Archive for 2018

TWW is NOT the Money-Maker Trentonian’s have been Led to Believe

The State of NJ has found that Trenton Water Works carries a $12M surplus but that it employs 1/3 of the staff needed to properly run the utility.   The Jackson administration’s own proposed but never passed budget for 2018 estimates a $3.15M surplus that they gleefully carry forward into the municipal budget as revenue.

So, what gives?

If you look at the proposed but not approved budget, you also find that in 2017, the city budgeted $9.3M for staff but spent only $6.3M in salaries.  Additionally, they underspent $221K on social security because they didn’t have the people for whom they budgeted.

So really, the $3.1M surplus is all because the city didn’t spend what even it thought it should on TWW.  And of course, we know how that turned out:  Brown water, pink water, low pressure, boiled water etc.

To figure out the rea situation we need to dig deeper.

The State says we have 1/3 the employees we need.  Let’s take that at face value because we really don’t have a more reliable source for needed staffing levels at this point.

In 2017 we spent $6.3M on salaries, ~$1.7M in statuary benefits expenditures (SSA, Pension, unemployment) and $1M in sick pay and vacation.  That’s a total of $9M in staffing costs.

If we need three times the workforce then we’ll spend three times the staffing costs, or $27M.

For 2018 the city proposes to budget a total of $13.5M (salary, statutory benefits + vacation/sick pay).   Therefore, if we had proper staffing levels we would need to spend $13.5M more ($27M – $13.5M = $13.5M).

That $3.1M surplus quickly turns into a $10.4M deficit.

But wait there’s more!

The FY 2018 proposed budget lists 38 projects that need to be done to make the water utility safe.  They total in value up to $98.9M.  I have no doubt that these are needed but included in the budget only after the State began to take a serious interest.   Nonetheless, this $98.9M represents a large capital exposure.

The city has $16.5M saved up towards the $98.9M, so that leaves an exposure of $82.4M.  That’s a lot of money that we don’t have.   The projects will have to be paid for with debt.   I don’t know the city’s borrowing rate, but let’s assume its 8%. If you work out the math, that comes to a debt service (interest + principal) on that $82.4M of $9.6 over the next 15 years.   That’s another $9.6M added to our deficit!

So now it’s not a $10.4M deficit, it’s a $20M deficit.

TWW isn’t a money maker for the city of Trenton.   It’s getting ready to be a big money loser.  And guess what, that means your rates are going up, a lot. Our current revenue for TWW is only $54M.   If we need to spend another $20M so our revenue will have to increase 40%.   That’s punishing.

To say we should sell the thing is a complex proposition.

The proposal on the table in 2007 was to sell off the distribution system in the suburbs for $100M.   That could have retired a lot of debt.  We’d have lost some revenue but would still be selling water to the buyer.   That was one option.

We could sell the whole thing.  Perhaps we’d get some money out of it but at least we wouldn’t be exposed to the predicted yearly deficits AND importantly we wouldn’t be exposed to the risk of things going wrong (i.e. a Flint situation).

There are lots of options to reduce our exposure to losses, bad service, contaminated water, bad management, corrupt employees and all the other things that have plagued us via TWW over the years.   But the first thing Trentonians need to put behind them is the notion that Trenton Water Works is a money maker and an asset worth having.

Running TWW well is NOT strategic for the city of Trenton.

A well-run water utility won’t attract new homeowners, it won’t improve school performance and it won’t stop crime.   Those are the activities on which our government needs to focus.

There are smart advisors who can work out a good deal for Trenton, but first voters need to at least entertain the notion that Trenton Water Works isn’t the key to Trenton’s future success.

The truth about home-ownership in Trenton

For the past 28 years, home-ownership in Trenton has been on the decline.  This isn’t me saying this, it’s the U.S. Census Bureau who tracks this statistic for all American cities.

Since 1990, home-ownership in Trenton has declined by 5,500 units or 35%.  In 1990 the housing split was 51% home owners and 49% renters.  By 2016 the split is 37% home owners and 63% renters.

This picture should scare the living daylights out of anyone who owns a home in Trenton.  It’s very possible that you may be the only one left to turn out the lights when Trenton closes.

Most people would say home-ownership is good for a city and its residents. I have no reason to dispute that.  It only makes sense that a homeowner would be more vested in the state of their home, the cleanliness of the area around them and the future of the city.

This idea is borne out by research conducted by J. Eric Oliver in his book Local Elections and the Small-Scale Democracy. Mr. Oliver found that homeowners voted in almost double the proportion than did renters.  Let me say it again, homeowners vote at double the rate of renters.  According to his statistics, 70% of homeowners will regularly vote while only 40% of renters cast a ballot.   This makes sense as the value of a homeowner’s largest investment is directly tied to the fortunes of a city.

Trenton politicians run against this trend.

