The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void. - Section IV, 14th Amendment.

https://www.fox43.com/.../521-ada2b119-0c3b-498e-9ad3...

First, the reality is that, even in the event the United States does default, it will likely be in the form of missing days' worth of Medicare / Social Security payments (that counts as a technical default as far as credit markets go). If and when we default, the market reaction will be so swift and severe lawmakers and Biden will sprint toward compromise to get an emergency deal done. They will lose their current confidence in not budging or refusing to compromise very quickly when the stock market drops 7% in a few hours, the bond market goes into spasm, and Biden's White House is inundated with angry and frantic phone calls from world leaders from all over the globe, not to mention his largest corporate donors. The same goes for GOP leadership; corporate lobbyists and powerful donors will unload on McCarthy and his team if this threat becomes real. It will be ugly. That said, the damage will likely be quickly reversed when a deal is done, potentially making this a good opportunity to buy bonds and stocks on weakness. Most realistically, a panic deal will be a clean, short-term raise to buy more negotiating time. Fortunately, the reality is that the US is still.. well, the US, and if we quickly remedy a breach, it's unlikely that the "default" will be treated by the global market as a genuine default, the type that stems from structural issues. Therefore we won't see a massive, permanent rerating of government debt, and therefore most commercial debt, several hundred basis points (100 basis points = 1%) points higher (US debt is the reference rate, if US debt rerates 175bp higher, you can expect to see that reflected in corporate /municipal bonds as well).

I can't believe I'm saying this, and I don't like this fact, but the Democrats arguing for Biden to lift the limit via the 14th amendment could actually be correct in that the power is there to do that, and I somewhat support them going down that road if not to end the debt limit as a legislative device permanently.. 14A makes it clear that a default on US debt is unconstitutional. A large portion of our new debt issuance is to pay interest on past debt, so essentially, we have to borrow more money to make good on past debt. To me, this means there is a constitutional argument to be had that due to our debt obligations that were permitted by past sessions of Congress (and for expenses appropriated and allocated by Congress), the US needs to continue accessing the debt marketplace in the form of new treasury issuance - which I *think* gives the executive branch the constitutional right to issue more debt beyond any arbitrary limit. Furthermore, Congress decides how to appropriate/allocate money; once they have done that, their duty with the strings of the purse is complete. From that point on, the actual financing of those spending decisions rests with the executive branch.

The 14th is clear: the US has a constitutional duty to honor its debt, given that debt is largely issued to pay off past debt and pay for spending already approved by Congress. A strong case can be made that the limit itself is unconstitutional. If Congress wants to limit or reverse spending decisions, it should pass a bill. Refusing to honor past made obligations and commitments, as well as paralyzing the federal government's capacity to issue debt in order to pay off existing debt (yes, the US government is essentially running a Ponzi scheme if you think about it..), seems to be at odds with the Constitution (at the very least, in spirit). The founders would not be ok with arbitrarily halting obligations or restricting the executive branch's ability to access the debt market after spending has been approved or past debt is due for refinancing. I believe they intended for a system in which Congress could pass legislation that appropriates and allocates funding, at which point their duty to manage the nation's purse has been met. The new debt is not for new spending projects; it’s simply to pay for past approved spending and to honor obligations tied to past debt issuance that Congress authorized.

I don't know, mixed feelings. Biden has been out of control with spending, and it's time we get back to a pre covid budget deficit size. To some degree, I'm glad Republicans have something to work with to force a concession, and given the circumstances, I do think Biden needs to make concessions as the obligation and capacity to honor debt rest in his hands as the chief executive - and that must be done no matter the cost to the president's personal spending agenda. But that said, I have always hated the debt limit. It's literally like giving a financial nuclear bomb to uninformed, unsophisticated parties and expecting them to negotiate the issue in brinksmanship and never accidentally setting it off. I hope at some point when Congress and WH are aligned/have supermajorities, this dumb device is permanently eliminated.

I think it's a ridiculous concept to begin with.. that a country with a nearly unlimited capacity to borrow and full ability to honor that debt (nevermind the fact that it controls its own currency and has the ability to print as much of it as needed to honor obligations) is thrown into a near-crisis situation every year and a half or so when the parties are split between Congress and the White House. It should be pretty simple: Congress should either not approve spending or pass legislation to reverse previous spending bills. I feel this way regardless of the party in control of the White House. Again, the bottom line is that we need to issue debt to honor past made commitments - such as social security payments - as well as service previously issued debt. It's the honoring of past debt commitments by way of issuing new debt to do so that makes the 14th Amendment case stick.

I've spent a lot of time in finance as an active market participant, and I believe I have good familiarity with debt markets, public markets more broadly, ramifications of debt issuing/debt default, and, importantly, a comprehensive grasp on the outsized role US treasuries play in both domestic and foreign markets. They really are at the heart of the modern financial system. To break them by way of not raising the level of some archaic device like this debt ceiling is absolutely crazy. The parties involved - Biden, McCarthy, Congress, etc. - clearly don't fully understand the ramifications of breaking the treasury market. These lifetime politicians and even some of the people meant to be expert advisors but who have never operated outside of government policy are just clueless about financial markets and the credit-driven, US debt-anchored global financial system more broadly..

It is hard to overstate just how big of a deal it is to break the financial system to mess with the treasury market and creditworthiness more broadly. It will cause structurally higher borrowing costs as this now realized the risk of US default due to political BS must be priced into the market (and I think that's going to happen regardless of a deal in time or no deal, I fully expect a credit downgrade/comment from the rating agencies in the coming days/weeks). It rattles business confidence and stability in corporate treasury activity (investing cash into short/medium-term assets with yield). It undermines US leadership/power over international markets (just another hit to our reserve currency standing..). I could go on at length about what the ramifications would be immediate to longer term, but I'll summarize that it's really bad, with lots of chaos and potentially severely broken markets.

More interesting than the 14th Amendment would be extraordinary Fed US debt purchases and remittance to the Treasury, or the treasury outright using its ability to print money (now done via the Fed through the open market committee adding zeroes to its buying power) to retire/expunge outstanding debt. They could go out to the marketplace and bid up every treasury on offer, then essentially retire the debt and remit the balance back to the Treasury Department, lowering outstanding debt and giving the treasury the capacity to issue new debt.

Another route that could be taken is the Fed's ability to create a financing window for the treasury to access. Those funds could then be used to cover expenses as they arise until a limit raise is sorted out. Even further, the Fed could do a discount window with the treasury itself, where the treasury posts some form of collateral with minimal value (maybe an IOU of sorts that don't constitute new public debt), and the Fed would lend against that collateral at a massively inflated valuation, flooding the treasury in new cash to cover immediate obligations.

These Federal Reserve scenarios are unlikely, but if it hits the fan and we do trigger a default, it is guaranteed the Federal Reserve will try and do something. It depends on how creative and willing Jerome Powell is to push the legal limit. In summary, this is a very real threat to economic performance. Missing debt payments will trigger many knock-on effects, paralyze business investment, potentially break more small/regional banks, cause chaos in global markets, and assuredly lead to a significant sell-off in the stock market. The debt limit is a dumb device that needs to be removed - the debt limit has been increased 70+ times over the last 50 years. By way of past precedent (up until this go around), the debt ceiling plays a pretty pure symbolic role. Biden does need to make concessions, it's his game to lose, but Republicans need to be within the bounds of reason in their requests. Get a small win and punt this financial weapon of mass destruction for a year or more.

