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Health & Fitness

Ch-Ch-Ch-Ch-Changes - Turn and Face The Strain

For those in the audience old enough to recognize the lyrics of "Changes" by David Bowie, I use that as the lead-in to what I see as an issue that the Mayor and several City Council Members seem unwilling to "turn to and face the strain" of a growing financial issue.  By the way, if you wish to visit your youth and want to find all the lyrics to the song, simple Google "Changes" by David Bowie and you'll get to LyricFreaks for the answer.

Tonight I want to review pages 7 and 8 of the Management's Discussion and Analysis (Unaudited) from the City's Financials.  For you readers following along on the home edition of "Wake up Kennesaw" it should be easy to find.  If you are new to the post, go to http://www.kennesaw-ga.gov/form-center/category/14-financial-reports and download your free copy of the financials.  Take a moment to become familiar with it because it can be intimidating.  Okay, let's start by agreeing on a few principles because there has to be a base-line of thought on why we are seeing what we are seeing.  Then we can move through pages 7 and 8.

First, running a P&L (profit and loss) for the City, at it's core, cannot be too much different than how you run your household (maybe a little harder for some of our elected servants).  Assets cannot be exceeded by liabilities, and revenue must exceed expenses, otherwise, you have to take from your balance sheet (i.e. your bank account to cover the short-fall).  Can we agree that makes sense?

Unlike your household the City is a perpetuity which means it never dies...it goes on forever (or in the case of Detroit, maybe not as long!).  Have you been following the travails of any of the California cities that have declared Chapter 9?  Does the city cease to exist?  No.  It simply reorganizes its debts but continues to pay police and essential services.  Most of the time pension and retirement benefits get taken out in the process.  But the City continues to exist.

And that is the difference between you and a City.  But there is one more difference.  Politicians.  Politicians can make promises regarding your tax dollars today and not be around when the checks need to be cashed.  That's what happened in Detroit with Mayor Coleman Young....gold plated retirement packages and lucrative benefits that kept getting him re-elected.  What did he care?  He figured by the time it all blew up, he would be dead....and he's been dead for awhile.

Okay, so what's this all got to do with the "price of tea in China".  Let's go to page 7  in the Management's Discussion and Analysis (unaudited).  I'll make this real easy for you.  Last year the Governmental and business-type activities combined provided a $3,832,043 increase in net assets. See page 8, third line up from the bottom. 

You will further note the individual line item expenses. These are taken directly from the Statement of Activities...see page 15.  Now what do you NOT see listed?My favorite subject matter:  OPEB...Other Post Employment Benefits. See it anywhere? You will see it on page 15 of the Statement of Assets for a whopping $1,888,145...but it is not reflected on the Changes in Net Assets.

It's not there because it is not currently being paid out (we only have 7 retirees at the moment), even though every year the City accrues an increasing liability of OPEB.  They show it on the Statement of Net Assets (the equivalent of your household Net Worth), but not on the annual income versus expenses (the equivalent of your net paycheck and all your household expenses)...it's not required.  

DIRTY SECRETS

And here's the "turn and face the strain" that your servants don't want you to understand...nor do they care about addressing because when the bomb goes off, they will be collecting their pensions and living in Florida.  Because if they had to fund the Actuarial Accrued Liability (see page 52, Financial Note 12), (the household equivalent of your children's college fund), they would have lost money in 2012...just like they did in 2011.

Let me use this analogy.  The OPEB is the equivalent of mother's and father's in the City of Kennesaw saying to their children:  "Children, we have WONDERFUL news...you are going to Harvard for college. Now we know that Harvard costs $60,000 per year in today's dollars to attend, but we are making the assumption that we will have enough money to pay the bill when you are ready to go to Harvard.  We've consulted with our accountant who tells us that the pretend money that we have socked away is earning 7.5% annually!"

Want proof? Turn to page 53, Note 12 and look at the Annual OPEB Cost.  The net cost was $642,560 for 2012...and the City put away $6,195 to fund it.  Yup, congratulations...you is going to Harvard to become a "rith-ma-ticker".

