Speaking on behalf of the NIMBY party: Part 2, A genuinely stupid idea

May 4, 2015 | Affordability, Apartments, Campaigns, Development, England, Homelessness, Homeownership, Land use, NIMBY, Political vaporware, Politics, Scotland, Wales, Zoning | No comments 88 views

[Continued from Friday’s Part 1.]

By: David A. Smith

As we count down to the United Kingdom’s election this Thursday, I think housing is the most important issue for Britain’s economic and social viability:

[Britain faces] the challenge of building 300,000 extra houses needed a year to tackle [the country’s] housing crisis. 


That’s going the wrong way, fellas

That’s nearly three times average annual new housing production, and it’s strangling Britain in under-housed accommodations:

[Liberal Democrat leader Nick] Clegg, who is speaking of boosting links along the “brainbelt of Britain”, will say: “Britain faces a housing crisis. Every day, 200 fewer families own their own home, as homeowners die and more young families get stuck renting, unable to afford to buy.”

Housing prices and housing shortages are a huge issue with the voters:

“Housebuilding is stuck in the doldrums, with nowhere near enough homes being built to meet demand and keep prices affordable for those families desperate for a home of their own.”

Despite all this, we saw in the previous Part 1 that though the parties know the voters want better housing, none of them will bet political capital on production.  None of the parties are proposing anything like a development policy, and in fact the Conservatives’ main proposal is an expanded Right To Buy, which though it may be a very good thing for the households who are able to buy and for economic activity generally, will not by itself produce a single new apartment.


And we’ll be back the moment there’s any sign of improvement

Opinionated sources used in this post

(font colored in rough approximation of party affiliation)

The Guardian (October 6, 2014; russet font)

Financial Times (February 12, 2015; by Jim Pickard and Kate Allen, tory blue)

BBC (April 14, 2015; by Robert Peston, Lib Dem orange)

Financial Times (April 26, 2015; by Judith Evans and James Pickford, Labour red)

Previous AHI posts on issues relating to the UK’s housing policy

April 5, 2005: What price greenfield?

July 14, 2005: Struldbrug buildings

October 25, 2010: Homeownership, a road to wealth or to poverty? (5 parts)

February 6, 2012: Floggings will continue until supply improves (2 parts)


We’re keeping our footprint small

Moreover, at least described in concept, Her Majesty’s Government would need to do some deft financial structuring, and the Euromasters in Brussels would also have a say:

He warned that such government intervention would also risk bringing housing associations’ £60bn of borrowings on to the public balance sheet.

It could – in the same way that a botched Fannie/ Freddie privatization would bring all their securities onto Treasury’s balance sheet – but that would be legislative malpractice and for this purpose is a boogeyman.


We’re grabbing your balance sheet

Brendan Sarsfield, leader of the G15 group of London housing associations, said that giving away homes at deep discounts would undermine the sector’s financial viability.

“It would mean giving away assets, many housing associations have large loans, what would the banks do if suddenly our assets were eroded in this way?”


As a non-profit, Sarsfield doesn’t believing in giving things away

Kate Davies, chief executive of Notting Hill Housing Group, said the proposal “would have to be backed by significant public funds”.


Here in Notting Hill, I have to be backed by significant public funds

Or guarantees or other things to make the sums work.


Pushing hard for the Right (to buy, that is!)

The extension of Right to Buy is being pushed by Iain Duncan Smith, the work and pensions secretary. He is understood to have support from some senior colleagues including Lynton Crosby, who is in charge of the Tory election campaign.


Who polls, wins

He backs a proposal from the Centre for Social Justice, a think-tank he set up in opposition, for discounts of up to 30% of a property’s value.

How convenient to have a think tank present proposals that coincide with its founder’s views!  Why didn’t I think of that?

Mr Duncan Smith is also floating an even more radical idea: giving away all social housing to its tenants.

Never mind the apparent irony of a Conservative government proposing a redistribution to each according to his needs, while the concept has had ‘ownership society’ appeal from Jack Kemp onwards, it blithely sails over a mountain of difficulties, costs, and risks. 


Margaret Thatcher takes tea with former GLC council house tenants in Balham in 1978.

Photograph: Kenneth Saunders for the Guardian Kenneth Saunders/Guardian

Under this idea, any tenant who has worked for more than a year would be given their home.

How will the housing association address its outstanding debts?

The association would retain a stake, perhaps 40%, which could be used to pay off any residual debt on the property.

That doesn’t work, because the debt is a cash obligation, and the ‘40% stake’ would be an illiquid position that could be monetized only if the new owner either (a) sold the property, defeating the purpose of giving it to him or her, or (b) immediately refinanced the property (but who would lend?).

It was first put forward by Paul Kirby, a former civil servant in the Number 10 Policy Unit, who wrote: “Essentially this is a simple proposal — give away the homes, clear £75bn of debt, relieve tenants of their rents and save billions per year in benefits.”

Now there is the idea’s kernel – to swap out the current annuity-style housing benefit, which is an ongoing and rising obligation, akin to US public housing operating subsidy or Section 8 vouchers, for a one-off payment.  But it makes the breathtaking leaps that the sums will work, and that people who exchange a welfare check for a property ownership stub will suddenly know how to protect their nest egg.

The FT then dryly notes:

This proposal has met resistance from the Treasury.


Prime Minister, HMT has a frowny face

Indeed, for it is, shall we say, adventuresome.


They’re giving us the bricks?

Mr Orr [of the National Housing Federation] said [Mr. Duncan Smith’s proposal] was “a genuinely stupid idea”. 

That’s another way of saying it.

Critics say this would leave even less social housing for rent.

That’s obviously true, because the supply of ‘social housing’ – meaning publicly-owned housing – would go own.  But the total number of homes wouldn’t go down, and some people who were lifetime renters would become homeowners.

More than a third of former council homes bought by their tenants in one London borough are now owned by private landlords, according to research.

Does that mean the people who bought them later resold them?  Or perhaps their new owners have moved elsewhere, and now rent their former residence?  Though the FT invites readers to conclude that one-third now privately rented is a bad outcome, that’s not a conclusion, it’s an unstated premise.

