Category Archives: Economy

The Wreck of the Penn Central: Conservatives want to replicate another financial debacle?

Rail logos Two days ago Fox News was happily promoting the privatization of Amtrak. [C&L]

“Gasparino went on to promote privatization. He said that the northeast corridor, between Washington and Boston, is a “very profitable service” and “there is no rationale why that service cannot be privatized. …If you put private management in there, it would probably be even more profitable and they could pay for even more upgrades.” “I’m not saying privatize the whole thing, at least not at first,” Gasparino said. But he insisted that privatization would make for “a Jet Blue of rail traffic.”

I admit to having “senior moments,” but I haven’t forgotten the fact that the reason Amtrak was created in 1971 was because of the FAILURE of private corporations to run the railroads.

A Bit of History

Once upon a time there was the Penn Central Transportation Company.

“The Penn Central merger was consummated on February 1, 1968, between the Pennsylvania Railroad and the New York Central Railroad. At the end of 1968, the New York New Haven & Hartford Railroad was merged into PC by order of the Interstate Commerce Commission.

Financial problems plagued the PC during its first couple years. Even though the merger had been planned for 10 years (on and off) before its inception, many problems faced the combined companies, such as incompatible computer systems and signaling systems.

Penn Central also invested in other companies, such as real estate, pipelines, and other ventures. The idea was to create a conglomerate corporation, with the railroad as one part of it. This diversification program, even 20 years later, is a point of debate over the fall of the PC, as some people say funds that were invested in other companies could have been used to run the railroad.” [PCRRHS]

Take a measure of mergers/acquisitions, add “diversification,” and … the world watched as the newly formed company created “dismal numbers.”  Enter the investment bankers. There were warnings.  One warning came before the big merger, in which it was noted that Penn Central had more than $1 billion in debt which would mature by 1982. When Penn Central finally went into bankruptcy it’s long term indebtedness, including obligations due in one year was an eye-popping $2.6 billion. $1 billion was due in five years; $228 million fell due in 1970; $156 million was due in 1971; $172 million came due in 1972; $270 million due in 1973, with another $160 million due in 1974. [Wreck of PCentral]

How this happened should sound eerily familiar:

“…economist Henry Kaufman says of this period in the late 1960s, “I watched with growing alarm as sources of corporate borrowers – in an effort to circumvent regulatory lending constraints – piled into the commercial market as issuers. The trend continued, and culminated in the collapse of the Penn Central Railroad.” [BuyHold]

And collapse it did, into the largest bankruptcy the nation had experienced up to that point, but not before:

“Penn Central’s subsidiaries were stripped of their treasuries in order to prop up PC’s own earnings. For example, New York Central Transport, a trucking subsidiary, had profits of only $4.2 million and yet paid $14.5 million in dividends to the parent. Despite this kind of maneuvering, the dividend on Penn Central common was slashed from $2.40 to $1.80 in 1969. Chairman Saunders vowed to hike it back up, soon. [It was later learned, however, that insiders at PC were unloading their company stock and bonds while all of this was going on.” [BuyHold]

We had a batch of corporate borrowers trying to get around regulations on lending, combined with a company fiddling the books trying to prop up its earnings reports, and taking on massive amounts of debt.  What could possibly go wrong?   The answer, of course, was “everything.”  June 21, 1970 the company declared bankruptcy.  What of the passengers?

“October, 1970, in an attempt to revive passenger rail service, congress passed the Rail Passenger Service Act. That Act created Amtrak, a private company which, on May 1, 1971 began managing a nation-wide rail system dedicated to passenger service.” [Amtrak]

Where was Wall Street?  Again, Wall Street didn’t appear to be all that helpful, except perhaps to themselves.  Goldman Sachs won “the opportunity” to underwrite Penn Central’s commercial paper in 1968.  We can almost guess what happened next:

“For large fees, Goldman sold the paper to its clients, including big companies such as American Express and Disney, and smaller ones such as Welch’s Foods, the grape-juice maker, and Younkers, a Des Moines retailer. Welch’s and Younkers, particularly, counted on the fact that Goldman told them that the Penn Central paper was safe and could be easily redeemed. Welch’s invested $1 million — some of it payroll cash — and Younkers invested $500,000, both at Goldman’s recommendation.” [TribLive]

After the Penn Central’s bankruptcy filing the SEC conducted an investigation.  This, too, is a bit too common for comfort:

After Penn Central filed for bankruptcy, an SEC investigation discovered that Goldman continued to sell the railroad’s debt to its clients at 100 cents on the dollar — even though, by the end of 1969, the firm knew that Penn Central’s finances were deteriorating rapidly.Not only was Goldman privy to Penn Central’s internal numbers, it also heard repeatedly from the railroad’s executives that it was rapidly running out of cash. [TribLive]

By February 1970 Goldman had about $10 million in Penn Central commercial paper on its books.  On February 5, 1970 Goldman Sachs demanded that the railroad buy back that $10 million inventory at 100 cents on the dollar even though it obviously wasn’t worth that much at that point. Goldman Sachs didn’t tell any of its clients about the offer, nor did it tell the customers that it had already taken care of its own interests before theirs.  Plus ca change, plus c’est la meme chose? [see also: WaPo 2102]

It doesn’t take too much imagination to see how (1) a boom in commercial paper – indebtedness; combined with (2) underlying debts incurred in operations, mergers, and acquisitions; abetted by (3) investors seeking ways around regulations; and (4) investment banking more interested in self preservation than best business practices combined to create a blockbuster bankruptcy. 