Biden's spending has been outrageous, COVID is long behind us at this point, and budgets are still bursting at the seams, and deficits are well over 1 trillion / year, despite no longer being in an emergency environment. To cool inflation and get back on track, we need the federal budget and total government spending to revert back to 2019 levels, where the deficit was a (relatively) mild $900 billion. Will post more as we approach June 1st and potentially trigger a default.

The idea of hiring locally... I was just talking to someone at City Hall about this. There needs to be some balance. A lot of the public entities around here hire and promote from within or they take from the community. I don't believe that we have a single person in leadership at the City (my example) that has outside Municipal experience. It ends up being a very parochial culture because of that, it's tough to get momentum behind new ideas. Getting a cross pollination of a very well qualified outsider can have a much longer impact than just the couple years served.

We've had two folks with outside experience in leadership at city hall in my year and a half, they've both resigned, and I thought they were the two most impactful folks in my interactions with them. Impactful even though their time was short

- Chuck Nelson, City Counsil President, on Facebook in reply to query about city and local government dealing with challenges of hiring and finding talent locallly and finding themselves having to look externally of the region.

In my opinion, the problem for the incoming side of the equation is that it can be a hostile and unappealing environment/reception for those interested in contributing with something to offer, be it skill, experience in other applications, or focused skilled capability. This is true of any small organization with a structure that values/awards years of experience, often even over performance. Often, the smartest thing one can do, with something to bring to the table but knows it’s futile, is to avoid getting involved and save the trouble. If you have good ideas/skillset/look to go outside status quo thinking, other places would gladly have you in their mix where proactive expansion/growth/thought is encouraged. If you know it will go nowhere, why commit the mental investment? I think there are many very smart and talented people throughout this community, but they don’t want to deal with the BS that often comes with these types of institutions.

Good ideas can often be taken as insults. An idea or suggestion can come off as “you should have known this,” even when that hadn’t entered your mental framework and you just wanted to see something good done. Other times, they are dismissed as a burden due to someone not understanding or following your proposals due to technical knowledge gaps between the two parties. Furthermore, big thinking is generally not welcome in smaller organizations with a slow operating procedure and many checks and codes on what can and can’t be done and what process it has to go through to get from point A to B, regardless of how meritless it may seem. In struggling organizations, new ideas, especially ambitious ones, often meet an audience with a defeatist mentality. Even worse, you can be seen as ridiculous (coming from an entirely different type of operating framework and experience, this is very possible), and you get zero velocity to go anywhere. Plus, a deficit starts growing each time an idea is shot down or dismissed, making each future proposal much more likely to be ignored.

I experienced this early type of dynamic early in my working career when I briefly worked in a public job and later, at an investment firm, but found out early that I’m not the type to fit in with a culture that is focused on clocking in, meeting job-mandated minimums, and clocking out, so I went out on my own where I got to bear the risk, but also potential, of adopting ideas that were dismissed previously. But it is much smoother sailing and safe to stick with the status quo and stick, just enough to keep your direct report happy, but not much more than that if you want to wade into these types of water.

I strongly suggest pursuing entrepreneurship for anyone who reads this and fears that scenario. You take control of your destiny, implement things you believe in, and, importantly, work at your desired speed. It’s not for everyone. Based on life experience and statistics about the number of business owners, it’s probably not most people.

Many people are cool to do what they need to do, which is totally fine. Live the life you want! But there is definitely a personality type that can’t sit comfortably with that. I am confident that, more often than not, local government bodies, often out of their very nature, do a lot to repel that type of person. Of course, there is the exception for people with that mindset who also want to hold public office, climb the ladder, and lead a group/community on a large public stage - those people I find truly impressive. This is a structural issue for sure, one that I think someone could probably flesh out and come up with a pretty good thesis on the dynamic and why it is a structural headwind to future potential and examples throughout history.

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I can think of a few big major ones with obvious evidence of this structural challenge that comes to mind when thinking about this. Even presently, I look around the country off the top of my head, and more often than not, it’s replicated in struggling/distressed cities/states/countries/companies. You could probably go to any small city with similar financial status or a steady to low-growing business with a fixed model with no real desire from ownership to mess with something that, for them, is working well enough and doesn’t want to take the risk associated with changing their tested and working model.

For examples to use as a way to identify these issues, many once strong nations failed because the smartest, hardest working, most experienced, or otherwise not conforming with status quo thinking members of the public knew just how bad and poorly managed the country’s leadership was, and given someone who did have the skills/knowledge/ability could get a much better compensation package elsewhere without the headache and constant taste of failure to get good things going anywhere.

The best example of this is for sure the Weimar Republic. It’s well-documented, and the downstream events were about as bad as it gets, so it’s at the top of the list. The state was not seen as powerful enough to bring about changes or new thinking. It was largely dysfunctional, with a small circle of overlapping personal relationships running everything and controlling the power of the internal machine and levers of control. Which benefited very heavily from the state bureaucracy. It was widely seen by the top technocrats/thinkers as a joke rather than a place for someone with serious value/credibility to risk their reputation by even just a simple association. Weimar continued to circle deeper and deeper into dysfunction as it did operate poorly but also had many real challenges to grapple with, unique in nature. (Reparations for WW1 being a big one).

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With no one in government with any monetary policy experience or understanding, they did everything at the top of the Def. Do Not Do list for governments dealing with spiraling inflation and high fixed structural costs, ultimately leading to full-blown hyperinflation where the economic collapse was incredibly dramatic and psychologically traumatizing. So much so that once formerly decent people had been pushed into the worst state of poverty imaginable and a resulting mental framework that couldn’t grasp how they went from a middle to upper middle-income earner with a job, savings, child education, and comfortable living, to suddenly having to use your cash paper currency to light the stove as it was cheaper than using the worthless paper as fuel than to buy woold - not an exaggeration.

Also, for what its worth, as its an interesting topic, I think, importantly, many of the German people lost their sense of dignity, having been thrown into severe poverty, still reeling from losing a great war effort that cost a significant number of lives - as well as vast resources, now unable to provide for their family or secure respectable work. Almost all working-age males were unemployed at the peak of the crisis period, which lasted for some time, and those employed would see their morning’s wages turn into a fraction of what they were just hours before when they could finally go shopping for their family - and the cash would be almost worthless by the following day.

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Those formally reasonable and generous wage-earning, tax-paying members of society eventually reached a crisis-breaking point, culminating in rallying for and enabling one of the vilest political movements in history. Obviously, that is not what I’m suggesting is going to happen in Erie, obviously, but its a maybe the best modern example of the dynamic and danger I’m speaking of. Ironically, in this example, many of the talented technocrats ended up working with the new fascist party because it, unlike the former democratic government, was seen as a vessel of strength for pushing through needed reforms and executing effective government that would get things done and “make the trains run on time.”

