First, let me point out that I believe that the district has the financial problems it does for a variety of reasons - flight to the suburbs, changes and uncertainty at the state legislature and poor management and oversight from the administration and the school board. In a district that was performing academically the administration could (as Southwest Allen County Schools did) go to the taxpayers and ask for a tax increase. However, the majority of taxpayers are unlikely to support such a measure since they do not have the confidence in the Superintendent or her administrators to solve the problems we face.

Next, I think it’s important to note that attempting to whitewash the district’s academic problems by focusing on “New Tech” highschools and other such programs only serves to exacerbate the problem and cost the district millions of dollars. The real focus should be on ending social promotion, improving parental involvement and fixing the academic issues at the elementary schools. Focusing on high schools just won’t get the district the bang for the buck they need right now. Too many kids are promoted on without learning the skills they need, and by the time they get to high school it’s simply too late.

Having said that I have come up with a list of items that I feel should be implemented to reduce the budget while minimizing the impact on academics. I recognize that some of these will be difficult and require an adept administration to pull off. I also realize that many of these will be unpopular for various groups. Unfortunately, we are in a position where these cuts are necessary. It isn’t a matter of how much will get cut; it’s a matter of what will get cut.

I believe these items can help bridge the financial gap but I recognize that more will be needed in order to turn around the academics. The administration’s latest plan of “blame the teachers” is self-servingly fool-hearted and won’t do anything to solve the problems we face. I’ll have more on that in a future post but for now here are my ideas. Feel free to let me know what you think of these items or post your own suggestions:

1. 20% cut in salary/benefits for administrators. The salaries of many administrators are out of line with the surrounding schools and their poor performance does not justify such a pay differential.
2. Elimination of all paid teacher assistants. Some of these people are helpful for the teaching staff and some are not. The district should focus on recruiting quality volunteers to take the place of some of the assistant staff - back in the day these people were called “room mothers”.
3. Outsource as many non-academic staff as possible. There’s no reason that the custodians, bus drivers, IT personnel, food service workers, etc have to be district employees. The argument that the district is too big to contract that work out doesn’t hold water. I believe the district could potentially save 15+% over their current costs without most people noticing a nickel’s worth of difference.
4. Reduce after-school pay stipends by 80%. The district simply can’t afford to pay thousands of dollars to debate coaches or any other form of after school stipend for that matter. More volunteers should be recruited and if that means that some after school programs have to go away then that’s unfortunate, but financially necessary.
5. Double the current insurance premiums for employees. Teachers currently pay 10% of the premium cost but costs are rising and employees should be asked to up their contribution to 20% of the total premium cost. This is still a nice benefit and on-par or better with many private company plans. Also, since the district is self-insured it needs to focus on strategies to minimize their healthcare costs.
6. Line-by-line budget reduction for travel, furniture, subscriptions, seminars, etc. Some of these are professional development and some are likely just boondoggles. When times are tough this kind of stuff has to go. Two years ago the city successfully cut its budget by focusing on many small ticket items like this.
7. A 2 year wage freeze for all teachers. Unpopular to be sure, but everybody has to have some skin in the game here. The alternative is teacher reduction which only serves to increase class size.
8. Eliminate the preschool program. The district is struggling to provide quality K-12 education so I propose we focus on that before worrying about preschool. (Note: I’m not talking about kindergarten here).
9. Re-allocate the racial balance fund back into the general fund. The achievement gap continues to widen despite the district’s best intentions with this program. The focus should be on finding new solutions to this growing problem without wasting money on programs that simply don’t work. The “we’ve always done it this way” or “the Supreme Court said we had to have this” will no longer suffice. Again, this is just a re-allocation and not a cut. However, I believe that a new plan can be found that will result in cost-savings.