FINAL TAKEAWAYS

1.  The Actuarial assumptions are reviewed every two years.  You can see that on page 53 under Annual OPEB Cost.  Note that the recommended contribution was determined as part of the January 1, 2011 actuarial valuation.

2.  The City's Unfunded Actuarial Accrued Liability (UAAL, page 52, Note 12), is $3,784,934 and that number is as of January 1, 2011.  Now if you turn back to page 53 and look at the annual OPEB Cost, it went from $925,175 in 2010 to $2,162,589 in 2012. Houston, do we sense a problem here?

3.  This means that when the actuaries come back to take a census of the workforce for the City of Kennesaw, the UAAL will probably be much higher, because it's two years later and the actuarial healthcare cost trend rate is 9% (page 52, Note 12, City Contributions, actuarial assumptions).

4.  However, it may go down slightly because, guess what, the City is outsourcing the Sanitation Department and all those bodies that get laid off will be dumped from the UAAL.  How many?  See the Organization Chart at the front of the report, Roman Numeral xii.  Find the Sanitation box under Public Works and there are 20 workers for Sanitation.  That's a lot of future liability going away.

5.  Changes?  Ask the Mayor, City Council, Steve Kennedy or Gina Auld about GASB 45.  Better yet, read up on it yourself.  Follow this link for a great piece that was written in 2007 and leave a comment if it doesn't sound like what is happening to your City.  

http://online.wsj.com/public/resources/documents/DroppedB.pdf

If you cannot find it, shoot me an e-mail to kennesawcitizen@gmail.com and I'll send you the PDF.  One of the takeaways from this piece is that City's will have to do a couple of things to meet their OPEB promises:  Cut services by cutting personnel, sell essential services (sound familiar Sanitation Department) or raise taxes.  And this report was written SIX years ago.

6.  Spread the word readers.  Get more people to link to this blog and get educated.  Share the link on your Facebook, or better yet, run to the window, and yell "I'm made as HELL and i'm not going to take this anymore".

7.  Finally, finally....What the heck has the Mayor and his cabal done over the past several years while these liabilities have gone unnoticed?  Answer:  I don't know.  Protect nice benefits for City Employees (and they deserve some benefits, but not empty promises that could be reduced or taken away in the future), accumulate a Pension for themselves and control the City Manager's employment contract and get re-elected.  On this last point I ask you....how does the City Manager, Steve Kennedy, who must be a financial guy, not put this on the front-burner? How can Steve rock the boat at City Hall?  He may not want to rock too hard...there is something wrong with the "checks and balances".

The Mayor and his cabal will most likely be long gone when the check comes due...and this is why my friends it is important to understand the financial backgrounds of those you elect to office.  You must ask yourself if a "poor country boy" can ask these questions then how do they miss it?  

Answer:  Might it be their lack of financial education, poor money management skills or is it  our own collective apathy (mine included) that these guys are doing what's best for the City?  

Just because the Mayor and many of the Council members do not have college educations does not mean they are not smart.  The world is full of educated idiots.  Does what occurs in their personal lives mean they cannot manage finances or personal relationships?  You can decide that.  Would the voters or readers of this blog feel comfortable receiving financial advice from a counselor who had gone through a bankruptcy?  Maybe, maybe not.  Leave it to the voters to become educated on the subject of their civil servants (serving and seeking) and decide accordingly.

As a small-business owner I can understand the moves one would make to save a business, but you have to back-up and understand how the business got to that point.  Did the owner not capitalize properly?  Did they take on too much debt?  Over promise, under-deliver?  Not provide a good product or service?  Not see the business failing and take moves to cut losses and shut down.  And there are a host of other questions one would ask.  Bankruptcy itself is not "Scarlet Letter" for life, it is just a black-eye for those seeking to place themselves in a position of Trust.  

And when you read the financials and try to reconcile why things are as they are (i.e. a Museum that loses $1mm in 2012), their financial acumen is called into question. These are reasonable questions to ask.

All the while they refuse to "turn and face the strain" while turning you away from some real issues they would rather you not notice.

Wake up Kennesaw!




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