But yet, we have the Cato Institute, the bastion of conservative economic imagination pontificating:

“Budgetarily, Amtrak has become a runaway train, consuming huge subsidies and providing little or no return. Four decades of subsidies to passenger trains that are many times greater than subsidies to airlines and highways have failed to significantly alter American travel habits. Simple justice to Amtrak’s competitors as well as to taxpayers demands an end to those subsidies. The only real solution for Amtrak is privatization.”

The conservatives are missing several points.  The point may not be to “alter” travel habits – but to maintain services which people were already using for their commute to work, especially in the Northeast Corridor.  The rationale for the act included stabilizing services for passengers, the general public, and shippers. [RRA]

Going to Court

Amtrak is a private corporation, albeit one with some very special features.   If we want to get technical about  it, the official name is the National Railroad Passenger Corporation.  In fact, the point was driven home in a legal case two years ago in which the private nature of the NRP Corporation was pivotal:

“A three-judge panel of the U.S. Court of Appeals in Washington today said Congress had improperly delegated to Amtrak, a private corporation, the power to draft performance standards that affected companies whose tracks the passenger carrier uses. Amtrak trains have legal priority over freight.

“Though the federal government’s involvement in Amtrak is considerable, Congress has both designated it a private corporation and instructed that it be managed so as to maximize profit,” U.S. Circuit Judge Janice Rogers Brown said in the ruling.” [Skift]

The case got the attention of the U.S. Supreme Court. [FRAdvisor] Enter the “fish or fowl” phase.  Roger’s decision was “vacated and remanded” on a 9-0 decision.  Could Amtrak “metrics and standards” be set aside because the Congress unconstitutionally delegated power to a private corporation? And the Court said:

“No. Justice Anthony M. Kennedy delivered the opinion for the majority. The Court held that, for purposes of determining the validity of the metrics and standards, Amtrak is a governmental entity. The members of Amtrak’s Board of Directors are appointed by the President and confirmed by the Senate, and Amtrak is required by statute to pursue broad public objectives. Because of Amtrak’s significant ties to the government, Amtrak is not a private enterprise, and therefore, treating Amtrak as a governmental entity is consistent with the constitutional separation of powers.” [Oyez]

Therefore, what the Cato Institute and its allies are arguing is that the decision in DOT vs. Association of American Railroads (49 USC 24301) should be overturned and the railways should exist without any “regulations” imposed by Amtrak which would be applicable to freight haulers.   Extrapolating the Cato’s position to absurdity, under their reasoning we could revert to the wonderful old days of differing track gauges. 

Riding the Thin Rail

However, perhaps the most crucial point the conservatives are missing isn’t about the legislative and legal nature of the National Railroad Passenger Corporation, but why this entity was established in the first place.  Although a person might think we’d have learned something from the financial debacle of 2007-2008, the calls to privatize Amtrak have a remarkably familiar ring.

In a financial atmosphere in which commercial debt is treated as fodder for the creation of derivative financial products, and trading is barely regulated in the face of financialist opposition, and mergers and acquisitions generate incentives for corporate mismanagement, and there isn’t an old school investment bank left on the American landscape because of the casino mentality of Wall Street during the Housing Bubble, are we truly going to believe that privatization is the panacea for all that ails the passenger rail system in the United States?

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Filed under Economy, financial regulation, Infrastructure, public transportation

It’s A Train Wreck?

Amtrack wreck Reno The cable news networks are off on their usual “Who’s To Blame?” penchant in reporting tragic news, and in the midst of the palaver over the Pennsylvania Amtrack wreck there’s the usual lack of context.

For example, has the media told us there were 220 derailments in 2012, 191 in 2013, and 228 in 2014? [FRA]  Or, when looking at accident or incident causation we have the following information at hand? [FRA]

Cause 2012 2013 2014 2015
Track 112 91 87 101
Human 98 96 132 112
Equipment 39 33 47 44
Signal 12 9 8 6

What is interesting about this abbreviated table is the the track and human failure seems to predominate, while equipment and signal failures account for substantially less than the  first two factors.  (Miscellaneous factors are not included in this summation.)

There’s another way to observe train accidents, by state, and we find the following among the states with the highest number of accidents:

State 2012 2013 2014 2015
California 17 20 13 18
Illinois 24 33 50 38
Minnesota 10 9 4 3
North Dakota 5 4 6 4
Nebraska 13 7 8 11
Ohio 14 10 15 14
Texas 35 22 31 37

*This summary doesn’t include crossing accidents.

The Federal Railroad Administration also keeps records of fatalities and injuries, and this is what garners most attention from the news media. Again, we can look at the record over the last four years, noting that those numbers for 2015 are preliminary.

Fatalities 2012 2013 2014 2015
California 19 12 18 25
Florida 4 8 7 4
Georgia 6 4 5 3
Louisiana 3 2 1 6
New York 4 7 1 12
N. Carolina 4 8 5 5
Ohio 7 3 5 4
Pennsylvania 3 4 3 3
Massachusetts 3 1 0 0
Texas 11 7 4 18

*PA will add 8, those fatalities in the Amtrak accident near Philadelphia, May, 2015.