“Right to Buy is a vote-winner.“ said Mr Sarsfield –

There’s the rub; almost every observer (probably including most voters) think this is just an election-weeks ploy. 

As the election looms, David Cameron – who in his early leadership days seemed to present himself as more the heir to Blair than Thatcher – wants a bit of Margaret Thatcher’s election-winning magic dust.

No one can touch the Beeb for casual syntactic sneering (‘magic dust’):


Got any magic dust?

So he has nicked and reworked her totemic policy of flogging council houses to their working-class tenants – some of whom redefined themselves as a new generation of aspirant Tories.

Totemic flogging?  BBC, you’re letting your biases show.


Beeb snark aside, the right-to-buy idea has been pulled, like a rabbit from a hat, with scarcely any thought, the flimsiest of program description and the sketchiest of analytical support


Shallow and unsubstantive?  Me?

It invites – but neither raises nor answers – the core policy question: What is the purpose of expanding homeownership?

Is it:

  1. To transfer government subsidy wealth to families?
  2. To encourage families to invest in place and property?
  3. To develop a ‘forced savings’ model for eventual retirement or children’s education?
  4. To strengthen people’s connection to civil society?
  5. To give people what they want (rather than what they need)?


You can’t always get what you wa-ant

As the question is profoundly important and profoundly difficult, I will, as the parliamentarians do, refer to my previous (five-part) answer: Homeownership, a road to wealth or to poverty?


I previously explained I’m not going to explain, and I’m not going to explain that explanation

[At some point, when I have suitable seed material I’ll return to the purpose-of-homeownership issue more fully.  Housing is Tocquevillean, in that it promotes civil society and democracy, and that concept deserves a better exposition. – Ed.]

On the other hand, what the Conservatives’ right-to-buy proposal may lack in conceptual or policy rigor, it more than makes up for with the spluttering incoherence of the objections being raised to it:


Thank you for that informed comment

[Continued tomorrow in Part 3.]

Speaking on behalf of the NIMBY party: Part 1, Hugely popular but widely blamed

May 1, 2015 | Affordability, Apartments, Campaigns, Development, England, Homelessness, Homeownership, Land use, NIMBY, Political vaporware, Politics, Scotland, Wales, Zoning | No comments 140 views

By: David A. Smith

The shorter the election cycle, the dumber the political vaporware, and as the United Kingdom barrels down toward the most confusing and hard-to-predict election for many decades, the buffoonery is rising to a silly crescendo.


“The truth is he [Miliband] is weak and despicable.”


“When did he [Cameron] lose his nerve?  These are pathetic, feeble excuses.”

The parties all agree that Britain has a huge housing problem, it’s the other parties’ fault, and it’s too late to do anything with their suddenly-discovered brilliant ideas until after they are elected.  To illustrate three divergent perspective, here are three equally opinionated (“we’ll report the right opinions, then give you the facts to support them”) stories:

Opinionated sources used in this post

(font colored in rough approximation of party affiliation)

Financial Times (February 12, 2015; by Jim Pickard and Kate Allen, tory blue)

BBC (April 14, 2015; by Robert Peston, Lib Dem orange)

Financial Times (April 26, 2015; by Judith Evans and James Pickford, Labour red)

Spoiler alert: None of these proposals show any awareness of the UK’s housing ecosystem.


There may be a big swing one way or another

The UK ecosystem, in brief

Urban housing is an economic ecosystem where homes and loans are outputs of two complicated value chains that are enabled or disabled by government.  In the UK:

     1.   For cultural/ historical reasons, (a) nearly all the economic growth is place-specific, radiating from London, and (b) the labor force is remarkably immobile; so there is a huge spatial mismatch between job creation and available workers.

     2.   In the UK, the supply side is disabled by land-reservation requirements (roughly two-thirds of the country is permanently dedicated conservation) and a massively dysfunctional NIMBY enthronement system called ‘planning permission.’

     3.   The demand side is enabled by easy-credit options including buy-to-let (B2L) and high-leverage homeownership.

    With economic growth spatially separated from available workers, housing demand enabled and housing supply disabled, the result is spatial divergence as the South gains while the North slides.


On the political outside, looking in

As none of the parties shows any awareness of practical housing policy in the UK ecosystem, nor any willingness to shoot the sacred cows (confronting the NIMBYist system), we will follow the political dialectic (dumb proposal, dumber counterproposal, dumberer counter-counter proposal) by reviewing the proposals in chronological order by date of publication.


“I don’t want you to get the impression it’s just a question of the number of words… um… I mean, getting them in the right order is just as important. Old Peter Hall used to say to me, ‘They’re all there Eddie, now we’ve got to get them in the right order.’”

1. “People who should be owners are stuck renting”

The Conservatives, who as the dominant party in the incumbent coalition are under pressure to justify their record, have fallen back on a pair of tried-and-true strategies:

1. Keep reforming something dating back to when the opposition was in power, and

2. Offer an easy-to-understand bargain:


All have won, and all must have prizes!

More than 2m people living in social housing could be given the chance to buy their homes under a Conservative party plan to extend discounts offered under the “Right to Buy” programme to housing association properties.

In the UK, affordable housing is delivered in two ways:

  • Directly from local housing authorities, known as ‘council housing’ (equivalent to US public housing).
  • Via non-profit mission entrepreneurial entities (Mee’s), known as housing associations, either via direct development themselves or acquired via stock transfer.

As a group, the Housing Associations are a tremendous national resource:

These private not-for-profit companies which in some cases date back to the 19th century, have gradually replaced councils as the main provider

Of these two modes, Right-To-Buy is available only to council housing, not to Housing Association properties, and so successful was the Thatcher stock-transfer program that the council housing is now a minority:

At present the “Right to Buy” applies only to Britain’s dwindling numbers of council house tenants, plus [only a few properties owned by housing associations, namely those] bought by the association since 1997.

The original Right to Buy scheme, introduced by Margaret Thatcher in the 1980s, was hugely popular but has been widely blamed for reducing the availability of social housing. It led to more than 1.5m homes being sold at discounted rates.

