By Christopher Briem, on December 14th, 2010
Kind of a bad day for water in Pittsburgh yesterday. Beyond the seemingly unexpected resignation of the boss, there was also the bad news of rate increases along with some big water breaks as well. I’ve heard of a few other big ones out there beyond what made the news. Probably goes with the time of the year and temperature. Water line breaks will most likely be worse next week. All that on top of ongoing investigations and litigation. I feel bad for PWSA board chairman Dan Deasy since he is relatively new on the job and most of the things leading up to most of these things happened on the previous guy’s watch.
Lots of other strange things related to the water authority of late. Before Kenney resigned, there was the odd episode last week where he said he couldn’t answer whether Pittsburgh Brewing had paid its water bill. This was a big story and was a big $$ amount owed to the PWSA. You would think he would have some idea the status. Curious at best. It also relates to another story some may have caught that former Pittsburgh Brewing owner Michael Carlow, is getting back into business and this time it’s in the slag business. Yes, slag. There just has to be a joke in that. He ran up a big PWSA bill as well along the way I do believe. Water… beer… slag… bankruptcy.. perfect together?
Last month there was the recurrent bruhaha over the legacy payments made by the PWSA to equalize billing to the parts of Pittsburgh. Make note of the water breaks above. I hate to say this, and am a PWSA rate payer myself, but there is a simple answer to the whole American Water payment debate that keeps recurring. Raise PWSA rates to the private sector rates set for the southern and western neighborhoods benfiting from the subsidy. There is more than enough justification to spend any excess revenue into capital investments. Remember this is a story that fully acknowledges it can’t account for 40% of the water flowing through its system. I suspect that if anyone could put numbers on it, the city of Pittsburgh has the oldest working water infrastructure in the nation. I’ve heard of a few places in New England that still have working timber piping, but other than that we really must take the prize. For a place that claims water is a huge competitive advantage, there is this little problem of getting the water to where it is actually used and taking it away afterwards.
What I just noticed reading the rate increase story is that one of the reasons given by the PWSA is that it was necessitated by, among other things, increasing credit costs. Thing about that is most interest rates are historically low these days. Raises some interesting questions why their credit costs are up. Are they referring to their costs in the past resulting from the nearly disasterous variable rate debt they had entered into. Remember, that was the debt that became insanely expensive when our friend JP Morgan unilaterally walked away from the credit backing the variable rate debt required. Some huge irony in that some think JP Morgan is the city’s saviour with the parking bid while at the same time would have been responsible for the collapse of the water authority if they had not been able to find someone to take their place. It was far from a sure thing. It cost the PWSA dearly to get through. Why would they act so benevolently in one case, and the opposite in the other? There will be many issues of contention over the course of a 50 year lease and you want to have some trust in your counterparty.
Which leads us to more questions. Since the PWSA claims to have stabilized the variable rate debt problem with a new letter of credit…. then again why the increasing cost of credit? May not have anything to do with anything, but still worth noticing by someone is that the credit rating on that letter of credit was downgraded a couple months ago. Not just put on credit watch negative, actually downgraded. You just have to wonder what else is in play here.
and remember… think these are all city problems, and only city problems. PWSA problems are the region’s problems.
By Christopher Briem, on November 4th, 2010
Well… way up on the Ambien scale is the latest actuarial report on the City of Pittsburgh pension system.
Here is the much anticipated: Special Study on the Pennsylvania Municipal Retirement System’s Integration of Administrative Services. Such a boring piece of ephemera you would think. Never has so much rested on what so few can make sense of. I will get around to adding it to my policy documents page and also the iPension page for posterity’s sake if you ever need to find it in the future.
You really need to wade through a lot to get to the points that are buried in all of that. What are the crib notes? I distill the whole thing down to two factoids. One is that there is a scenario in there, the likely scenario I think, that there will be a point in just a few years that the city’s minimum municipal obligation will rise from $38 million annually presently, to $127 million in 2017 and even rising to $159 million annually in 2030.
As incomprehensible as those numbers are, it gets worse. There is a scenario, again the most likely scenario I think, that says this:
….the Systems will be in a high risk period for the potential of running out of money because of funding relief and delay in MMO application. (see bottom of page 15 per the page numbering, or page 19 per the PDF numbering)
What? Huh? Who said that?
