in DC was whether Boehner would lose his speakership.) And just as importantly, folks like Senate Minority Leader Mitch McConnell and Sen. John Cornyn — who are both up for re-election next year and both have colleagues from their states who have become Tea Party stars (Rand Paul, Ted Cruz) – are probably more reluctant to make a deal than ever before. Bottom line: The Senate escape hatch that saved the day during the fiscal-cliff fight isn’t there right now.
So Todd understands that the Republicans are not moving. I have understood that from day one.
So ultimately, the big miscalculation on the White House’s part on sequester was that defense spending would be a forcing mechanism. It is not and will not be. And, as things stand right now, they are wrong to believe the Republicans are going to break like they did at end of 2012. The law was on the president’s ideological side at the end of 2012. That’s why the GOP broke on taxes. In this case, the law is on the Republicans’ ideological side. It is easier for them to defend the sequester at home because they can say, “We said we’d cut spending and the size of government, the president tried to stop us but we wouldn’t let him.” A bad spending cut for many Republicans is easier to defend than any supposed fair tax hike on anyone. So if the White House really wants to stop the sequester, they might have to come up with their own set of $85 billion in spending cuts for this year to replace it. In this political environment, there is no way Boehner, McConnell and Cornyn can politically survive doing anything short of that. The president can still get more revenue down the road on tax reform, but he may have to fold on sequester if he wants a chance at winning in the long run. But that’s also a hard thing to ask a president who just won re-election on this very issue.
So Todd characterizes this as a miscalculation on the part of the White House. I might agree with him on that point if a legislative fix on sequestration was truly available, but not reached because the President did not try hard enough. But if Todd is correct on the Republican political dynamic preventing any movement from them, how was such a deal available on anything but Republican terms? That brings me to the one earlier mentioned miscalculation in the Todd analysis, which is the political problem for Democrats. If sequestration is to occur it is not in the President’s interests to change the current mix of spending cuts. If what Todd means by “folding” on sequester requires the President to advocate for replacing defense cuts with domestic ones then he is dreaming. The President will be in the same political boat that Todd feels the Speaker is in: changes to the sequester that further cut domestic programs in favor of defense will create a major firestorm in the Democratic Party, and on that basis are a non-starter.
For now the President will likely continue to speak publicly (campaigning) not because he thinks he can win the legislative fight that way but because he sees the stalemate ahead, and there are no palatable options for him. Folks from both parties better get used to the sequester, and significantly lower defense spending in the years to come. The country no longer wishes to pay for the type of defense spending that we have had over the past twenty years. The sequester of 2013 will be the first step in reducing the global American footprint because with tax revenue at 15.5% of GDP the nation can no longer pay for what we have built in defense. Military bases in Germany? I don’t think they will be there much longer. That debate is likely to be just as fierce as the fiscal debate is today.