Here’s an example from the state budget director Chris Ruhl:

INDIANAPOLIS – Gov. Mitch Daniels wants to suspend millions of dollars in tax credits given every year to individuals, non-profits and Hoosier companies as part of his proposed administrative cost-savings measure. This comes despite his urging lawmakers in his State of the State speech not to “make this recession worse by adding one cent to the tax burden of our fellow citizens.”

The tax credits that would be affected include the Neighborhood Assistance Credit, Enterprise Zone Investment Cost and Loan Interest Credits, the Community Revitalization Enhancement District Credit and several business credits for offering health benefits and a wellness program to employees.
[...]
According to the fiscal impact statement on the bill, the suspension of the various tax credits could save more than $8 million per year.

Ruhl said Daniels does not consider it a tax increase. He noted that one taxpayer or another can always see his liability go up or down in any given year due to changes.

Wait a minute there professor - let’s just think about that statement a bit. You want to change the rules so that you collect $8 million more per year. That’s not a situation of some taxpayers’ liability goes up and some go down. That’s a net tax increase of $8 million. But it gets worse for Ruhl:

“It’s a balancing act,” he said, noting that something that affects one-tenth of 1 percent of the people is not a tax increase.

I’m not sure I even need to point this out but that’s probably the dumbest statement I’ve heard in quite some time. Why not just tax the wealthiest top 0.1% at 100% of their income then? After all it wouldn’t be a tax increase. Or wait, I’ve got it! We’ll only increase the taxes for everyone with the last name Ruhl or Daniels. That probably affects less than 0.1% of taxpayers.

Ruhl should just quit embarrassing himself. What the governor has proposed is (gasp!) a tax increase. If they want to argue the merits of that decision then fine go right ahead but don’t insult our intelligence by suggesting it’s something that it’s not…

Kevin Leininger has a must read column in the Thursday News-Sentinel entitled “Is Purcell salary pay for work or a gold parachute?” 

Basically Deputy Mayor Purcell resigned earlier this week on Monday.  He resigned to return to Michigan and care for his elderly mother.  I certainly wish Mr. Purcell well and hope that he is able to effectively care for his mother and wish both of them the best of luck.

That being said it is hard for me to imagine that the Deputy Mayor warrants being paid his full salary and benefits for an additional three months so that he can work on a part time basis for the City from Michigan. 

I believe the City of Fort Wayne has a policy in place that all of its employees live in the state of Indiana and be Indiana residents.  I am pretty sure that you cannot live in Ohio and be a City employee…

I wonder if the City is waiving this rule or if they just “forgot” that they had such a rule?

Mike Sylvester

Since there’s absolutely no way for him to perform his full-time job duties then he should not get full-time pay (shocking statement I know). However, if his input is needed during this transitional period then he should be paid his hourly rate and not a blanket salary. At this point he’s basically a government employee on retainer and he should be paid accordingly.

City council should remember this come next year’s budget talks and cut the mayor’s salary line accordingly in order to recoup the taxpayers’ money…

Of course such a ranking is not necessarily a good sign. One only needs to look at the top 10 to see that (from p10):

Top 10 Affordable Housing Markets

The report highlights how Lincoln Financial bought a hole-in-the-wall bank in order to become eligible for TARP funds. Had the bank itself applied for TARP funds it would’ve only been eligible for $350k but Lincoln was able to buy this bank for ~$10 Million and then receive $950 Million in TARP funds. Keep in mind that without this purchase Lincoln would not have been eligible for any TARP funds. And to top it off, they haven’t used any of the money towards the bank’s activities but have instead used all of it to shore up their insurance business.

