Friday, May 15, 2009

Fiscal Mismanagement 101

Today, I awoke to find on the front page, a story about how the FBI and the Indiana Secretary of State are investigating the handling of high risk investments by the Indiana State Teachers Association, which has left the teacher's insurance fund on the brink of bankruptcy.

Further down on the page is a story about the City of Carmel borrowing an additional $28 million to be repaid in 2035 to the tune of $91 million. Carmel City Council members complain that the Mayor's pet project, the arts center, has drained the city's redevelopment budget, thus leaving the City in a bad fiscal position.

Over on the editorial pages, is a letter to the editor from reader Peter S. Kovacs who complains that the revenue generated by the proposed water rate increase by the Indianapolis Department of Waterworks will not go toward improvements, but is rather to bail out the Department of Waterworks who gambled away ratepayer money on risky derivative products.

Then we have the epitome of fiscal mismanagement, the Capital Improvement Board, engaging heavily in borrowing with loans with fluctuating interest rates. Now that the debt is resetting at a higher interest rate, the Board is desperate to refinance to avoid the increased cost of borrowing. Like many homeowners, who financed their house at low interest rates utilizing balloon mortgages, the CIB if finding it's no longer as easy as it once was to refinance debt.

As previously reported here, we have the City of Indianapolis engaging in a self-funded insurance scheme for some of its employees that effectively pushes insurance claims for those workers off into a not-too-distant future, which claims when they come due will create a huge unfunded liability in the budget, just in time for the 2011 election.

It is one thing to risk one's own money on risky investments or borrow money with fluctuating interest rates, it is quite another to do it when it is the public's money at stake. Certainly the fact that these officials are dealing with the other people's money should encourage them to act in a more fiscally responsible and conservative manner than has been the case. If these officials are unable to act in such a responsible manner, it might be time to enact changes in the law that would prohibit such fiscal mismanagement of the public's money.


Shorebreak said...

I've been posting comments on various local blogs for over a year now about risk management failures. As you've detailed, Paul, the failures are systemic at the local and state levels.

Whgat I don't get is that I can imagine a small handful of local governments or departments who have poor procedures or methodologies for managing risks. But this is almost all of them. How is that possible?

In my own case, I'm just a regular guy with a regular job, but I made a decision back in 2004 to personally get out of real estate. I even got out of my own property, knowing that I wasn't going to be stayiong there permanently and that I was at risk if I held onto it. I lease. If I total up my leasing costs and compare them with depreciation in my neighborhood, I've come out ahead. And I mitigated other real-estate losses by getting rid of the investments before they lost value.

Why is it that a lone guy who simply watches market trends can stay ahead of the curve without relying on formal risk managment processes, yet the professionals who are hired to mange risk for our public investements seem to get it wrong 100% of the time?

I'm 100% confused on this one. I'd love to hear from the folks who manage our money to understand what they were thinking when they sold us out to dry with high risk investments that were clearly falling through the floor. I don't knbow if they're idiots or if it's something criminal, but when you see that the failure is systemic it means that a serious investigation needs to be initiated.

I know said...

The people in Indiana that are managing your money and contracts cannot tell you the difference between criminal and the buddy system as it all is mixed together.

The Good Old Boys and the Country Club elitists on both sides of the party lines as Paul stated in another blog have made sure the money managers are in their back pocket. Hear no evil ,speak no evil, juggle the books, write your own contracts and change boiler plate rules of government to enrich themselves.

That how it is in Indiana. It is a proven FACT!

Citizen Kane said...

They listen to people who make the money on the deals (thier called experts) and assume that they have no self-interest in the transaction (at least that is what they tell us afterwards). They generally believe in people profiting off a government and that government exists to help individuals profit; they (D's & R's) forget about the common good even when they pay lip service to it. Oh, and there is a lot of self-dealing going on. I don't have any stinkin' conflicts!