None of the 2018 Trenton Mayoral candidates have established a strong position on how to make Trenton attractive for homeownership.   This, despite the overwhelming evidence that homeowners vote in big numbers.   The results shown in the above graph bear this trend out and suggest that previous candidates and Mayors have given scant attention to owner-occupied neighborhoods like Hiltonia, Hillcrest, Mill Hill and Franklin Park.  They’ve been oblivious as Chambersburg and South Trenton have become predominantly rental.Trenton has steadily become less attractive to homeowners during the Palmer, Mack and Jackson tenures.   It seems counterintuitive that this would have happened.

Mr. Oliver’s book suggests an answer to this puzzle.  His research analyzed positions taken by candidates and the factors that drive them in small cities arranged by three characteristics of the city: size, scope and bias.  Size is self-explanatory.  Trenton is on the big side of small cities (< 100,000 in population).   Scope is the range of services the city provides.  Some cities may rely on county or states to provide services.  Some outsource services.  Trenton has a large scope in that most of our services are provided directly by the City of Trenton (water, police, etc.). One notable exception in Trenton is that the school system is quasi-independent.  Bias is how uniformly resources are distributed and is probably the most important characteristic to consider for Trenton.

Bias happens when special interests or political machines can unevenly distribute resources to their own constituents.   In other words, they redistribute the winner’s spoils.  Mr. Oliver gives a New Jersey example in his book that I found illustrative.

“As an example, consider the political importance of a garbage contract for a rich township like Princeton, New Jersey, compared to its impoverished neighbor Camden. With a median family income above $125,000 a year and an average home value of over $1 million, it is highly unlikely that many of Princeton’s 16,000 residents work for garbage companies (although they may own one). When the township hires a garbage company, it is probably importing all its labor and services. On the other hand, a garbage contract for an impoverished place like Camden (with an unemployment rate well over 30 percent) means dozens of good jobs for its residents. When Camden hires a garbage company, its leaders will thus be under considerable political pressure to hire Camden residents and to employ a locally operated firm. Camden officials who decide the garbage contract will, in turn, probably expect continued support from the company and its workers. The garbage contract, simply by virtue of Camden’s poverty, will be a major source of political contestation whereas in Princeton it is simply a contract to be filled.”

Oliver, J. Eric. Local Elections and the Politics of Small-Scale Democracy (Kindle Locations 661-669). Princeton University Press. Kindle Edition.

Does that sound familiar?  It should.  You can’t talk about a project in Trenton where someone with an interest in city employment won’t make that argument.  Our Mayor and City Council generally consider whether a contractor will employ city residents and therefore de-prioritize the importance of cost and service.  When they do this, they de-prioritize the interests of home owning taxpayers.

Size matters because voters in a larger city like Trenton are more disengaged than in a smaller city like Hopewell as voters are less personally connected to office seekers, according to Mr. Oliver. Scope matters because a larger city has a lot of money to throw around.  But bias is also a factor as it provides the reason why homeowners can be left out of the political calculus.  In Trenton, homeowners are ignored because a Mayor and City Council can become beholden to special interests (city service providers, affordable housing developers, and labor unions, etc.)) that feed off of bias in our city government. The problem is made bigger by our large scope and is enabled by the relative size of the city and disengagement of its voters.

Is there a way out for Trenton?

Yes.  Let me explain.

If you’re a homeowner in Trenton, then you must know that we are more Camden than Princeton in that special interests not aligned with your own are hard at work.   While all you really want are low property taxes and a high level of city services, including water, police, schools and public works, others don’t share your concern.   It’s natural.

However, even though the ranks of homeownership in Trenton have been decimated, they still vote in higher proportions than renters.  Voting still matters though candidates can and do certainly still lie to us about their vested interests (i.e. who’s funding them now and in the future).

For a candidate to be believable as a pro-homeowner candidate then their platform, fundraising and speeches need to put homeownership front and center. Making Trenton attractive for residential investment must be their only “focus”.   They must stand out as the “homeowner” candidate.

This means trimming non-essential services that don’t directly benefit homeowners.  It means investing more in making it easier to develop and improve property. It means increased school choice. It means more responsive police and public works departments.  It means new economic development. And, most of all, it means that there is a plan for the tax rate to eventually go down.  Trenton’s tax rate is the highest in Mercer County and as high as a mortgage rate.

This is hardcore stuff, but Trenton is in decline and has been for some time.  We are losing population.  Our per household income is losing ground vs. the rest of the state.  And obviously homeowners are leaving.

Voters will have to understand that they have a very real threat  if we continue to elect politicians who can’t or won’t address the issues of homeowners, they will likely never recoup the investment in their houses and  the situation will only get worse.  Taxes will continue to rise as property values decline or stay stagnant.   Services will continue to deteriorate until we hit rock bottom and look even more like Camden or Detroit.
It’s hard to say whether our decline is already too severe to recover from without an existential catastrophe like Detroit’s bankruptcy or Camden’s worst in the nation murder rate.  However, not trying to elect leadership with a real focus on reversing the homeownership trend just isn’t an option.