The same dynamic can be seen in many countries in South America and Africa, with an added risk beyond bad pay or not a hospitable/productive environment. It can be pretty dangerous with coups and military groups regularly attempting power grabs across parts of both continents —, as well as the small fact that state-backed criminal organizations get payback for getting a policy win or administrative win over their guy, not in city hall at a markup session or meeting…

The academics and experts take safe haven at the universities that are actually loaded with very smart people (I have a pen pal/ at this point dear friend who lives in Venezuela and is in precisely this position. Maybe the smartest person I’ve met, an engineer by education, with incredible intellectual depth, command of multiple languages, sharp memory, and immediate ability to grasp complex ideas). From what I’ve read and learned through conversations. They primarily stay inside the confines of academia. As I understand it, there is essentially an understanding from the State that they will be left alone if they don’t create noise or make any problems/criticism. This is agreeable over joining a terrible government with just awful policy, and if they pledge to stay completely out of political issues, they go unmolested.

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The State and Leader “get” credibility by pointing to a large collection of very bright minds and rigorous academics; in their eyes, its proof their deeply flawed system is “It’s clearly working; just look at this intellectual credibility!” - this was the exact same setup/deal n the Soviet Union, which also had a fair share of intellectual clout/smart and talented people in academia. This option is much better for many reasons, like inefficiency and churning wheels of graft/bureaucracy/corruption. Still, it also allows them to eliminate the potential risk of shining too bright and catching the wrong attention or becoming seen as a threat or a potential liability for power.

Anyways, I had many thoughts on this, and I am going to turn this into a blog post, but these comments here kicked off some thoughts about what I see as an operating headwind/liability for organizations looking to grow/improve their position, and I had actually been recently thinking about. I would also be curious to hear more about what this individual did at Millcreek.

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As a fair warning, this is a very lengthy piece. Still, I believe it to be important and think it’s worth reading through as it presents several new ideas - some outside of the box - for bringing new business to Erie, achieving city development goals, and steps we need to take to make Erie a thriving city.

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Erie faces structural decline, a shrinking industrial base, and a declining population. Our finances are in bad shape, and there seem to be no solutions or ideas from the city government. At this point, many believe bringing new business, including industries like manufacturing, can’t be done, but I remain optimistic. We have yet to max out our tools for this tax, and in fact, including some of our most powerful. I see a future for Erie with a thriving population, a financially stable and well-financed government, and a booming economy - all driven by a new business-led city renaissance as new companies start here or flock to our region. It’s a bold and challenging vision. Many things to work on require serious steps, substantial collaboration, and creative policy solutions, but it can be done.

How?

One first step could be recruiting data warehouse companies to take advantage of the cheap land, cheap utilities, and close regional access to three major cities. Edge Data - a localized data warehouse close to customers - will become more and more of a thing where tech companies disperse data storage facilities on a more regional basis rather than a few extensive facilities. This allows them to deliver content more smoothly and cheaply as the content literary slices closer to the end user. It’s something to keep an eye on. Netflix, Amazon, Microsoft, Google, and many others are aggressively pursuing this strategy.

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Also, as the technology matures, network demands will rapidly increase, and the current system of extensive centralized data facilities will either need help to support users or support users at a prohibitive cost to technology companies. This new cloud and networking infrastructure breed is smaller and visually more adaptable to urban and city ecosystems. Electricity costs are a significant factor in deciding where to place one of these facilities, as servers run very hot (an added bonus, the snow won’t deter them!).

Erie’s average kWh energy cost is around .15-.17 cents, with rates as low as .08 kwh. This is between 10.5% and 58% cheaper than the national average - even a minor reduction in electric costs can financially improve margins for these companies. If they add solar to their facilities, as many are now doing, they can drive those costs down even further.

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Another strategy is to leverage our strengths and play true to our historical identity. Erie is also a large plastics hub. Pursuing a strategy that encourages leveraging this strength and fosters a new additive manufacturing and precision manufacturing ecosystem makes abundant sense. We need to cluster these firms, which leverage each unit's combined economic power and fosters improved performance, growth, and efficiency. Erie also has a supply of skilled labor that can be tapped into and a history of manufacturing mastery. We have a city footprint built for it, ready to be revitalized by new business investment into modern facilities.

Further strengthening this position is that the world is de-globalizing for various reasons, and companies are rapidly onshoring manufacturing and production back to the USA. Companies are looking for cheap options for relocation and real estate footprints that can support a manufacturing base. Additionally, we are logistically well suited for this type of manufacturing, well-placed in the supply chain, near universities where talent for innovation can be recruited, and ready access to significant metro hubs and waterways.

We can be the testing ground and a prototype market where companies leverage automation and robotics, working with a skilled labor force to create low-cost, high-efficiency manufacturing plants. We can rebuild a modern American manufacturing economy through additive and high-precision manufacturing by taking advantage of these traits.

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One industry that is probably off most people’s radar is the financial industry - but it is one of the most powerful wealth-creating industries, creating many high-paying jobs and making a big impact on the tax base. Financial services might seem odd, but we already have a massive financial institution operating downtown that produces a lot of income for the city. It powers a sizeable economic ecosystem around its headquarters and creates many good-paying jobs. Imagine having a few more financial institutions and how their presence would ripple across the broader economy.

The financial sector goes beyond just insurance. The industry includes hedge funds and venture capital funds, private equity firms, investment management companies, corporate bank offices, fintech (financial technology) firms, and more. Some of these business models are highly profitable, especially hedge funds and venture capital firms. Venture capital in Erie might be a bit of a

challenge as we aren’t a large start-up hub. Still, we do have access to several universities in the region and, even more, highly respected programs within 100 miles in several directions. Suppose someone or a group with enough capital comes here to set up shop and invest in start-ups, and entrepreneurs in those universities hear about the new potential investment source. In that case, relocating to Erie becomes a real possibility.

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Of all the business types listed, hedge funds make the most sense. A hedge fund in its simplest form is a firm that manages a large portfolio of stocks and bonds, usually managing 100s of millions of dollars on the low end and many billions on the high end. If we had 1 or 2 headquartered here, the tax revenue alone from the employees of those firms would dramatically increase city revenue. It is not uncommon for people in the industry to make five to ten million a year, and in more senior positions, tens of millions, and all the way up to hundreds of millions - or even billions.

We are close to Chicago, and proximity is becoming more important in financial markets. The internet speed and latency on your connection to the exchange you are trading at make a huge difference in profit and loss when everything is netted out at the end of the year. The closer you are to Chicago, the better your latency and order execution quality.1 Proximity to New York is also a big advantage. We are located right in the middle of the two financial centers, where connection to Chicago is very reasonable and the same for a connection to New York. If you trade in both markets, Erie is a great choice as you have good access to both - which is better than great access to one and bad access to another, or worse yet, bad access to both. With Vnet rolling out fiber, this connection advantage only increases.