There’s an example of emotive phrasing where the description contains the value judgment.  Of course social housing went down, but social housing didn’t go down, because the 1.5 million homes weren’t lost.  Instead, the families in them were turned from renters of the state into homeowners.  It would be equally fair to trumpet that under Right To Buy, 1.5 million Britons were able to become first-time homeowners.


And Right-To-Borrow customers

So – did affordability go down?  Or did it go up?  The question has no definitive answer – it depends entirely on how one defines affordability, and for whom affordability is to be delivered.

None of the parties actually want to discuss that, they want their chosen voter demographics to perceive it positively. 


Do you perceive this mess as more Conservative, Liberal, or Labour?

However one views Right-To-Buy in a policy context, in Britain it is seen entirely as partisan politics: invented in the late 1980s by Margaret Thatcher as both policy (promoting an ownership society) and politics (breaking the Labour stranglehold on local-government pocket boroughs via council housing), it had a great wave of conversions; then was entirely mothballed by the Labour governments (Blair and Brown), only to be revived with the Conservatives’ return to power (albeit in a coalition with the now-waning Lib Dems):

The coalition has already tried to revive Right to Buy on council houses by extending the discounts for tenants buying their home: to £77,000 in England and up to £102,700 in London.

If there are to be discounts, these should be indexed to inflation (of either costs or housing costs, depending on your views).


You do if you’re going to collect in the future, but not if you’re going to pay

Further, the discounts referenced, one should note, are not against an original cash or financed development cost, but against current value (in effect, giving the occupant a portion of the capital gains/ appreciation that arose during that household’s tenancy); when that happens, as we saw in New York City with the Mitchell-Lama privatization of Southbridge Towers, profiled exhaustively in One man’s windfall is another man’s score (December 2, 2014: 11 parts, Part 1, Part 2, Part 3, Part 4, Part 5, Part 6, Part 7, Part 8, Part 9, Part 10, Part 11).  Everyone fully understands that, if given the opportunity to buy their apartment at a discount from market value, nearly everybody will jump at the chance:

“If you have an opportunity to have ownership of a piece of Manhattan real estate in one of the fastest growing areas, does that outweigh any of these negatives?” Mr. Dimson said. “I think most people will tell you yes.”

The same personal decision-making continues to work in Britain:

More than 27,000 homes have been sold under the programme since the coalition came to power in 2010.

As the proposal would likely result in housing associations losing many of their best properties (and highest rents), the sector’s negative reaction is not exactly surprising:


I am not surprised at that

A series of housing sector figures have cast doubt on the latest Conservative party proposal.

David Orr, chief executive of the National Housing Federation, said that because they were charities many housing associations were legally barred from selling homes at below market value.

David Orr, of the National Housing Federation

NHF wonders if selling at a discount is mandated Orr prohibited

Doubtless that is true, but inherent in the Conservatives’ proposal is intention to change the law:

The government would need to introduce legislation to allow housing associations to sell houses to tenants at a discount, according to Piers Williamson, chief executive of the Housing Finance Corporation (Sober brown font):


Making a business of lending to his Piers

Mr. Williamson has a particular reason for noting this complicating factor – he is the government-sponsored lender to the entire housing association industry:

THFC is an independent, specialist, not-for-profit organisation that makes loans to regulated Housing Associations that provide affordable housing throughout the United Kingdom. THFC funds itself through the issue of bonds to private investors and by borrowing from banks.

THFC, through its subsidiary, Affordable Housing Finance is the delivery partner for the Affordable Housing Guarantee Scheme. AHF makes loans to RP borrowers and funds itself through the issue of bonds and by borrowing from the European Investment Bank.

In effect, THFC is the UK’s Fannie/ Freddie, exclusively for affordable multifamily rental and with explicit credit-subsidy limitations.  It is, in short, a model for a post-conservatorship Fannie/ Freddie (not that anybody in America would even think of looking to the UK for a paradigm, but still, perhaps someone can point it out to us.)

AHF’s obligations under the terms of its financings and the obligations of its RP borrowers are guaranteed by the Government. The scheme has been designed to allow RPs to access cost effective funding so as to act as a stimulus in the building of affordable housing.

Definitely a Fannie/ Freddie countercyclical liquidity model – and an entity that the government would have to hold harmless.  Nor is that the end of the technical challenges,


That’s why we’ll post Part 2 on Monday!

[Continued Monday in Part 2.]


Month in Review: March, 2015

April 30, 2015 | Blogs, Essential posts, Government, Greece, Grexit, Lucy Martin, Month in review, NGOs, Nonprofits, Overhead, Political theory, Real estate taxes, Taxation, Theory | No comments 116 views

By: David A. Smith

During March, in honored surprise at a decade’s worth of continuous blogging, I published the first 10/17ths of the longest post I’ve ever done, Ten Years a Blogger,

01 ten_years_warning

As an encyclopedia should seldom be excerpted, I’ll simply list the titles here: Ten years a blogger: Part 1, What is a blog?, Part 2, What a blog can do, Part 3, Literary antecedents, Part 4, Blog construction, Part 5, Blog evolution, Part 6, The laboratory of housing laws, Part 7, Housing as urban technology, Part 8, Slums as an asset class, Part 9, Housing’s value chains, and Part 10, Affordability and government:

02 pleez_daddy

[Oh, all right; here’s a clip. – Ed.]

Section 10. Affordable housing and the essential role of government

Because sustainable urban affordable housing always costs money, it arises only when a benefactor is willing to make that happen.  Occasionally the benefactor is the private, for-profit owner; sometimes it can be a philanthropy or charity (such as almshouses), but most commonly the benefactor is government, because only government has the resources at scale, and only government can use eminent domain for economic development or affordable housing development.

03 supreme_court_wrecking_ball

Beware the wrecking ball?