What we might expect to find are a higher number of fatalities in the Northeast Corridor, where ridership includes commuting,  but the reports indicate higher numbers generally in California and Texas.  If the accident numbers (in terms of passenger travel) appear to be increasing, so is the ridership, as shown from BTS (interactive) figures from 2000 to 2015.  The light blue line doesn’t include seasonal adjustment.

Rail passenger miles

The general trend shown by the unadjusted and adjusted numbers indicates more people using rail transportation since 2000. In calendar year 2006 the FRA reported 602,280,892 passengers transported; the number of passengers transported as of the end of calendar year 2014 was 694,507,965.

FRA regions map And, where is the ridership?  Where we would expect it.  Region 1 reported 369,467,363 transported, Region 2 reported another  83,444,579.  Region 7 reported 99,512,195; Region 6 reported 56,260,844.  Region 4 reported 41,748,653. Region 5 reported 32,943,327.  Region 3 reported 5,938, 814; and, Region 8 reported the lowest passenger traffic at 5,149,686.

What Use Can We Make Of The Numbers?

First, if we take a look at the ridership numbers (which don’t include local transit services) and the reported fatalities,  it’s reasonably clear that passenger travel is remarkably safe. Certainly safer than travel by private automobile.

Secondly, we can question the popular opinion offered to explain the political inaction on public transportation funding – like for Amtrack – that low funding is because most of the country isn’t using passenger rail service.  Granted that Regions One and Two (Northeast Corridor) are reporting the highest usage, but quite obviously Region Seven (California) and Region Four (the upper Mid West) are contributing significant ridership numbers.  The assertion that low ridership may equate to low support could only true for the Southeast and the Northwest.

Third, if we look at accident causation, it’s worth repeating that track issues and human error are the most common.  Therefore, while it’s useful to speak of new and better gadgets for passenger train safety – and we should be applying the best technology we can devise for passenger safety – it’s also true that suggestions like putting a second person in the cab, or promoting better track maintenance should be part of the larger conversation.

Fourth, if we focus down on the human error factor, we should note the 2006 FRA study of the fatigue factor:

“As part of the study, researchers analyzed the 30-day work-schedule histories of locomotive crews preceding approximately 1,400 train accidents and found a strong statistical correlation between the crew’s estimated level of alertness and the likelihood that they would be involved in an accident caused by human factors, FRA said.”

We can delve into the details to substantiate this conclusion:

The risk of human factors accidents was elevated at any effectiveness score below 90 and increased progressively with reduced effectiveness. At an effectiveness score ≤ 50, human factors accidents were 65 percent more likely than chance. Human factors accident risk increases reliably when effectiveness goes below 70, a value that is the rough equivalent of a 0.08 blood alcohol level or being awake for 21 hour following an 8-hour sleep period the previous night. Below an effectiveness score of 70, accident cause codes indicated the kinds of operator errors consistent with fatigue, confirming that the relationship between accident risk and effectiveness was meaningful. [FRA]

If preventing the next accident is our major concern then addressing the fatigue factor is crucial, and yet we have a situation in which railroad employees and management are at odds over the safety rules. For example, SEPTA (the Southeastern Pennsylvania Transportation Authority) wanted to relax fatigue abatement rules in 2014:

“Regional Rail engineers have asked federal regulators to require SEPTA to follow a safety rule designed to limit fatigue. SEPTA wants the Federal Railroad Administration to renew a waiver that the transit agency has had from the work rule for two years. The Brotherhood of Locomotive Engineers and Trainmen asked the federal agency to deny SEPTA’s request and hold a public hearing on the issue, citing accidents at other railroads caused by fatigued engineers.” [Phl.com]

And the reason for the waiver request?  That can be safely predicted:

“SEPTA said the waiver was “in the best interests of the riding public from both a service (more employees available for duty to address service demands) and economic standpoint (reduced labor costs by eliminating a potential need to hire additional employees).”

“Maintaining tight controls on labor expenses and operating expenses is one way SEPTA manages to fulfill that obligation [to operate efficiently],” SEPTA said in its request for the waiver extension.

“SEPTA estimates one additional crew costs approximately $150,000 annually, so even one new employee could cost SEPTA hundreds of thousands of dollars in labor expenses in a relatively short period of time.”[Phl.com]

In short, to address demands for service it was deemed better (from an economic standpoint) to have fewer workers working longer hours, in spite of the FRA report eight years before demonstrating the decline in the probability of passenger safety.  Is the “mission” of SEPTA to function “efficiently” or “safely?”

Fifth, returning to the gadget fixation there’s an abiding American proclivity to believe that we can apply tools to fix human problems.  It’s one of our basic strengths – we have a problem, we invent a tool to mitigate or solve it.  The news media has been abuzz about the Positive Control Train System, but while we have this tool in the box it’s not been applied universally.  The recent wreck provides a case to the point:

“In 2008, Congress ordered the installation of what are known as positive train control systems, which can detect an out-of-control, speeding train and automatically slow it down. But because lawmakers failed to provide the railroads access to the wireless frequencies required to make the system work, Amtrak was forced to negotiate for airwaves owned by private companies that are often used in mobile broadband.

Officials said Amtrak had made installation of the congressionally mandated safety system a priority and was ahead of most other railroads around the country. But the railroad struggled for four years to buy the rights to airwaves in the Northeast Corridor that would have allowed them to turn the system on.” [NYT]

This junction of private vs. public concerns was literally a wreck waiting to happen? Could Congress have made the wireless frequencies immediately available to the railroads? Probably yes. Would they buck the powerful lobbying interests of the mobile broadband providers? It doesn’t look as if they did.