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People who work at hedge funds are largely private people and want to avoid media and people nosing around their business or approaching them asking for money. That makes Erie a great location for that type of actor. Furthermore, with real estate (land) being quite cheap in Erie, you could build an extremely lavish home on a significant property for, from a wealthy fund manager’s perspective, very little. For him, the ongoing cost of ownership is almost an afterthought with regard to utilities like electricity. There is great property in the exurbs with decent to great privacy, but it still has a (relative to big cities) very short commute and get to the office in under half an hour, whereas in New York, if you wanted to live in a suburban or more exurb type area, you could see commute times of 1-2 hours or more.

Another selling point for hedge funds - and all financial firms for that matter -, Penn State’s finance program and other universities offering similar solutions, there is a steady supply of potential labor to intern and/or hire. Finally, the cost of living here is extremely low for someone with a lot of wealth, so a young manager could run his hedge fund here in Erie and unlike New York, live extremely comfortably for a fraction of his earnings, while able to save the vast majority, compounding his wealth dramatically and quickly, allowing for a very early retirement or some new pet project investment.

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All of these things are a recipe for financial firms, such as larger investment firms or hedge funds with a small staff, to relocate here - tapping into a trend of firms in the financial sector leaving their large metro hubs and a widespread desire to live in a smaller community with good access to universities, cheap cost of living, and good recreation. I will try my best to help make this a reality in Erie.

One specific policy idea proposal that could help in these recruitment efforts, especially for the heavy industry, would be the formation of designated “Industry Development”: or “Growth Zones.” These zones would focus on location and investment in specific city regions. The local government and the nonprofit community have identified these regions in many planning and strategy documents. Potential targeted efforts should be focused on economic dead zones/economic vacuums (certain sectors of 12th street, neighborhoods with large surface lots, regions of eastern Erie along the Bayfront Connector, and central city) that are currently unproductive.

These areas detract from the tax base, lead to crime, and worsen the aesthetics and streetscape of Erie (aesthetics are an important factor in younger generations’ decision-making for where to live and start a family).

The focus and establishment of these “Growth Zones” should be centered on areas that the combined nonprofit and government (local, state, and federal) community has prioritized for development through leveraged resources and policies. These efforts to highly target the community’s combined resources and powers would result in economic growth that aligns with long-term city planning (and this applies to the County as well).

Through the targeted formation of Economic Zones, such as the 12th Street corridor, would benefit from new economic activity and logistically make sense for operations. These zones could come with specific subsidies and access to lending programs (more on this topic and ways to create lending programs will come soon) to help underwrite the investment cost of building infrastructure, relocation, and initial operations. This could come in the form of subsidies, similar to the LERTA program, and access to favorable financing facilities.

Special economic and growth zones could also include direct investment into these new industries by leveraging stand expanding the investment mandate of the City’s investment account, as well as the Pension - a fund that already invests in much riskier assets and could invest in private equity, venture capital, and private credit and equity. Those alternative asset investments from the investment fund and pension system could serve a dual purpose while leveraged to help grow and improve the region. Some might hesitate and say that we can’t use pension money to invest in local businesses, but I ask, why not?

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There is plenty of precedence. Investing in alternative assets (investments beyond simple stocks, bonds, CDs) is standard practice for many pensions across the country - most pensions hold private investments in various ways through allocation to various types of “alternative investments,” including private equity, hedge funds, venture capital funds, private direct investment, and other asset classes.

Investing a portion of the pension into local private enterprises and allocating capital targeting the investments mentioned above or that would thrive in our region would help incentivize businesses to move to Erie. And it's not in violation of any pension rules. As previously mentioned, countless pensions make direct private investments - this would be no different than that standard practice. But instead of sourcing potential investments nationally and sending cash out of city and state, we would focus the investments in our own backyard.

The Ontario Teacher’s Pension successfully implements this policy, making targeted investments into industries critical to Ontario’s economy and helping fuel a vibrant entrepreneurial ecosystem.

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This pension investment program would enhance Erie-based businesses' capital position, increasing their operational capacity and the likelihood of success. This policy would also create new sources of investment income for the pension that, given the higher rates of return for private investments relative to the public stock market, would enhance the returns of the pension system that are currently meager to outright poor (more of this to come in a future article). More on the status of the current position can be found below in a footnote.2

To be eligible for these investments from the City’s pension (and the County could certainly employ the same strategy), requirements would be tied to the potential investments and locked into place through a contract. Through these contracted agreements, the city can advance its long-term agenda, make progress on city development plans, and improve citizen welfare, which has the added benefit of increasing the tax base.

Achieving long-term city development goals can be done in many ways, some more untraditional or creative than others - in this case, it's harnessing the power of capital, using investment to entice new business growth, and guaranteeing certain outcomes through binding contracts.

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These covenants could include a minimum time commitment for operating in Erie and require businesses, through best effort, to source materials and services from the Erie region that are available in the local market. Another stipulation could have the city play a role in determining where to locate the business - advancing city planning efforts. Additionally, the terms of the investment could contain commitments by the business to offer competitive pay and create a minimum number of jobs for the region.

These requirements could be contractual between the Pension, City, and any business that secures investment. The city could be protected by requiring a "break up fee," a standard practice in finance, that would require a substantial payment to the city for breaking the contract.

This is just one idea for making Erie a desirable domicile to build and grow a business - but there are many other reasons Erie could be an attractive new home for businesses. A proposal like the one just suggested stems from thinking outside the box and thinking through the lens of how every last resource could be most effectively used to achieve an outcome for the city. The City needs a lot more of this, as many past and present elected officials suffer from a collective failure of the imagination.

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Between local and nonprofit resources that can be harnessed in a targeted, concentrated way, and this pension investment policy proposal just outlined, when all added up, collectively maximizes the leverage of all resources at our disposal to grow the city’s industrial and service industry base. Every dollar possible can be put to work. None of this has been done before, but look where we are today. Does it feel like our strategy was a winning one? It seems like attempting new. Bold strategies makes sense at this point so that we may have a different, more positive outcome. After all, what do we have to lose?3

Another easy step for the City to take to help reinvigorate the business base located here in Erie is hiring a full-time, well-networked city ambassador with substantial corporate experience to serve as a liaison to potential businesses, targeting recruitment efforts on industries located in higher-cost municipalities or businesses who have recently signaled plans to move to a new location.

This ambassador (and a potential team) would spend most of their time attending trade shows and business conferences where there is easy access to networking with business owners. These industries also use those events as forums where their needs and requirements are presented. They also serve as platforms for new businesses to present their company, its products, and growth plans.

Knowing those facts would greatly enhance our representatives’ ability to understand and point out how our region can serve them. Companies at these trade shows (in targeted industries that align with the Citys strengths) should be aggresively pursued. Furthermore, this position and team would be charged with networking and building working relationships with the venture capital and angel investment community, tapping into the entrepreneurial ecosystem, and recruiting them in their earliest development stages.

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These groups largely finance start-ups and have significant sway over their portfolio companies (investments made into new, small emerging companies) and corporate decision-making, including where to locate new business operations. This representative can argue that the low fixed costs of Erie, its logistical position, its pool of future labor stemming from our large university ecosystem, and the low cost of living and housing that potential employees would benefit from.

This ambassador or his deputies would also serve as a full-time liaison with the business community, ensuring their needs are met and addressing problems they face to the extent of the city’s limitations.