The need for government resources, coupled with government’s general inability to be an effective owner/ manager/ doer (an indubitable reality that at some point I should prove via essay), means that the best affordable housing is created through properly structured public-private partnerships (PPPs) or government incentivized financing programs; I’ve explored the nearly infinite variety of these in many posts, including this Top-25 post (June 11, 2009), Development done right in Jamaica? Part 1, the gates of exclusion:

04 argonath_01

None shall pass … without zoning

Theorizing has always been a favorite use for my blog, and it seems reality will keep producing things that require theories, as I posted in reviewing a fascinating study by doctoral candidate Lucy Martin, Taxation, loss aversion, and accountability: theory and experimental evidence for taxation’s effect on citizen behavior, (September, 2014; caramel font) via a two-part post, People value a government they pay taxes for: Part 1, The experiment and Part 2, The implications:

Given that People value only what they pay for is indeed a universal rule, it will have subcases – and one such subcase, striking in its own right and with major implications for the way donors deals with country governments, was highlighted in a recent article in The Economist (February 7, 2015):

No representation without taxation

A behavioral argument for higher taxes

Taxes are the fees a government earns for providing services that its citizens value.

While government is the name for things a society agrees everyone will do together, government is a service business with enforced dues subscriptions,

As we’ve seen in the context of real estate taxes, the connection is quite direct, and when citizens’ taxes go up they squawk, challenge the figures, and suddenly focus on the government budget; and they use, or threaten to use, their votes as political equity to replace the old scoundrels with new scoundrels.

05 snip_scissors

Long blog posts are snipped for your protection

Ms Martin tested her theory with an experiment in Uganda. In an “aid” game and a “tax” game, two players, a Leader and a Citizen, split 1,500 Ugandan shillings (about 54 cents).

The experiments consisted of the “Tax” and “Grant” games, each played between one “Citizen” and one “Leader”.

In both games, the Leader is given a “group fund” of 10 money units (MU) to divide between himself and the Citizen.  The Citizen can then pay to fine the Leader if she is dissatisfied with the allocation. The games differ in the source of the group fund.

The two games [Tax and Grant] have the same economic distribution and the same judgment (Citizen punishes Leader, and in so doing hurts himself), but the antecedents differ for both the Leader’s sharing decision and the Citizen’s judgment of the Leader’s adjudication.

The decision tree and payoffs are the same in both games, and so the only difference between the Tax and Grant games is the framing effect created by having the group fund previously owned by the citizen. This implies that any differences in gameplay between the Tax and Grant games must therefore be due to some behavioral effect activated by taxing the Citizen.

Further, Ms. Martin put a nice sting in the punishment; nobody wins from it.

As a result, the unique subgame-perfect Nash equilibrium of both games is for the Leader to offer 0 MU to the Citizen, who never punishes. Punishment is never economically rational, but rather a purely expressive action by the Citizen.

I thought and think this was a brilliant study, because it invited people, especially those playing the Citizen, to make judgments solely on the basis of perceived fairness, with self-interest entirely excluded.

06 paddle_punishment

That’s for not sharing

In a subset of the sessions, respondents were asked to explain their in-game decisions (N=100).  These data provide compelling evidence that the treatments activated the relevant expectations and norms surrounding political behavior.  

A number of respondents also specifically cited the tax as a reason for demanding high transfers from the leaders. For example, one respondent said that “As a citizen, since my money was taken as a tax, I want to earn more than the leader.” Another made a similar reply, explaining that “Because it’s tax money, [the leader] has to give back more.”

Taxes are sales of a product citizens are forced to buy (thank you, Obamacare) for the good of all and to avoid free-rider problems.  And when the extraction of tax is visible, people are more aware of it, so they demand greater accountability of those who use their taxes.  Ms. Martin’s work implies that taxes should be traceable, from taxpayer through government body and back to visible improvements – say, local taxes into streetlights or better police presence – as that traceability will result in greater voter expectations of service and quality.

07 uganda_constitution

I swear to uphold the Constitution, even if I have to change it to do so

Ms. Martin’s work also implies that making the taxation invisible (as in payroll deductions at source) actually reduces voter expectations of accountability.

The motivations for paying or not paying taxes are far from theoretical, they’re front and center in the continuing bluff game between Greece and the Eurozone, because Greeks basically don’t pay their national taxes, and as I posted, Creditor of deadbeats = deadbeat debtor: Part 1, Bad debt and bad paper and Part 2, Your creditors can’t handle the truth:

08 you_cant_handle_the_truth

You can’t handle the taxes

In my book, property taxes are good taxes, because they are objectively measurable (based on property value), collectible (because property does not move so it can be legally and financially attached), and can be connected quite visibly to local services.  Of course, property tax collections, like so many forms of taxes, depend on the observant herd paying and the system breaks due to compliance-requirement overload when the observant herd stops paying because they believe the taxes are unfair.

09 taxes_are_good

Where does it say I got these things?

There is an imaginary company called ‘GreekBiz’ – the Greek government’s bundle of services that it sells to its citizens in exchange for their taxes, and the business of GreekBiz is to enable Greeks to raise their own economic activity. 

The reason isn’t just political, but economic. The country’s depression has already pushed many small businesses to the brink of collapse.

GreekBiz has a busted business model, and GreekBiz’s creditors’ demanding to be repaid actually makes it harder for GreekBiz to implement a new business model.

Since 2008, the Greek economy has shrunk by about a quarter. Although not quite as deep a downturn as America’s Depression, Greece’s recession was more prolonged and is likely to take more time fully to recover from. Recent downturns in the euro area and Britain seem like minor hiccups in comparison.  

As I analyzed it, Greece’s fiscal problem is hopeless, and default is inevitable, just being progressively more delayed (and hence worse):

6. “What’s the solution?”  “There is no solution.”

Greece is Europe’s Detroit, spiraling down in population, economic development, and everything else.  But unlike Detroit, it has no bankruptcy option and hence no means of selectively cutting its debt.

Having started to grow, Greece’s economic recidivism is deeply frustrating. But Greek voters had plenty of reason to plump for change. Even before the crisis struck, Greece was a laggard. In 2008 only a third of households had the internet, the lowest share in Europe. Levels of youth unemployment and government debt were already among the continent’s highest. Since then, the gap between Greece and the rest of the euro zone has grown. Unemployment has more than tripled to 26%, and three-quarters of the jobless have been out of work for 12 months or more.