Sixth, in the interests of not perpetually “fighting the last war,” or focusing too narrowly on factors associated with one instance of a rail system problem, we need to be cognizant of the other common factor in derailments and related accidents – the track inspections.  Perhaps it’s time for a report along the lines of the Deep Dive study conducted on the Metro North system, which called for Metro North to “create a plan for the use of advanced (track) inspection technology, ensure track is maintained to Metro North Track Standards, collaborate with labor unions to increase the availability of off hours maintenance time, improve training programs for track inspection and maintenance, and to analyze train schedules to determine whether there is sufficient time for inspection and maintenance of track.”

It’s not reassuring to find out that Minnesota has only one track inspector for its 4,500 mile of track. [MST]  Pennsylvania has 5,600 miles of track and “There are currently six PUC railroad inspectors who each focus on a specific discipline (track, operating practices, hazardous materials, grade crossing and motive power and equipment). PUC inspectors work in close coordination with FRA inspectors to ensure safe train movements throughout the entire state.” [PPUC]  Please tell me there are more than 6 people working on inspections!  The recent controversy over the Oil Trains moved New York to conduct an examination:

“Governor Andrew M. Cuomo today announced completion of the latest round of targeted crude oil tank car and rail inspections, which uncovered 100 defects, including eight critical safety defects that require immediate action. The inspections were the latest part of the Governor’s push to protect New Yorkers from the potential dangers associated with the transport of crude oil by freight rail companies. State and federal teams examined 704 crude oil tank cars and approximately 95 miles of track in these inspections.”  [Gov.NY]

Perhaps the Amtrack accident might move the states to engage in comprehensive reviews of track safety?

Finally, we need to address some philosophical and political problems.  What is the “mission” of our transportation system, especially with regard to our railroads?  As usual, there are more questions than answers.

Is the mission, to replicate the focus as illustrated by SEPTA  on “management efficiency,” or is the mission to provide safe, reliable, and modernized transportation for passengers and freight?  Have we down-sized employment levels of engineers and track inspectors to a point where we are being penny wise and pound foolish?  Are we requiring adherence to the best safety standards or simply accepting what is “economical” at the moment?

Have we placed impediments to modernization such as the implementation of Positive Control systems? Have we also jeopardized other safety considerations and systems by emphasizing privatization at the expense of public safety and the economic benefits of infrastructure improvement?

Are we perceiving our transportation system and infrastructure as essential to the economic well being and growth, or are we limiting our vision to the quotidian arguments between labor and management?

The national conversation about railway infrastructure and its management needs to be far broader than the current fixation on how to prevent wrecks.  That train left the station long ago.

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Filed under Economy, Infrastructure, labor

Zombie Guns Blazing in NV Legislature

zombie guns 2

This is the kind of news Nevada can do without:

“A “campus carry” bill believed to be dead in the Senate will be amended into another Second Amendment measure on Friday, Assembly Judiciary Chairman Ira Hansen said Wednesday.

Hansen said that because the Senate Judiciary Committee won’t hear Assembly Bill 148 that would allow those with concealed weapons permits to carry their weapons on college campuses, it will be amended into a Senate bill on the deadline day for committee action on most bills.” [LVRJ]

The bills in question is SB 175 and SB 240.  The Guns Galore crowd, championed by Michele Fiore (R-NRA) and Ira Hansen (R-Ammostan), wants those with concealed carry permits to be able to pack “heat” on college campuses.  Little matter that others may find this uncomfortable or downright dangerous.  Happily, there are some restrictions in place on concealed carry permitting in this state – not that the Ammosexuals wouldn’t like to eliminate those eventually.

The Current Requirements

In Clark County those wanting a permit must the a Nevada resident of Clark County, or an out of state resident who has received firearms training in Clark County; 21 years of age, not prohibited from firearms ownership by state or federal law; and must successfully complete an approved firearms course in Clark County.  [LVMPD]

The requirements in Washoe County are essentially the same. A person must be at least 21, provide documentation of competence with a firearm, meet the standards set forth in NRS 202, have no DUIs in the preceding five years or record of “substance abuse.”  [Washoe pdf]

Campus Numbers

The University of Nevada campus in Reno as of the Fall of 2013 had 15,694 undergraduates, of whom 47%, or 7,454 were male, 8,240 were female.  The average age of a UNR undergraduate was — 21 years of age. [CP]  There were 23,090 undergraduates enrolled in UNLV, 12,824 female, 10,275 male.  The average undergraduate age at UNLV was reported as 18 years. 23% were aged 25 or older. [CP]

One obvious feature of these figures is that there are a significant number of young males on both major college campuses in this state.  We do know from the CDC* and other sources  that firearms and young men aren’t a particularly good mixture.  Pew Social Trends reported:

“Men (and boys) make up the vast majority (84% in 2010) of gun homicide victims. The gun homicide rates for both genders have declined by similar amounts since the mid-1990s, though the male rate is much higher—6.2 gun homicides per 100,000 people in 2010, compared with 1.1 for females.”

… and …

“Males are the vast majority of gun suicides (87% in 2010), and the suicide rate for males (11.2 deaths per 100,000 people) is more than seven times the female rate (1.5 deaths). The highest firearm suicide rate by age is among those ages 65 and older (10.6 per 100,000 people).”