Remember, it is irresponsible to cry fire in a crowded room.
and apologies to Mitch Leigh… and I suppose Jim Nabors.
By Rok Spruk, on June 7th, 2010
Gary Becker (link) and Richard Posner (link) have initiated an interesting debate on low economic growth as the main macroeconomic concern of European economies in overcoming the increasing burden of public debt.
By Rok Spruk, on May 4th, 2010
NY Times recently reported on the agreed financial rescue assitance to Grecce from EMU (€110 billion) and IMF ($145 billion). Alongside Ireland and Mediterranean countries, the economic recovery of EMU is hampered by a high mountain of public debt and unfavorable macroeconomic data on growth, employment and current account.
Public debt in the European Union in 2009
 Source: Eurostat (2009)
The graph I attached, shows the level of public debt in EU countries in 2009. Solid horizontal blue line shows the 60 percent debt-to-GDP ratio required by Maastricht criteria for each EMU entrant.
The underlying data (link) on economic recovery in the US point out a strong and robust recovery. The data from Bureau of Economic Analysis show that the US economy grew by 3.2 percent in Q1:2010 continued from a remarkable 4.6 percent growth in Q4:2009. While private consumption expenditure growth increased by 2 percentage points from the previous quarter, private domestic investment rebounded by 14.8 percent in Q1:2010 after a remarkable 46.1 percent increase in Q4:2009. In addition, labor productivity in Q4:2009 increased by 6.9 percent – the largest quarterly increase since Q3:2003 (link) On the other side, recent revision (link) of quarterly growth rate in the EMU has shown that quarterly GDP in Q1:2010 increased by 0.0 percent, revised from 0.1 percent. Industrial confidence, an important measure of manufacturing outlook, further decline by 12.2 index points.
The macroeconomic outlook for the EMU is downsized by high public debt and negative budget deficit which led 10-year bond premium spread between EMU economies and Germany (link). The premium spread between Greece and Germany stood at 8.57 percentage points on April 28 while the spread between Ireland and Germany was at 2.54 percentage points.
High level of fiscal deficits restrains the economic recovery of the EMU countries. In 2009, Spain, Ireland and Greece faced the highest deficit-to-GDP ratio while Denmark’s 2 percent deficit-to-GDP ratio was the lowest in the European Union. NY Times recently collected annual dataset on public debt and budget deficit (link) in which an overview of key public finance indicators is availible.
The prospects of economic recovery in the EMU are further downgraded by unfavorable growth forecast. One of the key questions during the ongoing debt crisis has been whether the EMU will sustain fiscal discrepancy within the EMU since asymmetric fiscal policy undermine the ability of the common monetary policy. Even though Greece’s debt crisis is the core of the debate regarding future viability of the single currency, growth estimates for Spain and Italy in 2010/2011 will determine the mid-term macroeconomic stability of the eurozone. European Commission recently updated the quarterly economic growth estimates for eurozone countries (link). Depending on the absorption of financial market spillovers into investment and net exports, economic growth estimates for Italy and Spain are quite pessimistic. After an estimated 0.1 percent growth rate in Q2, Spain’s economy is likely to contract in Q3 by -0.2 percent and experience a slight rebound in Q4:2010. Quarterly economic forecast for Italy is positive throughout the year although the economic growth rate is likely to be close to zero. However, Italy’s economic growth rate is likely to keep the increasing pace towards the end of the year although current macroeconomic outlook deters consumption, investment and inventories’ contribution to GDP growth mainly because of high unemployment rate and sluggish productivity growth.
Robust economic growth is essential to the cure of high public debt. Since EMU countries have adopted a single currency, policymakers cannot trigger exchange-rate adjustment through currency depreciation. The latter would spill into higher inflation and modestly reduce the volume of public debt. Due to high unemployment and slower recovery of inventories, inflation rate is unlikely to rebound to pre-crisis levels.
EMU’s most problematic countries’ recovery is unlikely to be robust given public debt and deficit constraint on quarterly growth outlook. Without a prudent fiscal tightening, lower government spending, there will be a bleak economic outlook for the future of EMU countries which could result in a decade-long period of low growth, high unemployment and Japan-styled deflationary persistence.