Putting this resource in place and a team that supports it will help stabilize the industry base in Erie and help prevent more companies from leaving the region. I have heard from many business owners that they feel like the city ignores their needs and fails to include their input or help address challenges to their businesses that a city can help address (such as upkeeping and improving logistic resources companies depend on).

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After speaking to many business owners, my sense is that the business community in Erie feels like second-class citizens and that, in the eyes of the city, they are, at best, an afterthought and, at worst, a nuisance. (In future articles, this topic will be expanded, where the case will be made for why Erie can be an attractive location for expansion or relocation).

In summary, we need first to identify what the future of the industry looks like in Erie. What type of city are we, and what type of businesses make their home here? Once we know that, we need to be proactive in recruiting them, a process that can be multi-faceted and ongoing. We need to understand the needs of businesses and their hesitations about moving to Erie. We have some great attributes, but we remain uncompetitive in some categories. A large part of that has to do with State law (something I will be addressing in the near future), but there are still steps we can take locally, some more obvious, some more complex and sophisticated.

What’s important is getting the whole community on board, coordinating, and marshaling our resources. Lots of tiny investments yield lots of tiny outcomes. On the other hand, combined resources and planning that incorporates all aspects and members of the community with a capacity to help make investments, introduce a leverage effect where each dollar exponentially increases the impact of the previous dollar. The city can help, and there are some concrete steps they can take to grow our industrial base, but the desire to be proactive has to be there.

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These steps don’t necessarily have to be expensive or require huge budgets. While tax incentives and financing are an option, there are other tools on the table to recruit new companies to Erie without breaking the budget. Importantly, a good first step would be for the city to thoroughly survey local businesses and identify what challenges they face and what the city can do to help alleviate them. Sometimes, it’s something very simple. Other times, the city might not be able to help, but by building a comprehensive central database of resources and partners in the business ecosystem, they could point the firms in the right direction and facilitate communication and implementation of whatever solution is demanded.

We are in a tough spot facing significant headwinds, the population decline slows down economic growth and shrinks the tax base. This is a major structural challenge for a financially tight city. Beyond those issues, median incomes are low in Erie as there is a shortage of in-city employment opportunities that pay good wages. Yet I remain optimistic.

There are lots of incremental steps the City can make that, down the road a decade or so, in the aggregate, would translate into major transformation. I will do my part and continue to propose ideas and solutions, but the whole community needs to participate and pool ideas so that the best ones emerge with public support to get them done.

I appreciate you taking the time to read this lengthy article, but the issues addressed couldn’t be more critical to the future of our home. The sky is dark now, but I do see a glimmer of hope on the horizon, and I hope you see the possibility of a brighter future, too.

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Some very good news to share! The other day, we published a post outlining that the City of Erie holds a substantial amount of cash on its balance sheet, deposited in a banking checking account that pays next to no interest (and also only insures deposits up to $250,000). Our research found that the city had deposits totaling about $117 million. Fortunately, City Council President Chuck Nelson took notice of what we published. He immediately brought the issue up with the Mayor, Treasurer, and other related staff involved in managing the city's finances. It was confirmed to him that the City could, in fact, hold its cash assets in investment securities beyond just simple checking accounts, just as we called for.

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In our earlier piece (linked below), we pointed out that the $117 million in cash deposits, if actively managed and invested into short-term debt securities, could earn a yield north of 5% due to the Federal Reserve's recent dramatic increases in the Federal Funds Rate, a policy action taken to combat inflation. It seemed crazy to us for that amount of cash to sit there and slowly dwindle in value due to inflation. However, Nelson's inquiry made it clear that the city's large cash balance could be held in Treasury Bills (short-dated Federal Government debt securities). Once this was confirmed, City Hall began making the necessary moves to move the cash from deposit accounts to Treasury bills. This swift financial decision was based on an opportunity identified and an argument made by the Independent Erie Review just days ago.

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So some money was moved around - what was the net result? A huge windfall for the city. The $100 million plus balance will be invested into 3-month Treasury Bills (yielding 5.255 as of today's market close) soon. As a result, the city will see a large influx of cash to ~$6,000,000 in unexpected revenue for the 2023 fiscal year. Those earnings are more than enough to offset a potential budget deficit this fall and with enough left over to cover a large portion of our city's yearly debt-related payments.

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We couldn't be happier. We started this publication to write about the city’s operations, ways it could improve, our financial condition and paths for improvement, and potential routes to future prosperity in Erie. To learn that, in less than a week since launching, our work published here directly led to the city generating $6,000,000 in revenue that would have otherwise never materialized. Many past budget fights and deficits have been fought over for much less.

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Obviously, $6,000,000 is a large amount of money, but for added context, it's about 6-7% of the City’s yearly operating budget. City Hall must be thrilled to have such a large source of revenue fall into their lap seemingly out of the blue. We couldn't be more pleased with the swift action taken by City Council President Chuck Nelson's interest and swift action, as well as the work done by the city's team that oversees financial matters. This is a win for all involved!

Here is the original article outlining the city’s large cash balance and the opportunities missed by remaining in a checking account versus active treasury management that would see cash balances actively rolled into high-yielding short-term debt. When we wrote this, we were cautiously optimistic something could be done to remedy this missed opportunity. Today, we are thrilled to say our efforts went noticed and led to the city finding itself with $6,000,000 in new, unexpected revenue!

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In 2021, the city earned a modest $1,794,828 from investment activities. That is a 12% return on its $14,566,496 investment account. That is fine, but it’s down from 2020 earnings of 2,316,799 and 2019 earnings of $10,537,328. These large investment returns are a byproduct of the massive influx of cash onto the balance sheet stemming from the water lease payment acceleration. Those funds, originally planned to prepay outstanding bonds, were not yet eligible for that purpose. As a result, they were temporarily stuck on the balance sheet and in that process, were invested, and generated a tidy sum for the city. That 12% isn’t a bad return and sounds about right given the strong market performance of 2021. $1.8m is great in the context of a ~95 million budget, but we can definitely do more. If legally able - I’m not sure of the law - the city should allocate more unused cash to the investment fund.

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Increasing the size of market investments is an aggressive plan and I can see why market risk is a concern holding the city back. However, there are ways to avoid the volatility and unpredictable nature of the stock market, or even avoid putting assets into the investment fund itself. With its substantial cash deposits of over $100 million, and with today’s historically high short-term interest rates, there are ways to generate meaningful returns. With that cash, the city can invest in ultra-safe assets, on a short time horizon (with the ability for immediate liquidity if the situation demands it), that allows cash to be readily available for committed expenses or unexpected demands.

What I call for in the following essay is not complicated, it simply requires some proactivity and a few hours of work over the course of the entire year. Given my proposal stands to gain the city potentially enough revenue to balance the budget, the return on work effort is stratospheric. It starts by simply forecasting out cash demands for the city on a monthly, quarterly, or half-year basis. With those various forecasts established, it just takes a little treasury management (actively investing cash in near-term yielding instruments).