Thus, what the ammosexual alliance is proposing is to place more firearms in a setting in which there are significant numbers of already vulnerable individuals in the setting.

Individual Tragedy and Economic Costs

Aside from the human tragedy there are economic factors to consider before advocating any further proliferation of firearms and the situations in which those guns can be allowed.

In December 2012, Bloomberg Business news reported that gun violence was costing the American economy some $174 billion.  Forbes magazine reported in 2013 that gun violence was costing each American about $564.

And, then there is the “market” argument, which the Minneapolis Post analyzed as follows:

“Treating gun violence as an externality assumes that weapons markets are legitimate and that we must live with the consequences.  However, certain aspects of this market may not be legitimate. Markets do not exist in a vacuum.  They are created and designed by people, and societies can decide to modify or restrict markets depending on its values and goals.

Debra Satz, a professor of philosophy at Stanford University, addresses this in her book “Why Some Things Should Not Be for Sale: The Limits of Markets.” At the heart of her analysis is the concept of noxious markets, i.e. “markets that people find especially objectionable” and which should be curtailed or eliminated.

One important reason why societies deem some markets as noxious is that trade in these goods causes extreme harm to individuals and/or society.  Markets in assault rifles, large-capacity ammunition magazines and related items could be thought of this way. The damage caused by guns used to commit crimes is so great that we must regulate them and, in some cases, eliminate them.”

We know, for example that alcohol and tobacco products are often classified as “noxious markets.”  There are spill-over effects in society, in terms of public health costs, and other related expenses or losses.  Therefore, we regulate and use tax policy to curb the consumption and use of these items.  State legislatures are quick to add “sin taxes” to diminish the ‘noxious’ markets for some products, especially in the tobacco categories. However, they’re remarkably slow to consider taxing/regulating the use of guns and ammunition.  An amended SB 175 merely serves to advance a ‘noxious’ market, rather than curbing firearms proliferation which endangers young people – especially young men.

U.S. News and World Report was more blunt on this subject, when speaking of the economic costs of firearms and school security in America:

“However, the firearms industry has managed to avoid picking up the tab for its externalities. A recent proposal by Wayne LaPierre of the National Rifle Association shows the size of the problem. After the Sandy Hook school shooting, the NRA proposed that the best solution to gun violence in school is to have more guns in school. They argued that every school should post an armed guard (or several) to stop would-be shooters. Let’s set aside the constitutional and practical considerations and just consider the economics of this for a moment: It would cost nearly $5 billion per year to put a trained, equipped, armed guard in each of America’s 132,000 K-12 schools. That calls for a fee—let’s call it the “Schools Security Fee”—of $500 to $750 for every new and used handgun purchased in the United States. The fee is roughly the cost of a typical good-quality new pistol! If imposed, it would double the price of handguns and cripple the firearm industry. Yet it’s ironic that many of the folks who claim to hate taxes and government see no problem in proposing a $5 billion expansion in government, which necessitates taxes to pay for it.”

Whether viewed in macro-terms such as in the classification of firearms as a ‘noxious’ market, or in micro-terms as in a discussion of school safety officers, the message is essentially similar.  The manufacturers of firearms and their Ammosexual Allies are arguing that lethal weapons do not constitute a ‘noxious’ market and therefore should not be taxed or regulated even if the economic costs run into the $174 billion range.

Hostage Taking

While we can have socially oriented or economically based arguments over firearms regulations it must be admitted that there is an emotional factor to consider.  The positions taken by the Nevada Firearms Coalition which calls for legislation to “enhance personal liberty,” perceives proliferation as a ‘beneficial’ market, and a positive social good.**  “Armed” with this emotional attachment to firearms and their retail sales, the Guns Anywhere advocates are perfectly willing to hold other, and better, legislation hostage in order to advance their cause. Witness:

“As I reported earlier this week, Assembly Members Michele Fiore (R-Las Vegas) & Ira Hansen (R-Sparks) are retaliating against Senate Majority Leader Michael Roberson (R-Henderson) & Senate Judiciary Chair Greg Brower (R-Reno) for shelving their “Guns Everywhere” bill (AB 148) in Senate Judiciary. So they just amended SB 240, Roberson’s mental health & “voluntary background checks” bill, to include elimination of Clark County’s “Blue Card” handgun registry…”  [LTN]

Winston Churchill was right: “A fanatic is one who can’t change his mind and won’t change the subject.”

—————————————-

* Warning: Depending, of course, on your download speed this file can be very slow loading. (94.3 mb .zip format)

** See also: The 50 Caliber Institute.

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Filed under Economy, Gun Issues, Nevada economy, Nevada legislature, Nevada politics, public safety

Heck’s Jolting Idea: H.R. 1401

Heck photo Nothing illustrates the tenuous GOP grasp on the concept of job creation quite so well as Representative Joe Heck’s JOLT Act of 2015.  H.R. 1401:

“Amends the Immigration and Nationality Act to authorize the Secretary of Homeland Security (DHS) to admit into the United States a qualifying Canadian citizen over 50 years old and spouse for a period not to exceed 240 days (in a single 365-day period) if the person maintains a Canadian residence and owns a U.S. residence or has rented a U.S. accommodation for the duration of such stay.”