Here’s the relevant info from the SIGTARP report (PDF, p14):

H/T - Mish

Hartford and Lincoln were able to obtain CPP funds by buying small thrift savings institutions and becoming thrift/savings and loan holding companies, thereby meeting the technical criteria for receipt of CPP funds. The amount of CPP funds provided, however, was then determined by the assets of the holding company (i.e., the parent insurance company), not just the assets of the much smaller qualifying thrifts. In the case of Lincoln, for example, the company was able to obtain $950 million in TARP funds after it acquired a thrift that, on its own, would have been able to obtain at most $350,000 (if it would have qualified for CPP funding at all). Moreover, in using TARP funds, there was no requirement that TARP funding be used in connection with the subsidiary thrifts’ activities. As it happened, the insurance companies reported that they used little (in the case of Hartford) or no (in the case of Lincoln) TARP funds in connection with the subsidiary thrifts’ activities but rather used the vast bulk of the funds to support their insurance businesses. Stated another way, simply by purchasing comparatively tiny thrifts, Hartford and Lincoln — companies whose primary businesses (unlike other CPP participants) have little to do with lending to consumers and businesses — gained access to more than $4.3 billion in taxpayer funds, an amount that is many multiples of the thrifts’ total assets.

I’m not going to go into the details of all the various programs being used to bail out these institutions but I do want to focus on what I believe is the most important – the easy monetary policy being used by the fed. It’s what helped cause the current crisis and it will likely be the cause of the next one as well.

Currently the federal reserve is loaning money to banks at near 0% interest rates and politicians are pretending that they are SHOCKED that the banks aren’t lending that money to consumers and small businesses.

This is all bogus and those making the arguments know it. There are very good reasons why the banks aren’t lending money and one of them is related to a concept called the “carry trade”. The carry trade is how the banks game the system to ensure they make billions of dollars and pay massive bonuses all the while the real economy continues to struggle. So let me explain how this works:

As a banker you borrow from the fed at 0% interest and immediately convert the money into some other foreign currency. You use this money in the foreign currency to buy stocks, bonds or other risky assets in that foreign currency. Because the fed is printing so much money many other banks are doing the same thing you are and that tends to inflate the prices of these assets even further. Think of it this way, if everyone is given a bunch of free money then they are likely going to find ways to spend it.

Now what makes this even more profitable is that the fed’s decision to continue to print money is driving the dollar even lower against these other foreign currencies. So, for example, if you borrowed $100 million US dollars and converted it to South African Rand you may only have to pay back $80 million US dollars because the fed’s policies are driving the dollar lower and lower. This means you are effectively borrowing at -20% interest rates AND what you are investing in continues to increase because there’s so much extra money that it has to be spent somewhere.

But that isn’t the best part for you as a banker. The best part is that all the while this is going on you make a lot of money for your bank and in turn pay yourself massive bonuses for your “genius”. Never mind the fact that it doesn’t take any skill or intellect to pull this off – all you need is access to the federal reserve’s cheap money supply.

So you continue to borrow money, leverage it up in some foreign currency and buy risky assets while paying yourself millions and millions in bonuses for your investment wherewithal. But at some point, things go bad and a credit crunch ensues. This can happen for a variety of reasons but all of a sudden people can’t borrow money as cheaply and everyone who was flooding the market driving up risky assets is in panic selling mode trying to get out before they lose their shirt.

This drives the asset prices you were invested in through the floor and forces everyone to flee to the safety of US treasuries. This causes the dollar to increase and now you are really screwed (or at least the taxpayer is) because your assets have plummeted and now you are paying dollars back at +20% interest. If you are leveraged up 10, 20 or 30 to 1 then you can imagine it doesn’t take long before you are entirely wiped out – you no longer have the capital reserves to cover your losses.

But don’t worry because your bank is special! Since the government has declared you Too Big To Fail they will come along and bail you out once again. And even if you get the boot, which isn’t likely, you’ve paid yourself hundreds of millions in bonuses during the time you were making risky investments pretending that you were some kind of investment whiz kid.

The bad news for taxpayers is that when the system blows up we are left to pick up the pieces and our debt-to-GDP goes from 40% to 80%. Beyond that, the carry trade is driving investment out of the US into bubble-laden assets in foreign countries. Why would a bank lend to small businesses here in the US when it’s much more profitable, in the short term, to send the money elsewhere? Of course unemployment skyrockets as well which hurts the real economy even further.