Over a third of Greeks are considered to be at risk of poverty, more than any other euro-zone member.

10 greece_population

You can’t grow an economy on a shrinking and emigrating population

Worse still, the recession exacerbated some unfortunate demographic trends. Greece’s population peaked in 2009 at just over 11m, because of falling fertility rates and work-hungry emigrants. This has pushed up Greece’s old-age dependency ratio (in essence, the ratio of people too old to work to those of working age), already one of the highest in the world. 

Go back to GreekBiz; like Detroit, it has too many retired workers and not enough current ones.  Unlike Detroit – sorry for repeating what by now is obvious – Greece can’t go bankrupt.  Greece really is Gulliver’s struldbrug, doomed to eternal life, but at the cost of eternal senescence.

Lastly, during March I tackled an issue that has long bothered me: How much should non-profits pay people?, a question that matters because There’s big money in charity: Part 1, Not corporate chieftains?:

[I wrote a report about how] some Madison Avenue sharpies ripped off the Office of Economic Opportunity. That one I entitled, “Poverty is Where the Money’s At.”

– Ross Thomas, If You Can’t Be Good (1973)

11 top_endowments

It’s good to be well endowed

Profit is normally the premium one pays for competence, but are all profits equal? 

Aside from ‘waste’ being a normative concept (like greed, it’s something others do and we condemn because we never do it), there are non-profits and non-profits – and that makes everything fairly complicated.

1. A non-profit is a business stapled to a beggar

Nearly all the non-profits in my experience are in some way or another mission entrepreneurial entities; they produce products and services, which they make available to the public either free or at lower prices than pure economics would require them to charge. 

And unlike Mee’s that grew out of a profitable activity and discovered purpose along the way, non-profits started with the mission and invented the enterprise as a form of sustainable and scalable delivery.  But the intangible infrastructure of an expanding organization costs money, so nearly all non-profits have their begging bowl out all the time.

After a lengthy analysis, covering many parts including Part 2, Few would thrive, Part 3, To court donors, Part 4, We need top performers, Part 5, Competitive-pay analyses, Part 6, High Fees and handsome compensation, Part 7, Sacrifice in turning down the other job, I finally reached a conclusion in Part 8, Whatever they want?:

After too many words [Is your explanation overhead, or program activity? – Ed.  Clearly I’ve been thinking about this far too much – Auth.], I’ve found my way out of the wilderness and know what I think.

12 wrong_turn_luke

You made a wrong metaphor 11,000 words ago

At some point a non-profit business may grow so large that it becomes economically a conglomerate stapled to a foundation, and the conglomeration outvotes the foundation.

[By the way, government is the ultimate non-profit conglomeration, whose fundraising business model has the teeth of law behind it.  Everything I’ve written above about unreliability, overhead, executive capture, and lack of governance applies in spades to government. – Ed.]

Never having met Dan Pallotta [Who argues emphatically that non-profits should pay market compensation to its fundraisers, including his for-profit consultancy – Ed.], I conclude at a distance that he genuinely means what he says – and I conclude his beliefs are wrong.  High-overhead fundraising is damaging for what it does to the fundraising non-profit, to other non-profits, and to the non-profit ecosystem as a whole.

13 high_overhead_non-profits

Rationalization is too powerful not to be denied

To me, it boils down to this: If money is the sole criterion how you choose your career, choose something other than non-profit work.

A tale of two cities: Part 12, A beautiful city rising from this abyss

April 29, 2015 | Annexation, Bankruptcy, Chicago, Cities, Detroit, Finance, Housing, Infrastructure, Municipal bankruptcy, Pension funds, Real estate taxes, Speculation, Urbanization, US News, Zoning | No comments 196 views

[Continued from yesterday’s Part 11 and the preceding Part 1, Part 2, Part 3, Part 4, Part 5, Part 6, Part 7, Part 8, Part 9, and Part 10.]

By: David A. Smith

“It is a far, far better thing that I do, than I have ever done; it is a far, far better rest that I go to than I have ever known.” 

Charles Dickens, A Tale of Two Cities


“Banking, of course, imposes its own restrictions and silences.”

Yesterday’s post, the penultimate in this adventure, ended with our dual awareness that (a) secession is legally and financially feasible if there is agreement among the political units, namely the new seceder, remaining city, state as officiant or judge or celebrant; and (b) city bankruptcy is imminent.  If that’s so, might one trigger the other?

Sources referenced in this post

Reuters (February 27, 2015; gray-blue font)

National Journal (March 28, 2015; black font, main source)

Encyclopedia of Chicago’s History; Georgia sepia)

Previous AHI blog posts on related subjects

June 5, 2013: A grand unified theory of municipal insolvency (2 parts)

September 13, 2013: Next up, Chicago (3 parts)

September 25, 2013, Decline and fall of the Roamin’ Empire (5 parts)

December 4, 2013: A fool and his bond market are soon parted (2 parts)

December 31, 2013: Sub-cities? (2 parts)

January 6, 2014: Out of the muck? Jefferson County (5 parts)

January 5, 2015: Doublethink pension funding (10 parts)

Paul Green, described as the doyen of Chicago political analyst, has written:

Chicago is a giant political/governmental laboratory. In most of my courses students go out into various communities to do research and interviews.

Not all experiments work, and chaos in the empire is a great time for breaking away, especially if the chaos can be foreseen, and this can.

[Writing this post has convinced that Mayor Emanuel knows all this, and that he’s planning his bankruptcy-filing calendar now.  I predict it’ll be in roughly a year, when he’s taken as many pre-filing actions as he thinks he can get through.  If you see a period of 90 days, the standard preferential-transfer reachback interval, with nothing from Emanuel, that’ll be the clue filing is right around the corner. – Ed.]


Always think ahead

10. Breakup: Will bankruptcy mean breakup?

Chicago is heading for bankruptcy, whether voluntary or involuntary.  