By the Numbers

There are 35.16 million people living in Canada. 4.7 million of them are between the ages of 55 and 64. [StateCan]  The 2011 Canadian census counted 4,945,060 individuals over the age of 65. [CanCensus] Of these numbers, approximately 500,000 can be classified as Snowbirds – those owning property in the United States. [FinancialPost] To apply some context, 500,000 is about 0.00157 of the U.S. population estimated at 317 million.

Some Canadians did take advantage of the housing bust in the U.S. to purchase retirement properties in California, Arizona, and in Mexico, but even in 2012 this was described in the Canadian press as a “small but growing group.”  It would be small considering the travel related expenses, and the tax liabilities incurred. [GlobeMail] Not to mention the affluence required to maintain two residences.

Now comes the part wherein Nevada’s representative from the 3rd Congressional District tries to explain how wonderful this bill would be.

Representative Heck wrote:

“Boosting our economy and improving national security are two of the most critical challenges we face as a nation and the JOLT Act addresses them both,” Heck said in a statement.

“Expediting the visa interview process and expanding the Visa Waiver Program will bring more international travelers and tourists to destinations around our country and creates jobs,” he continued. “Making discretionary visa waiver security programs mandatory will improve our security at home and aid our intelligence community in the fight against global terrorism.”  [The Hill]

Notice the attempt to tie the 500,000 Snowbirds to a booming tourism economy; “Expediting the visa interview process and expanding the Visa Waiver Program will bring more international travelers and tourists to destinations around our country and creates jobs.”  We might venture to ask how increasing the temporary population of the U.S. by 0.00157 or 0.157%  is exactly a big “job creator?”

Who Wants This?

The U.S. Travel Association wants it, as does the Canadian Snowbird Organization.  And, from the Snowbirds we learn that Canadians purchased $2.2 billion in Florida real estate, making the National Association of Realtors very happy. [CSB]  Representative Heck’s interest in this bill may be peaked by the $92,449 in contributions he received (2013-2014) from real estate interests, including $60,559 from individuals and another $31,890 from PACs. [OpenSec]

To sum up the situation: This bill isn’t about jobs.  It really isn’t all that much about tourism.  It is about serving the interests of a relatively few wealthy Canadians who want to retire to Sun States – anything has to be sunnier than Newfoundland – and the real estate interests who want to serve them.

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Filed under Economy, Heck, House of Representatives, Nevada politics

Taxing Tesla and Its Promises

Tesla

It isn’t quite a bait and switch, but it’s close enough to warrant further scrutiny.  Back on April 17th there was a news report about Tesla, it’s promises for wages, and the tax incentive package awarded if Tesla would build a really big factory in northern Nevada.  I’ve argued against tax incentive packages in general because: (1) Tax rates are not among the priorities given real consideration by corporations when determining factory locations.  (2) The actual criteria include (a) transportation and commercial infrastructure – can the materials be received and products shipped with ease and economy? (b) availability of local and accessible research and development assistance – are there research institutions in proximity which can enhance the research and development goals of the factory/corporation? (c) is there a well trained work force immediately available that can meet the corporation’s employment and staffing needs?

Tesla made the argument that Nevada was not first on the list in terms of the usual criteria, and the tax incentives were a “significant factor.”

“The application confirmed that the plant will employ 6,500 full-time employees but raised its average wage estimate to $26.16 per hour. Tesla expects to employ 300 workers during the first year of the project, growing that to 2,000 workers by the third year and 4,000 workers by the fifth year. Tesla plans to have 6,500 employees by its eighth year. Initial projections had the gigafactory being fully operational by 2017.” [RGJ]

Predictably, there are problems now – such as The Lawlessness of Averages.  Return with us now to elementary school arithmetic. There are three kinds of averages: the mean, mode, and median.  And, just to make certain we do well on the test – there’s also the Range.

Reports from October 2014 indicated Tesla’s personnel costs would include $22.79 for production associates and material handlers; $27.88 for technicians, and $41.83 for engineers and senior staff.  

One of the obvious problems with projections is that they are always based on figures said to be the ‘best available at the time.’  What else could they have been based upon?  Thus we had Tesla saying “$22.00, and the state saying $25.00” and no one offering hard and fast numbers on which to base the calculations.  Enter a new factor – contract negotiations elsewhere:

“Contract negotiations this year between the United Auto Workers and Detroit automakers are likely casting a spotlight on Tesla wages, said Kristin Dziczek, research director at the Center for Automotive Research. Tesla’s Fremont manufacturing operation, however, might be playing a bigger role in the wage issue, Dziczek said. The Free Press story noted, for example, that the starting pay at Tesla’s Fremont facility is $17 per hour.

“They don’t pay ($25 per hour) for their assembly wage,” Dziczek said. “Certainly, there are forces that would like to organize the Tesla assembly plant and would use a $25-an-hour wage in Nevada to rile up assembly workers.” [RGJ]

Yes, some people could become a bit riled if the wages for production workers (the most numerous in any operation) were as far apart as $25 and $17 per hour.  It’s not like we weren’t warned that the state was overestimating the economic benefit of the tax incentive package.

tesla chart

The Los Angeles Times offered the graphic shown above in September 2014.  There were some assumptions not necessarily in evidence:

“The projection, for instance, counts all future tax revenue, but makes no allowance for government spending to serve the influx of residents. It counts every dollar of workers’ salaries as if they were unemployed or lived out of state before Tesla arrived. And more than half of the estimated economic jolt relies on the assumption that the bulk of the factory’s supply chain will relocate to Nevada.” [LAT]

We can calculate dandy results for Nevada’s economy if we simply ignore some pesky details – such as: the cost to state and local governments to absorb the influx of new residents; or, we assume that everyone who applies for work at the battery plant was previously unemployed; or, we assume the suppliers will relocate to Nevada…

We might also have to factor in the costs associated with getting those suppliers to relocate?  Are we to offer “tax incentives” (read breaks) to suppliers who want to move to Nevada – on top of the tax breaks already given to the parent factory?