Reviewing what ”has” and “could have been” is useful only because it gives us some context into the earning power of cash and reserved capital - something the city has, despite its relatively weak financial position (Yes, the city has an A rating from the bond rating agencies, but by my own analysis, that rating is a few points lower, and I anticipate the official rating will follow mine in short order).

Had the city allocated 50% of its cash to its investment fund, based on its 2021 performance, the city would have generated ~7mm, covering all debt and ~7% of total expenses. Not major, but it chips away. If you are aggressive in your assumptions about what can be invested, its worth noting that the city holds $117,559,285 in its deposit account (well over the FDIC insurance limit - however, the balance was collateralized - backed up with assets by securities held by the City of Erie and its agent in the City’s name. (I’m not sure what that means in practice; unclear how the city could hold assets of ~$117,000,000 in its custody to back up its cash balance with assets as I see no signs of $117 million on either side, assets or liabilities - which I believe they would be marked as given they have an obligation - of the ledger).

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However, it’s important to note that the risk of PNC or counterparties with custody of City cash balances going insolvent is incredibly remote and extremely low as PNC is a bank approaching Too Big To Fail status for other reasons I will outline ahead. In a bank-run scenario, the Federal Government would likely deem its failure a systemic risk and guarantee deposits. However, given the recent regional bank turmoil, I thought it was worth noting. The bottom line is that the city’s bank account’s cash level is well above the $250,000 insurance protection and is also exposed to potential loss if the financial partner fails, but that event is near impossibility.

Concerning deploying more of its cash to investments, with aggressive, active management, and in a very safe manner “risk-free” (the investment I outline is considered in financial markets as a risk-free asset), in one scenario, the city could park 90% of its cash in 3-month Treasury bills and collect 5% on those assets, withdrawing 25% of the initial balance each quarter as cash is moved back to the bank account from the investment account to cover upcoming expenses for the current quarter. In this scenario, the city could generate $987,187.5 in the year’s first quarter by investing 75% into three-month bills and keeping 25% in cash to pay ongoing expenses for the first quarter.

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In the second quarter, the investment capital would shrink to 50% of the total initial cash balance noted above invested in the Treasury bills as 25% was used in the 1st quarter and 25% would be needed to cover 2nd quarter spending, which ultimately results in $731,250 in second-quarter earnings. Again, in the third quarter, using that same logic of reducing the investment account for another quarter as the cash is transferred to the checking account to cover ongoing expenses, the total investment income would be $365,625. Finally, there would be no income in the 4th quarter as the remaining 25% of cash in the investment account from quarter three would be transferred to the checking account to cover ordinary expenses in the 4th quarter.

So in total, the city, by employing active treasury management, would have been able to earn an extra $2,084,062.5 while leaving more than enough cash for current quarter operations in the bank - in fact, enough cash to cover three months of spending. Going further, in a simple example where we don’t worry about keeping cash available, I think you could be strategic in finding highly rated corporate debt (bonds) and private credit (direct loans to highly stable, large corporations) yielding closer to 7-10% in today’s environment while also being more aggressive with the amount of cash committed to the investment fund. This would net the city 9-13 million (based on the current $14 million in the investment fund plus the $117 million in new cash).

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That said, I’m nearly 100% certain Pennsylvania law would not allow municipal funds to be invested in corporate securities or other private market securities. These funds need to be held in accounts that are as conservative as can be. But that leaves the door open for specific Treasury securities (debt issued by the Federal Government) that have maturities of 12 months or less, Treasury Bills, often referred to as T-bills. These Treasury bills, often considered near cash or cash equivalents, are risk-free, liquid assets guaranteed by the US Federal Government.

In fact, assets held in Treasury Bills at the Treasury’s website (Treasury Direct), your money would be safer than if they were sitting in an FDIC-insured account at a traditional bank. Banks fail, and sometimes, if the deposit is large enough, depositors lose money, depending on the discount or premium to the $250,000 FDIC limit. If it were in a treasury account, your T bills would have the safest custody in the world, and in the event of financial turmoil, they would be backed and honored by the full faith and credit (read: taxpayers) of the United States Government.

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It might take a little longer to figure out which corporate bonds to buy and what maturities to match up with spending requirements; however, I wanted to present the safest, most conservative scenario to show what revenue the city could collect on a base case. Saying we can’t commit cash to an investment account is not reasonable as you can strategically invest over different time maturities, as we did in the first example.

Treasury bills are one of the most liquid securities in the world. They can be sold within seconds of submitting a sell order, and the new cash could be wired from a treasury investment account to the city’s spending account in less than two hours. You could be more aggressive than committing 75% in the first quarter and drawing down 25% each quarter. You could get away with a more significant portion or switch from 3-month treasuries to 1-month treasuries that yield 4.11%. That would allow you to start with 91% of the total balance invested into T-bills (treasury bills), and draw the investment account down by 8.3% each subsequent month, giving the city immediate access and spending power for one month of total spending (this analysis is purely based on assets, the reality is that the city collects substantial income and real estate tax income, which would free up far more cash to remain invested).

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Whether you budget out monthly or quarterly spending and move assets accordingly, the total investment income isn’t the most significant, but that would essentially cover debt service payments. For a city consistently crunched at budget time at the end of the year and running a deficit of a few million, this could make the difference between a balanced budget and a net deficit, eating away at the city’s assets and pushing future financial conditions into more jeopardy.

The city has a very large total of liabilities between the pension liabilities, long-term debt, and other agreements, coming to just under half a billion dollars comprised of unearned revenue, accrued liabilities, compensated absences, OPEB liability, and, importantly, net pension liability. This sounds like a complicated or time-consuming task, but once you design the timing structure of the investments and cash movement, the reality is that executing it would take 4-5 hours a year. That’s a return of $416,000 an hour! I think that’s well worth some time and planning by the city’s financial officers.

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All you do is periodically initiate wires and enter purchase orders on the web-based investment platform for T-bills, just like many Americans do when they buy a stock. Given our limited tax base and resources, we must fight for every extra dollar the city can get. By collecting ~99% of levied income and real estate taxes and practicing treasury management, the city could have covered 12% of the public safety (police/fire) budget. The process is straightforward, consumes very little time, and pays a huge return on the effort invested. If the city needs someone to design a bond ladder, make quarterly wire transfers, and buy T-bills 3 - 12 times a month, they should send this outlet a direct message. I have just the person.

Currently, the city holds $117,559,285 in its primary deposit account, well over the FDIC insurance limit of $250,000. However, the city maintains the balance is collateralized, meaning the deposit is backed up with assets by securities held by the City of Erie and its agent in the City’s name. This means a custodian holds a basket of assets that could insure the deposit. This is not a bad thing necessarily. Below I will give a little color on banking crises, PNC’s status and stability, the effects and aftermath of the 2008 crisis, and federal government policy regarding bank failures and its rationale.

Not addressed here, but also worth noting that the $486,132,206 in pension fund assets are held in an account with $500,000 in insurance for equity balances (stocks and securities) and $250,000 in cash - the likelihood of an investment account held at a financial institution is even less probable than the highly improbable event of a banking failure.