Chicago’s finances will continue to be imperiled. The day of reckoning will near, as pension bills increase. The city’s social divide will likely continue to worsen. And whoever ends up serving as mayor will face a daunting set of challenges, with few clear solutions in sight.

When it gets there, will the city that emerges have the same geographic boundaries as the entity that went in? 

Bankruptcy as the vehicle for dissolution and ‘right-sizing’

Not all bankruptcies are reorganization; some are dissolution.  And in many bankruptcies, the reorganized company sheds one or more major assets – a property, a business unit, a division, even an entire operating company – to generate cash, to free the subsidiary to pursue its own business path, or to lighten the managerial and administrative load on the remaining company.  (In fact, this happened with GM and Delphi, its parts-manufacturing subsidiary.) 


Gone but not forgotten

Procedurally, an asset-spinoff sale is very simple:

1. Someone proposes that an asset is more valuable if spun out and sold.  The proponent could be the bankruptcy trustee (or receiver, if there is one) or it could be a creditor.

2. The court then assesses the asset’s value – or if there are more than one bidder for the asset, the court conducts its own intra-bankruptcy auction of that component asset.

3. If the spinoff is value-additive to the bankrupt estate, the court approves it and it happens.


A setoff neighborhoods, why not a city of their own?


A proto-city with its very own university: Loyola

Exactly this happened in Detroit’s bankruptcy, when clever Kevyn Orr zeroed in on the Detroit Institute of Art, an asset that was by no mean essential to city government, that had value, and that could readily be privatized.  By pursuing DIA’s outright sale, he induced other parties (some of them creditors, some of them interested bystanders) to develop, structure, and close a proposal to buy DIA into a new non-profit.

“When the DIA attached itself to the city in 1919,” said elated director Graham Beal, “they did so because they thought it was the best way to secure it for the future. But circumstances changed so much in ways nobody could have expected that now the safest position for the DIA is as a private charitable organization.”

Why couldn’t that happen to an affluent part of Chicago?  The property owners of our imagined Lake View City, for instance, could constitute themselves as a proposed independent new town and seek to buy their freedom from Chicago, at a price consisting mainly of assumption of a fixed sum of Chicago’s liabilities.  They could then raise their own localized real estate taxes to pay for local improvements and/or have a lower bond rate on their liabilities.


We’re the lone gunmen, and the truth is out there

The ‘findings of fact’ concerning mega-Chicago today

Though lack the resources to subdivide Chicago into constituent geographic business units and test their overall economic value, even the most casual glance at the map suggests that the city’s “profitable subsidiary neighborhoods” are:


Chicago’s moneymaker, and still expanding

  1. O‘Hare Airport.  The gold mine.  Retain at all costs.
  2. Midway Airport.  The previous gold mine that could be reworked with new technology.
  3. The Loop/ commercial district.  The oil well.
  4. The convention district.  The secondary oil well.
  5. The Gold Coast/ North Side.  The bread-and-butter business.

In bankruptcy, several of these should be ‘for sale’.  The Loop/ convention district can’t be sold, without them there is no Chicago and they exist because of the rest of Chicago.  O’Hare and Midway can be monetized but that may not be enough.  That leaves our North Side, which I think is worth more to Chicago if ‘sold’ via secession with an extra dollop of liabilities ladled on its way out.


Transportation to Chicago available

If the court appointed an expert to appraise the civic value of a proposed spinoff of Lake View City, the expert might reach these conclusions that the court would then confirm as ‘findings or fact’:

Mega-Chicago: “Findings of fact”

If the question of Chicago’s survival or dissolution into component cities were put to me as an arbitrator, based on the evidence presented (this blog post), I would make these findings of fact:

1.     From its inception, Chicago was a consciously expansionist city based on a value proposition of scaling and infrastructure network benefits.

2.     The value proposition was compelling between 1837 and 1955.

3.     Annexation was always more appealing to lower-income townships than to higher-income ones (e.g. Oak Park and Evanston), which opted to stay independent.

4.     Somewhere around 1950, Chicago lost its value-proposition mojo and was unappealing to unincorporated townships.  Its expansion stopped then.

5.     Today’s Chicago is fiscally unsustainable without dramatic recapitalization equivalent to bankruptcy.

6.     Chicago has enormous spatial disparities between rich and poor: a core similar to Austin and a fringe similar to Detroit.

7.     Chicago is experiencing ‘urbanization concentration’ where some neighborhoods in the city (e.g. the Loop) are further urbanizing even as others (e.g. South and West sides) are de-urbanizing in a manner like Detroit’s.

8.     Finding that the pension-fund cost-saving amendments are constitutional is necessary to keep Chicago out of imminent default, but even if they are upheld, that is probably insufficient to do more than defer bankruptcy for a little while. 

9.     There’s a scientific-analytical basis to conclude cities reach a maximum viable city if their infrastructure-scaling synergy doesn’t translate into higher-wage job creation.

10.  The higher-wage jobs Chicago is creating are too few for the mega-city as a whole, and largely concentrated in a sub-city (that corresponds to the original Chicago core), the Loop.

11.  Tax rate equalization (within property categories), an inescapable feature of Chicago’s size, is hurting the city because it prevents neighborhoods from self-financing neighborhood improvements.

12.  ”If mega-Chicago didn’t exist, one would not create it today.”

On those facts, the court would approve a secession of Lake View City, with economics to be submitted by the parties (seceding Lake View City and remainder-Chicago) and then adjudicated by the court.


Secession may end in a war but it starts in a vote

(Secession votes do divide political units; we saw that in a civil manner in Everett from Malden, and ten years earlier, it happened in a military manner when West Virginia split itself off from Virginia.)

Normally the court also looks to see the debtor/ plan proponent contribute new money into the bankrupt estate, so that the remaining creditors gain something from approving the release.  That could easily be done here, with the property owners of soon-to-be independent Lake View City agreeing to take on a slightly larger share of the liabilities, and to pay for that larger share via increased local property taxes, or even a one-time special assessment of so much per capita, per household, or per thousand of assessed value.  I can certainly imagine a lively town campaign, not unlike campaigns to bring in casinos, that would emphasize the economies to be realized by breaking free of sludgy corrupt Chicago and running our own progressive-suburban government.