By Claus Vistesen, on January 6th, 2010
This is really a follow-up on my earlier piece today and my last 2009 piece on Eurozone imbalances and internal devaluation. In particular, I want to point you towards two things. Firstly, Edward has, no doubt after a long hard thought, come to the conclusion that Greece should be sent to the IMF or rather that it is ok to ask the fund for help in order credibly sort out the mess in Greece (and possibly Spain). This is not news as such since the proposition of sending ailing Eurozone countries to the IMF has been on the table for a while now. The main question basically is, as it has always been, whether the program proposed by Greece in conjunction with the EU and set in relation to what ever we might have left of the stability and growth pact (SGP) is really credible as a working solution.
Meanwhile, Danske Bank had a very interesting research note out today by economists Gustav Smidth and Frank Øland Hansen on the sovereign situation in the Eurozone and the potential for correcting not only in the immediate short term (i.e. preventing a collapse), but more importantly how to get debt to GDP ratios back on a solid footing within, let us say, a decade or so. As it turns out this is very difficult.
These are challenging times for public finances across Europe. Reducing debt to the Stability and Growth pact’s upper limit of 60% of GDP will not happen any time soon for most euro area member states. Indeed, even 100% of GDP appears an immense task for several countries. The situation is most dire in Greece and Ireland, which are to be found in the fast track lane for default in our mechanical “no change scenario”. However, it is still not too late to avoid default. If the plans put forward by Greece and Ireland are strictly adhered to, it would stop the debt-to-GDP ratio from sky-rocketing.
Now, Danske Bank’s argument is based on some simple algebra of the government’s budget constraint and some equally simple, one would presume, arithmetic. Basically, the gist is as follows and for all the attacks on Neo-Classical economics accounting, this argument is actually pretty solid.
Therefore, high nominal GDP growth and low interest rates on sovereign debt allow a country a larger deficit-to-debt multiple without increasing the debt-to-GDP ratio. A country with nominal growth lower than the interest rate level will on the other hand have to run primary surpluses in order to keep the debt-to-GDP ratio steady.
This is an important point to take away. Basically, it means that if you can maintain a high level of nominal growth (and what ever amount of primary deficit you run (in principle!)) the debt-to-GDP ratio can be kept in check. We don’t need to entertain this possibility a lot here I think and simply note that this is not likely to be relevant for many of the Eurozone economies going forward. This goes especially for those who are in the biggest trouble right these very days. In fact, the whole rigamole begins by taking to heart chart 4 and 5 in Danske’s research note which shows that while Eurozone economies, in a pre crisis context, enjoyed high GDP growth (nominal) and low funding costs it is expected to be the exact opposite going forward.
This represents a gordian knot since it means that not withstanding the extremely tough austerity that Greece, Ireland and Spain (etc) now need to take in order to get the ship back into the wind through forced primary deficits, they cannot be sure that this in itself will bring the debt to GDP back on track. Much will of course depend on global yields here and the general discourse on fiscal adjustment and how sovereign risk (rising across the board) will quantitatively be reflected in bond yields.
Yet, I don’t want to focus so much on bond yields (although I do think they are important); rather I would like to focus on the other part of the equation as it were, namely that of nominal GDP. You see, this is where it not only gets complicated but also outright problematic. Consequently and since Greece, Spain, and Ireland are members of the Eurozone, the have no independent currency and thus the nominal exchange correction that would almost certainly had occured had these economies had a floating exhange rates now must occur through internal devaluation or outright price deflation.
So this is not only about public debt but also about net external borrowing which these economies now have to shed in order to become competitive and essentially in order to achieve growth in nominal GDP. However, in order to reach this point they need a large and severe bout of deflation exactly, one would imagine, brought about in part by running primary surpluses to simply shock-force the economy onto a more sustainable path. Notwithstanding the obvious cost on the employment from this process it has another very tangible costs. Price deflation thus, through its effect on nominal GDP, increases the real value of the debt and it is exactly this mechanism and how it intersects with the perspective offered by Danske Bank which is so damn important to understand here. And incidentally, as an aside, it is this point which Edward has been desperately trying to pass on during the past two month’s worth of writing (see overview from link above).
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PS1: I am lining up a paper on Eurozone imbalances (quantifying them essentially) which will also tackle the issues mentioned above in some detail.
PS2: Danske Bank’s piece is worth reading in its entirety.
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