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The risk of PNC or counterparties with custody of City cash balances going insolvent is extremely low. PNC, whom I assume holds the city’s deposits and is the probable agent referenced, is a bank approaching Too Big To Fail status. The Federal Government has made it clear that while regional banks can be seized by the FDIC and see potential losses for depositors over the FDIC limit, large institutions that play important roles in our financial system get different preferential treatment. In a bank-run scenario, the Federal Government would likely deem its failure a systemic risk and outright guarantee deposits or strongly (some could say coerce - this happened in the 2008 crisis when banks were essentially forced into buying failing institutions) recommend that another larger financial institutions buy their assets and assume their liabilities (deposits) which would make depositors whole. Given the recent regional bank turmoil, I thought it was worth noting.

The investment fund’s assets are well above the $250,000 insurance protection and are also exposed to potential loss if the financial partner fails). It is also worth noting, to rebuild some confidence for anyone reading this who might have worried about the revelation that nearly all the city’s cash was at risk, PNC was one of the partner banks that contributed cash as new deposits in one of the banks that recently ran into severe difficulties, joining the likes of Goldman Sachs, JP Morgan, Citi, Wells Fargo, and would never have taken that action if it wasn’t highly capitalized, liquid, and able to meet any withdrawal demands. In my eyes, this was their purchase price into the TBTF club and placed them under the blessing of the Federal Reserve and Treasury Department, making them a critical institution.

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PNC is significant, but the other banks mentioned are significantly bigger - but that doesn’t matter. PNC is big enough to get special treatment. If that’s fair is a whole other debate, I would argue not. The thing is, if confidence starts collapsing in banks, the fear spreads rapidly, and other banks which might not have had issues would suddenly be met with a huge amount of withdrawals and find themselves in a bank run situation, and this would spread throughout the total financial system, and the whole system would come down.

The US banking system relies on fractional reserves, meaning that banks essentially lend out your money multiple times, assuming that it is highly unlikely that all depositors would demand the return of their money all at once. So when you invest $1 at a bank, that turns into $5 of loans. Managing this balancing act is called asset liability management. Due to this system, confidence is critical so that people don’t rush to pull their assets because if they do, there wouldn’t be enough money to cover all the deposits. So if a bank like PNC failed, confidence in all larger banks would quickly collapse, leading to a 2008-like situation or even worse.

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The 2008 recession, which started as a financial crisis, turned into a full-blown recession that destroyed property values, collapsed the stock market, caused massive unemployment, damaged municipal balance sheets and pensions, and led to nearly a decade of very low, below-trend GDP growth. The zero-interest-rat policies put into place by the Fed to help reverse the recession had to be kept in place up to the end of the last decade, making the system heavily reliant on those low-interest rates. With the Fed increasing rates significantly, business and investment models are failing.

PNC’s position goes beyond just depositors losing money. The bank participates in the capital markets, serving as a counterparty to many institutions. Financial institutions participating in the capital markets would default on counterparty agreements in a bank run and insolvency situation. If PNC failed, it wouldn’t just be depositors taking a big hit; it would be other banking and financial institutions who trade with PNC and suddenly find themselves holding worthless trading positions, which could spiral into a financial crisis.

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This is why it’s very likely classified as a “systemic institution” by the federal government. PNC is a significant counterparty to many financial institutions, from banks to corporations to insurance companies. Its collapse would wreak havoc on other financial institutions’ balance sheets, leading to even more significant insolvencies that spiral further and spread across the system. The government makes the bet that rushing to provide guarantees to large banks and telegraph that behavior as soon as there are signs of distress in the banking system will likely cost far less than what would happen if the fear spread and suddenly lots of banks are facing bank runs, and you have large scale insolvencies.

A situation like that would set the country back years and result in very painful conditions for everyone, rich and poor. But just by suggesting they will backstop large banking institutions, it prevents bank-run scenarios by giving depositors confidence that their money is safe. In summary, the City holds a lot of cash in deposit accounts at a bank beyond the FDIC insurance limit, but they say the cash is collateralized. Additionally, even if some crazy events led to turmoil at its banking partner, which I presume is PNC, there are several reasons why I don’t think there is even a remote chance of issues with uninsured deposits.

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If the bank ran into issues, it would likely search for a buyer of its assets, generating cash to cover deposits. If that fails, they would likely find a strategic partner to buy the bank and assume assets and liabilities. And if THAT fails, at the end of the day, as a major banking institution, as the federal government and its representatives have made clear, it will not be allowed to fail, and the FDIC, Treasury Department, and the Federal Reserve working together would guarantee all of its deposits.

One thing unclear from the source documents is that $117 million is listed in the city’s checking account, but it is unsure if that includes the component units such as the Erie Metro Authority, Parking Authority, etc. To present the information, the Erie Metro carries $9.6 million and is backed by collateral held by a custodian as required under Act 72. The Parking Authority carries $10,741,929, which is also collateralized. The Parking Authority carries 1.95 million, is not collateralized or insured, and is held by a Broker Dealer (securities account). Finally, the Redevelopment Authority carries $93,597. It would be interesting to know if that is included in the $117 million figure or could this additional cash also be earning interest.

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Admittedly, for the amount listed, it might be more trouble than it's worth. Even if it were invested in 3-month treasuries, it would only generate about $400,000 for the two authorities with approximately $10 million in holdings. However, exploring all options and leaving no stone unturned regarding financial management is essential.

Thanks for reading, and if you thought this was informative or interesting, please share this page or comment below. It all helps spread the content. If you have any questions about what was covered, more detail on the data, or any other items you want to discuss, drop a comment here or on social media. I’m happy to have a conversation or answer questions.

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In the 2023 budget, one department has interesting income and expense projections. That would be the golf department, whose loss is already understood as the budget breakout doesn't include part-time labor in the golf unit as part of its expenses - according to city data, the golf department has one director and no other employees - if that's the case, that man is Superman given all the mowing and maintenance that must be done at two separate courses (one way out of town), not to mention being in multiple places to sell tickets, equipment, and deal with customers!

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The 2023 Budget final figure for the Golf Department's total revenue is $639,366. For context, the prior year saw revenue of $576,561. The 2023 budget is anticipating an 11% increase in golf income, which is a statistically significant increase, and I see no evidence to explain why they expect such a large jump. In fact, golf income has been declining for the last few years, reporting a record high of $593,289 in 2020 - a year where many were out of work, had free recreation time, and were looking to get out do something other than sit at home. This makes sense. Since then, revenue has been declining. The low of the period of years accounted for was 576k. So budgeting a surge of $62k causes some questions, I can't think of why suddenly there would be a 15.5% surge in golf fees (where the increase in estimates is coming from).

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Now, where it gets... shady. The Golf Deparment's 2023 Budget final projection is suggesting the expenses for the year will be, wait for it, $639,366. Yes. Exactly the same, to the dollar, as the Income figure that, barring some information unknown, is inflated to that exact figure. In calculating that, operating supplies expenses will decline from $61,563 to $45,000. In other words, in a year where the city expects more people out on the course playing, the costs associated with operating it will decrease by 37%. All of this definitely makes sense.