Though little mentioned, Chicago Tribune columnist Dennis Byrne has noticed that bankruptcy has clearly benefited Detroit:

Ironically, under bankruptcy, the city’s homicide rate, the highest in its history, dropped 18%, The New York Times reported. Police average response time dropped to less than 18 minutes, from 58 minutes. Replacement of the city’s streetlights — of which 40% failed to work — is in the offing. Detroit isn’t out of the woods yet, but it’s in a better place now than when there appeared to be no hope, none at all.

On Mayor Emanuel’s tombstone may well be written his most famous quote:

You never let a serious crisis go to waste. And what I mean by that it’s an opportunity to do things you think you could not do before.

Mayor Emanuel has his crisis; he has his mandate.  Dennis Byrne exhorts:

Rip Chicago’s finances out of the hands of the connivers, special interests and political opportunists and give them to a court-appointed manager to oversee the necessary reorganization. Start with Chicago Public Schools and, if necessary, throw in the entire stinking mess called the city of Chicago.

Might as well include the state of Illinois, too.


Okay, Bruce, now when I put the city into bankruptcy, you back me up, okay?

Wobbly conglomerates may last longer than observers expect, but they can crumble when hit by an external shock. 

The Enron debacle led to the implosion of Arthur Andersen, and the management buyout spinoff of its management consulting division, which wasted no time rebranding itself Accenture.

The fall of the Berlin Wall led swiftly to the collapse of the Soviet Union, because suddenly it was possible for the long-yearning Baltics to envision how they too could escape.

World War I put paid to the Austro-Hungarian Empire.  World War II brought independence to India and two Pakistans.


Holy cow, it’s an independent India

Perhaps Rahm Emanuel will discover, via bankruptcy, that the best thing he can do for the city is to be the last mayor of mega-Chicago.

I see a beautiful city and a brilliant people rising from this abyss, and, in their struggles to be truly free, in their triumphs and defeats, through long long to come, I see the evil of this time and of the previous time of which this is the natural birth, gradually making expiation for itself and wearing out.” 

Charles Dickens, A Tale of Two Cities


We just need to make a few cuts

A tragic update

Lest you think that internal Gini coefficients and spatial socioeconomic separation are sustainable events, the last few days’ awful events in Baltimore may serve as a grim wakeup call.  As reported by BBC News (April 28, 2015),

To understand why you have to understand that Baltimore is actually two cities: One is a city mired in decline and poverty, made famous by the TV show The Wire. Another is a city on the rise with a shiny waterfront and increasing numbers of young affluent residents.

To keep the affluent Baltimore viable, city officials have pursued a laser-like focus on crime, ensuring its new up-and-coming neighborhoods stay safe. Meanwhile, in sprawling low-income areas on the city’s east and west sides, the police have been omnipresent. Sometimes their methods have bordered on draconian.

The success of the new Baltimore has never touched many parts of the city, most prominently the west side where this week’s violence began. Take away the towering downtown, the waterfront and other affluent enclaves and Baltimore suddenly looks a lot like Ferguson – poor, harassed and angry.


There’s a reason James Baldwin called it The Fire Next Time


A tale of two cities: Part 11, Only Detroit has a lower bond rating

April 28, 2015 | Annexation, Bankruptcy, Chicago, Cities, Detroit, Finance, Housing, Infrastructure, Municipal bankruptcy, Pension funds, Real estate taxes, Speculation, Urbanization, US News, Zoning | No comments 133 views

[Continued from yesterday’s Part 10 and the preceding Part 1, Part 2, Part 3, Part 4, Part 5, Part 6, Part 7, Part 8, and Part 9.]

By: David A. Smith

“And who among the company at Monseigneur’s reception could possibly doubt that a system rooted in a frizzled hangman, powdered and gold-laced, pumped, and white-silk stockinged, would see the very stars out.” 

Charles Dickens, A Tale of Two Cities

Any reader who has made it this far down the convoluted rabbit hole with me has by now become at least attuned to the possibility that a bankruptcy of the City of Chicago could lead to at least one large neighborhood area breaking away, and that this possibility will become live because Chicago is by now certain to enter bankruptcy. 

But as with other unpleasant events, though this may be inescapable the timing is discretionary within a window.


First, I anesthetize myself!

Sources referenced in this post

Reuters (February 27, 2015; gray-blue font)

National Journal (March 28, 2015; black font, main source)

Encyclopedia of Chicago’s History; Georgia sepia)

And that invites the now-pressing question: What Will Rahm Do?

President-elect Barack Obama's Chief of

I know that’s how you feel about us, but what does it mean?

9. Crisis: When will bankruptcy be forced upon Mayor Emanuel?

Throughout his public pronouncements, Mayor Emanuel has made no secret of his belief that bankruptcy is a live possibility, and while many of these pre-election statements could be seen as casting himself in a favorable light compared with his more liberal and less specific opponent Chuy Garcia, having won the mayor’s office, he’s bought the bankruptcy risk option for the next four years.

And as I said when I started this piece, I believe he’ll have to cash in that option – soon – for the credit markets are cutting off Chicago:

Under a three-notch downgrade, Chicago would default on about $2.8 billion of credit facilities, including letters of credit, that the city would likely not be able to replace, according to Scott. Moody’s analysts said most of Chicago’s $806 million of variable-rate GO bonds are tied to swaps.


You promised me an annuity for eternity

Bankruptcies come in two flavors: voluntary and involuntary.  In the former, the debtor makes the filing; in the latter, it’s an unpaid creditor who invokes the bankruptcy court, and that possibility of involuntary filing means that though Mayor Emanuel holds an exclusive option on the city’s actions during the bankruptcy-choice window, plenty of others are or will soon hold their own options. 

The downgrades are coming, and with them the loss of Chicago’s bond-market access, because neither the numbers nor the calendar negotiate.