You would think that given the history of our meltdown-bailout cycle in this country that somebody would actually try and stop the madness. Somebody might actually say, “You know what, if banks want to play these games then they need to be broken up so that when they inevitably fail they don’t take the rest of the economy with them.”

Or heaven forbid we put the smack down on the bozos running these banks that are paying themselves massive bonuses with taxpayer dollars for doing something a monkey could do – borrow money at -20% interest and invest in bubble assets with the rest of the sheep. But no, what we get is a government that talks tough but sets policies that only serve to reinforce the bad behavior…

It’s important for people to know that there are many serious and well-respected economists out there that don’t support Ben Bernanke. Johnson probably tops that list, and Obama would do well to fire Geihtner and replace him with Johnson.

I’ve been using the term “Clinton retreads” for years now so it’s always funny to see the term pop up in other writings. I’m going to blockquote a chunk of this post below the fold because I think it’s that good.

A State of the Union address is always a good place for an incumbent President to set out his priorities, and in that regard, Obama’s speech is most revealing. He rightly argues that everything “begins with our economy” and then curiously emphasizes that “our most urgent task upon taking office was to shore up the same banks that helped cause this crisis.”

No, Mr. President. Your most urgent task upon taking office was to shore up employment. Over the past year it has become obvious that the policy to shore up the banks has been a dismal failure in this regard. It has done nothing to pull the economy out of its deepest slump since the late 1970s. The single most important thing Washington can do to help the vast majority of American citizens who do not work on Wall Street is to create jobs — tens of millions of them.
The President was right about one thing: “If there’s one thing that has unified Democrats and Republicans, it’s that we all hated the bank bailout. I hated it. You hated it. It was about as popular as a root canal.”

But at least a properly executed root canal solves the problem once and for all. The President and Congress have administered the economic equivalent of pain killers, without addressing the underlying problems in our financial sector. If we’re going to undergo root canal, then let’s fix the damaged nerve and prevent a recurrence of the problem. Tens of trillions of dollars have been committed to deeply insolvent institutions (the extent of which we still do not understand due to persistent stonewalling from the Treasury and Federal Reserve). These institutions continue to pay out massive bonuses to their staff on the basis of fraudulent accounting. And many of these institutions are still engaging in activities which continue to worsen household balances in order to maximize their own profitability. Households and non-financial institutions have hitherto received very limited assistance. If this is how the President measures success, God help us when we have failure.

Obama observed that “if we had allowed the meltdown of the financial system, unemployment might be double what it is today. More businesses would certainly have closed. More homes would have surely been lost.” All true, but there was little value to be gained by preserving what are fundamentally insolvent institutions. The President could have done something politically popular which would have resonated with the public by shutting down zombie banks, and used fiscal policy to promote employment via a Job Guarantee program. That would be both smart economics and politically popular. The two are not always mutually exclusive, but this administration curiously appears to conflate unpopularity with “responsibility”. This is what happens when you take your advice from a bunch of failed Rubinite retreads.

I really am starting to believe that if both parties can’t agree on something then it’s probably something worth considering and vice-versa. It’s kind of like this scene from Seinfeld where George decides that every decision he’s ever made has been wrong and he’s going to do the opposite from now on:

The bipartisanship I’m speaking of is the renomination of Ben Bernanke which passed the Senate yesterday by a vote of 70-30. Nobody in a position of authority now was more responsible for the financial crisis than he was. The Federal Reserve, and Bernanke in particular, was the last to understand the depth and breadth of the current crisis. How anyone could take this guy seriously after his embarrassing failures is beyond me. And what’s more is that he (like Treasury Secretary Tim Geithner) doesn’t even acknowledge that he had any part in the financial crisis.

As long as Bernanke is in charge there can be no serious reform of the financial industry and what this means is that you can bet your life that there will be another disastrous meltdown directly attributable to his failures. But hey, as least our politicians worked together to pass some legislation - Obama must be so proud…