What we might want to consider before we go launching off on any new forays into ‘economic development’ and diversification is guidance which:

(1) Calls for a minimalist approach to employment prospects; one in which we do not assume that all applicants for positions are previously unemployed.

(2) Specifies that ‘average wages and salaries’ do not include senior executives and specialists.  Those higher salaries have a way of skewing the arithmetical averages.  Since Nevada has no personal income tax, we cannot expect revenue to stream straight in from wages and salaries; we have to assume that most of the wages will be spent within the state.

(3) Takes a situation as it is not as we would want it to be; that is, we do not assume the existence of an imaginary number of suppliers who would move at no cost to support a manufacturing facility.

(4) Takes into consideration the impact on local governments and their services in terms of an influx of population, and the need for physical infrastructure to support manufacturing.

It’s not necessarily a bad thing that the Tesla plant will be built in Nevada, but it is not helpful when the tax incentives applied to attract such manufacturing may end up costing the state and local governments more than they can bear.  And, certainly less than what Nevada citizens might have expected in return.

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Filed under Economy, Nevada economy, Taxation

Shady Lender Protection Act heard in Nevada Legislature Committee

AB 282

Perhaps this was a good week to revisit “Margin Call?”  Why? Because Fiore and Friends are promoting AB 282 in the Nevada state Legislature.

“AB 282: AN ACT relating to real property; revising provisions governing mediation of a judicial foreclosure action; revising provisions requiring certain actions related to the foreclosure of owner-occupied property securing a residential mortgage loan to be rescinded after a certain period; revising provisions governing civil actions brought by a borrower for certain violations of law governing the foreclosure of owner-occupied property securing a residential mortgage loan…”

This bill is on today’s agenda in the Assembly Judiciary Committee.  Might it be suggested that the informal title of the bill be “The Shady Lender Protection Act of 2015?”  Here’s why:

“Existing law provides that in a judicial foreclosure action concerning owner- occupied property, the mortgagor may elect to participate in the program of foreclosure mediation. (NRS 40.437) Section 1 of this bill removes provisions governing the process of such mediation and the documents required to be brought to the mediation. Section 1 instead requires the Nevada Supreme Court to adopt rules governing the mediation.” (emphasis added)

Let’s start with the part wherein the Nevada foreclosure mediation process has been successful.  It’s been especially beneficial for borrowers in owner occupied homes who want to avoid foreclosure. [nolo] Perhaps this is why Fiore and Friends and so dead set against it?  So, what are those documents required in the process?

“Nevada’s mediation program requires that borrowers and the lender provide the mediator and each other with certain documents prior to the mediation. The borrower must provide appropriate documentation, such as financial information, so that the lender can make a determination about whether the borrower is eligible for a loan workout. The lender must provide documents such as the original note, deed of trust, and assignments (or certified copies).” [nolo]

Remember those bad old days, the ones in the wake of the housing bubble debacle?  Those were the days during which lenders were seeking to foreclose properties on which they didn’t have the paperwork necessary to prove who held the mortgage.  And at this point we return to the messy problem of MERS.

MERS was an ‘electronic’ recording of mortgages which was supposed to facilitate the assignment of mortgages etc. at high speed – speed high enough to sate the demand from Wall Street for more and more and more mortgages to slice, dice, tranche, and otherwise divide into financial products for marketing.  The idea was that county recorders weren’t fast enough to keep pace with the Wall Street demand for mortgages in the secondary market.  The fall out from the MERS mess is still being felt in parts of the country. [Harpers]

Thus, what AB 282 does is to (1) eliminate a mediation process which has been successful in Nevada, and (2) eliminates the documentation requirements now on the books according to which the borrowers must provide their financial information and the lenders must prove they own the paperwork on the property.  We can guess who’s having problems with the paperwork, but an article in the Reno Gazette Journal in 2012 provides some interesting details:

“Data from the same report (on program effectiveness) , however, have some questioning what the program’s definition of good faith is. Out of the 3,183 total cases from the same time period, banks did not bring all the required documents in 1,149 cases — a rate of 36 percent.

JPMorgan Chase topped the list, failing to bring all necessary documents in 52 percent of its cases. Ally/GMAC was second at 50 percent, followed by Bank of America at 41 percent, US Bank at 32 percent and Wells Fargo at 31 percent. Citigroup posted the lowest rate of the six banks mentioned at 12 percent.”

And, why did the banks have problems with the paperwork?  They didn’t have it. The Great Wall Street Mortgage Mill had shredded the mortgages into sliced and diced financial products in which nobody knew who really owned what – much less what the paper was really worth.