Mayor Emanuel knew this was coming, and ran for re-election anyhow

If pensions were a small part of a city’s budget, then all of this wouldn’t matter that much. But pensions represent one of the largest expenditures in Chicago’s budget (which is also true of other cities). Of a budget that runs around $8 billion, pension costs will amount to about $1.1 billion in 2015, and will rise to $1.2 billion in 2016 and $1.3 billion in 2017.

As I posted earlier, Chicago’s structural deficits are about to hit 14% of revenues, on their way to 16%.  Not only is that unsustainable, capital-markets shutdown should be imminent.

If bankruptcy is inevitable, the inevitability effect takes over


– and this can happen with astonishing speed (just ask Fannie Mae).

Those fleeing their creditors often resort to tossing money behind home in hopes either of slowing down the posse or lightening their own load.  In his first term, Mayor Emanuel did that:

Emanuel’s ‘scoop and toss’ strategy raised Chicago’s interest costs and contributed to Moody’s 2013 decision.

As I posted above, ‘scoop and toss’ out to be illegal.  Here, though, I suspect mayor Emanuel did it in hopes of starting a downtown revival that would have boosted the city’s revenue potential more than the usury element of scoop and toss.

In this, he was only following in the footsteps of Mayor Daley fils, who did the same thing, though less artfully:

When finally faced with falling revenues, Richard Daley, Emanuel’s predecessor, undertook several controversial efforts at privatization, but the initial funds the city gained quickly evaporated.

For a decade Chicago has considered selling or leasing Midway Airport, which still makes economic sense,


Once we lengthen the runways, that is

Emanuel has said he opposes raising property taxes, but one of his chief lieutenants on the city council acknowledged that the city would eventually have to do so.  Higher property taxes –

Talk of raising property taxes might be all the encouragement Lake View City needs to consider secession, because in America they’re among the most fundamentally local political decisions, and Chicago has become so large that ‘tax equalization’ is hurting the city because it’s eliminating neighborhood-level tax touch.

US property taxes use a flat rate, so much per thousand of assessed value.  Then they incentivize or subsidize different uses by setting assessed value as percentages of market value that vary by asset class.  As explained by Greg Hinz of Crain’s Chicago Business (October 1, 2014):

The local property tax system is filled with complicating factors: different tax levels for different kinds of properties (e.g., factories versus condos), a state-imposed equalization multiplier and various exemptions for the elderly and other groups. 

While the complications can have a policy purpose, they also have a big political upside: system opacity makes it harder for homeowners to discern how they are being taxed relative to their neighbors.


Did you notice a powerful and obnoxious odor of opacity?

That has obscured how Chicago’s mayors – Emanuel and his predecessor Richard M. Daley – have been raising tax rates as fast as they can:

In the last five years, it has gone up by half, moving from 1.25% of a home’s market value to 1.84%.

Bad as all of that is, commercial property owners have been hit harder, at least in Chicago, with a 61.7% hike over 10 years, with the figure more than doubling between 2007 and 2012. Most Cook County suburbs were a bit below the city figure — especially in Evanston — but still up considerably.

Evanston abuts our imagined Lake View City, and it’s better to be Chicago’s independent neighbor that Chicago’s dependent neighborhood.


Hey, it worked for Odysseus and the sirens, why not here?

No wonder that GOP gubernatorial hopeful Bruce Rauner is talking about a property tax freeze, however unlikely he is to actually implement one. And no wonder that Chicago aldermen went into collective hysteria when Mayor Rahm Emanuel moved to raise property taxes to pay for a pension reform deal with city unions. 

It might be that homeowners in our imagined Lake View City would pay more in real estate taxes if the results were infrastructure investments in their own neighborhood, but given Chicago’s size, that’s impossible.  More money from the North side would go only to pension-fund retirees throughout the city

Mr. Emanuel since has partially backed off, using receipts from a telephone tax instead.


Boosting revenue any which way he can

Tax equalization is no longer viable in mega-Chicago.  As I wrote in January, 2014, on the subject of Chicago’s using TIF funding for a downtown development that added investment, jobs, and commercial activity:

The City of Chicago is not underwritable.  That TIF property was underwritable.  The City of Chicago would never have been able to attract DePaul’s fundraising.  The TIF arena was able to do so.

When the sub-sovereign entity is more creditworthy than its sovereign, to me that is a strong clue the sovereign is unmanageable and should break into component parts. 


Affects the whole city, not just some neighborhoods

Lake View City is much more underwritable than Chicago.

I’ve argued this in the Eurozone context; I think it applies equally here.  The city is both extremely diverse and extremely insolvent; it’s hard to see how the profitable neighborhoods will sit idly by while this continues. 

TIF, in fact, may be the city’s gestures of conciliation to its better neighborhoods.  If your neighborhood invests in things that pay for themselves, then your neighborhood can keep the resulting profits. It’s a strategy to keep the profitable neighborhoods from seceding.

Mayer Emanuel is squeezing every possible revenue source, and he will squeeze until it becomes politically impossible:

Faced with a budget crisis of this magnitude, Emanuel did make some cuts, shuttering some schools and mental-health clinics. But these measures mainly infuriated the affected Chicagoans while generating few savings.

Other proposals, such as jacking fees for city services and installing automated red light cameras, will likewise irritate the voter base and stir up sentiment to be gone from Chicago.


[Revenue raisers] coupled with modest [Modest? – Ed.] retiree benefit cuts and an increase in city-worker contributions, seem like the only plausible solution.

Only solution short of bankruptcy, that is.

The rating agencies have taken note. In 2013, Moody’s issued a “super downgrade,” reducing Chicago’s credit rating three notches. Last February, Moody’s took Chicago down another notch, leaving it only three steps from junk-bond status. 

Further, if an entity is rated ‘junk’ – below institutional grade – then its interest costs spike because the major players are prohibited (under the prudent man rule as currently interpreted by institutional investors) from buying its paper at all.

Lower bond ratings mean higher interest rates, making it more expensive for Chicago to borrow money to cover its deficits. Other cities have faced similar crises, but among major American cities, only Detroit has a lower bond rating than Chicago.

And Detroit went through bankruptcy.


I took Detroit into bankruptcy; now you take it out, okay?

[Continued tomorrow in Part 12.]