So given the income and expense numbers were projected to be identical - meaning the department didn't lose money - and the assumptions on revenue seem to be overinflated - what's going on here? I answer that the city was finishing its budget last fall and was close to a deficit. They wanted that to be as small as possible, if not flat/breakeven, so a small department that no one really pays attention to could be fudged a little bit on the 2023 documents so that on passing glance (and who gives these documents much more than a passing glance at the paper, or anywhere else for that matter), who would notice that the income and expense figures offset beachgoer perfectly, producing no loss that would drag the deficit lower. Some call it accounting; I call it shady.

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The other possibility for doing this, or maybe in addition, is that when the city is asked, "Why do we have a golf course," and "Does the golf course lose money," they can say, backed up by the budget, that it does not lose money. Well, I think that is BS. First of all, as mentioned, if you factor in the seasonal workers, there is no question that it losses money. But even pretending they don't exist, given the assumptions about operations costs going down. In contrast, use goes up, and inflated estimates of golf income rising significantly - even higher than an unprecedented year where golf was one of the few ways to get out of the house and do something with friends - I think there is no doubt the two golf courses (one of which you basically need to take a plane to get to its so far from city limits) lose money. I even think they were losing money before this year when you factor in the seasonal labor, but at minimum, there is no doubt this year.

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Why would the city want to be able to say, "No, the golf course doesn’t lose money?" My take is they don't want to deal with the backlash of people finally fed up enough with the golf situation to have one more (big) fact to add to their argument that these ridiculous courses cost taxpayers money. It would put them in a corner, increase pressure to sell, and they might even have to do it, saddling them with a lot of work dealing with setting up actions and sales that I don't think they want to do.

It might not be that, but that's what makes the most sense to me as to why they would fudge numbers, along with the desire to prevent the deficit on paper from growing too large. The reality is that when it does present a loss, that loss will pass onto next year's budget and make the 2024 deficit even worse.

The important takeaway is to me, this is solid proof that city hall plays games with numbers to avoid bad narratives and make make-believe with numbers, and more importantly, we are in a relatively low-income city with a very tight budget city, substantial pension, and debt oblations, have annual close calls with deficits, and we own two golf courses, one far out of town, that LOSE taxpayer money. Taxpayers are net subsidizing middle and upper-middle-income golfers to play golf.

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Owning the golf courses has been ridiculous, remains ridiculous, and is now an affront and beyond indefensible. #sellthem in an auction process, do not award strictly on the bid, require developers to submit plans that outline their projects, materials used, number of units, etc., and then factor in the economic bid. At that point, you choose the developer whose plan advances the beauty, quality, and other city government property objectives goals that also pay a reasonable economic premium for such high-demand property.

Joe, you dog you, with your budget gimmicks. I caught you, though; better luck with next year.

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The potential buyer would receive a marked-down price on its assets, comprised of performing loans and investments like treasuries and mortgage-backed securities. However, if no buyer emerges - which I believe is unlikely, this could make a good deal for a larger bank (that has a substantial cash position and liquidity) that can absorb the liabilities to buy assets on the cheap from a distressed seller - it would be a more challenging situation. The potential does exist for deposit losses. In reality, the First Republic does have asses, and those would be liquidated. The FDIC would help manage the process of giving deposit holders as much

recovery as the asset sales allow in addition to FDIC coverage. If there are deposit losses, will the government allow the bank to fail - meaning force banking clients to suffer losses truly? The federal government launched several programs after the SVB collapse and guaranteed all deposits. This was done because, in Janet Yellen's - Treasury security- words, the bank posed a systemic risk to the broader banking sector and economy due to its size and banking relationship. 

What of note, Yellen also made it clear that this policy was not universal for all banks, smaller banks not designated as systemic risks (a nice, fancy, and more politically palatable way of saying the more toxic phrase with voters, Too Big to Fail, a throwback to the 2008 crisis) would not receive full guarantees on deposits beyond the FDIC insurance limit. This is a challenging situation; it is deeply unfair for one depositor to be made whole while another faces substantial losses do the size of the bank and whom the bank served as clients. SVB benefits not just from size but also due to its customer base of countless large tech startups carrying multi-million dollar deposits. The government feared that not guaranteeing the deposits would lead to a ripple contagion event where many of those start-ups and venture capital funds served by the bank would suddenly find themselves in near or actual bankruptcy - something that would cascade and almost certainly trigger a broader economic recession. 

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The government also wanted to instill confidence in the public that large banks would not fail to quell potential future bank runs on larger banks deeply engaged in capital markets activity that presents a dramatically more severe risk of triggering a full-blown financial collapse where credit markets freeze as all the banks stop trusting each other and then through a self-fulfilling prophecy ALL of the major banks would be faced with likely bank runs all at once, causing catastrophic economic damage that would wipe out trillions of dollars of wealth, skyrocket unemployment to 15%+, send countless Americans into poverty, and would likely take many years, even a decade plus, decade for the US economy (and global - the banking contagion would without a doubt spread to Europe and Asian banking systems). I know this because I was alive and very actively engaged with financial markets and systems in 2008, and that is precisely what happened. However, due to massive intervention, the contagion was finally arrested, leaving only several collapsed investment banks in its wake and the takeover of several more. 

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Again, this dual standard of who faces losses and who doesn't is not fair. It also incentivizes people to withdraw their money at smaller regional banks and give their new business to large banks (JP Morgan, Goldman, Citi, Bank of America, etc.). In some ways, this is a giveaway to the major institutions. It could also create a self-fulfilling prophecy. The incentivization could trigger sudden, large-scale withdrawals that could easily tip into bank runs if a panic, hard mentality kicked in. Thought position, but with all that set, I don't think the government has many choices - that said, I probably would announce a full backstop of all future bank insolvencies for the remainder of the year, immediately convince an emergency session and encourage Congress to swiftly pass a bill that would raise the FDIC insurance limit to 10,000,000, and I would have the fed open a lending window to all the banks in the system to access ample liquidity (letting banks swap out assets with investment losses for a period of time in exchange for cash at par value of the investments - 100% of the initial value of the investment - which would give the banks enough cash to orderly manage any withdrawal requests and go a long way in preventing future panics. 

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An interesting note about this has it does have a very faint connection to a bank that many of us use, is that after SVB and First Republic first started to wavier, a consortium of major banks (Goldman Sacks, Bank of America, Citi, Wells Fargo, JP Morgan, others, - and one we know locally joined them, PNC) borrowed money from the financial markets and deposited their new cash into deposit accounts at First Republic to sure up their cash position to help manage withdrawal demands and instill confidence in the business. Unfortunately, that has not worked out well, and it will be interesting to see how those deposits are handled. If there are losses in the event the government does not backstop it, what size losses will those large banks incur a billion dollars? More? We will likely find out by Sunday night. Ironically, those losses might scare depositors and trigger withdrawal surges at the big banks. However, I understand that the banks have ample cash and liquidity to meet new demands. One thing is for sure, the president and his team must be very angry. It’s not a good look to have banks fail under your watch or bail out major companies that face investment losses due to perceived mismanagement. I hope this was informative! Share if you enjoyed it or leave a comment - I’m happy to answer any questions about this situation or the banking sector and financial markets in general.

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