“They want the original paperwork and not a certified copy, which becomes an issue for mortgages that have been securitized (into investments),” Uffelman said. “Once a mortgage gets securitized, the paperwork ends up in a different place and can be tough for a servicer to track down and pull back together. The more you securitize stuff, the easier it is to screw things up.” [RGJ 2012]

And screw things up they did. Since Wall Street was in such a glorious rush to manufacture asset based securities on offer in the Casino, the recording and other record keeping practices were lost in the great paper shuffle.  Only in the imagination of Wall Street sycophants does this create a problem to be borne solely by the homeowner.

If we look at the latest report (pdf) from the program we see the nature of the continuing documentation problem:

“Of the 1,894 mediations held during FY 2014, 73 percent resulted in the homeowner and the lender not coming to an agreement to retain or relinquish the property. In 28 percent of these cases, no resolution was reached because the lender failed to prove it had the authority to foreclose, or the lender failed to prove ownership of the deed of trust or the mortgage note.”  

“For example, in 319 cases, the beneficiary failed to bring the required certifications for each endorsement of the mortgage note. By statute, the lender must provide a certified deed of trust, a certification of each assignment of the deed of trust, a certified mortgage note, and a certification of each endorsement and/or assignment of the mortgage note.”

And just so borrowers aren’t inclined to take on the banks in a questionable foreclosure, AB 282 limits the time line for the mediation process, drops awards from $50,000 to $5,000, and eliminates the recovery of attorney fees by a prevailing borrower.

The Legislature already has AB 360 The Annuities Saleman’s Friend Bill in the hopper, and now the financialists must be rubbing their palms at the prospect of the Ultra-Big-Bank-Friendly AB 282!

AB 282 is a bill for the Banks, for the Wall Street Casino Players, for the Speculators, for the Financialists – and it is NOT a bill which does anything for average Nevada families.   As the session progresses it’s becoming ever more clear who the Nevada Republicans are supporting – and it’s definitely not Nevada homeowners.

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Filed under Economy, financial regulation, Foreclosures, Nevada economy, Nevada legislature, Nevada politics

Legislative Headaches: The Tax Man Cometh

Take Two Aspirin

If the three major tax plans in the Nevada Legislature, and their varied explications, are giving you a head ache, the Las Vegas Sun offers a good comparison of them.  There’s a major problem with the Assembly GOP plan which:

“Would change modified business tax rate from 1.17 percent for general business and 2 percent for financial sector businesses to 1.56 percent for all businesses. Exempts companies with payrolls less than $50,000 per quarter and removes a deduction for health care premiums.”

This is a form of “flat tax.” And, there’s one group of businesses which benefit most from a “flat tax,” – the big ones. I know, it sounds counter-intuitive, but what gives the appearance of equity (the flat tax) actually ends up being one of the most inequitable forms of revenue raising.

Beloved by such think tanks as the ultra-conservative Cato Institute, flattening taxes works against middle income groups, both domestic and business.  Let’s assume that the 1.56% tax were to apply to all businesses in the state with payrolls more than $50,000 per quarter ($200,000 per year.) This would apply to all forms of enterprises except those in the financial sector.  For clarity, the financial sector includes commercial banks, investment banks, insurance companies, investment companies, unit investment trusts, face amount certificate companies, management investment companies (closed/open), and three types of non-bank investment companies: (1) savings & loans, (2) credit unions, and (3) shadow banks. [Investopedia]

Current law and the Sandoval Plan keep the tax on those financial sector enterprises at 2%.  The Assembly Republicans would provide them with a 0.44% tax break. At this point, it ought to be asked – Why is a bank like Wells Fargo with a reported revenue of $21.4 billion (up 4% YOY) getting a tax break when a supermarket is running on a 6% margin?  Or, why is a hedge fund, and those similar firms which operated in the shadows in the run up to the crash of 2007-2008, getting a break?

One conclusion is that the Banking Lobby and associated financialists are running full bore at the tax proposals.  Hedge fund managers already have one of the sweetest tax breaks imaginable in the form of the Carried Interest Loophole, and now the Assembled Wisdom is proposing they get a nice break from the state. [See also: TO.org, BusinessInsider]  If nothing else, the Assembly proposal indicates that Financialism is alive and well in the Legislature’s bailiwick.

In short, what looks superficially “equitable” actually makes it easier on the financial sector firms, and places more of the revenue raising responsibility on those businesses which operate on a local level – retailers, wholesalers, and the like.  “Shadow” financial institutions, already the beneficiary of copious tax avoidance strategies, are paying the same “freight” as the supermarket chain and the retailers.

There’s another point which ought to be addressed:  Who is at greater general risk during an economic downturn?  In case we hadn’t noticed – the financial sector is no longer directly connected to the commercial sector. The advent of the Shareholder Value theory of corporate management is what drives stock prices – it doesn’t matter if employment is dropping, if the cuts in payroll are assumed to be part of the management plan to boost the value of the shares.  However, in the real economy it matters very much if employment is reduced because that in turn yields lower demand for goods and services.

In this instance, “sharing the load fairly” actually means that the businesses most likely to be hurt by any economic downturn, and those businesses which are dependent on local economic conditions, are to “share” an equal burden in terms of revenue raising with those which are all too often the perpetrators of commercial difficulties in the “real economy.”

Putting it less diplomatically, the Assembly proposal really isn’t very fair at all.

*And by the way – doesn’t eliminating the deductions for health care insurance make it less likely employers will sponsor such plans, making it all the more necessary that the health insurance exchange markets under the Affordable Care Act be sustained?

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Filed under banking, Economy, Nevada economy, Nevada legislature, Nevada politics, nevada taxation