Chatham capital projects: 2010 Archives

In our earlier item we pointed out that the U.S. fiscal condition was much worse than that of Greece, that our fiscal shortfall totalled about $130-$140 trillion, ten times the current American GDP.

Now Professor Kotilikoff of Boston University says it's more like $202 trillion. In fact, the U.S. is bankrupt and there are no easy solutions.

The can has been kicked down the road for decades and the vast expansion of spending by the Obama administration has made a bad situation impossible to solve without a great deal of pain and misery. Reality and backbone are lacking in Washington and the nation is likely to continue to hurtle towards an even worse disaster than is forecast now.

U.S. Is Bankrupt and We Don’t Even Know It Commentary by Laurence Kotlikoff

Aug. 11 (Bloomberg) -- Let’s get real. The U.S. is bankrupt. Neither spending more nor taxing less will help the country pay its bills.

What it can and must do is radically simplify its tax, health-care, retirement and financial systems, each of which is a complete mess. But this is the good news. It means they can each be redesigned to achieve their legitimate purposes at much lower cost and, in the process, revitalize the economy.

Last month, the International Monetary Fund released its annual review of U.S. economic policy. Its summary contained these bland words about U.S. fiscal policy: “Directors welcomed the authorities’ commitment to fiscal stabilization, but noted that a larger than budgeted adjustment would be required to stabilize debt-to-GDP.”

But delve deeper, and you will find that the IMF has effectively pronounced the U.S. bankrupt. Section 6 of the July 2010 Selected Issues Paper says: “The U.S. fiscal gap associated with today’s federal fiscal policy is huge for plausible discount rates.” It adds that “closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.”

The fiscal gap is the value today (the present value) of the difference between projected spending (including servicing official debt) and projected revenue in all future years.

Double Our Taxes

To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act.

Such a tax hike would leave the U.S. running a surplus equal to 5 percent of GDP this year, rather than a 9 percent deficit. So the IMF is really saying the U.S. needs to run a huge surplus now and for many years to come to pay for the spending that is scheduled. It’s also saying the longer the country waits to make tough fiscal adjustments, the more painful they will be.

Is the IMF bonkers?

No. It has done its homework. So has the Congressional Budget Office whose Long-Term Budget Outlook, released in June, shows an even larger problem.

‘Unofficial’ Liabilities

Based on the CBO’s data, I calculate a fiscal gap of $202 trillion, which is more than 15 times the official debt. This gargantuan discrepancy between our “official” debt and our actual net indebtedness isn’t surprising. It reflects what economists call the labeling problem. Congress has been very careful over the years to label most of its liabilities “unofficial” to keep them off the books and far in the future.

For example, our Social Security FICA contributions are called taxes and our future Social Security benefits are called transfer payments. The government could equally well have labeled our contributions “loans” and called our future benefits “repayment of these loans less an old age tax,” with the old age tax making up for any difference between the benefits promised and principal plus interest on the contributions.

The fiscal gap isn’t affected by fiscal labeling. It’s the only theoretically correct measure of our long-run fiscal condition because it considers all spending, no matter how labeled, and incorporates long-term and short-term policy.

$4 Trillion Bill

How can the fiscal gap be so enormous?

Simple. We have 78 million baby boomers who, when fully retired, will collect benefits from Social Security, Medicare, and Medicaid that, on average, exceed per-capita GDP. The annual costs of these entitlements will total about $4 trillion in today’s dollars. Yes, our economy will be bigger in 20 years, but not big enough to handle this size load year after year.

This is what happens when you run a massive Ponzi scheme for six decades straight, taking ever larger resources from the young and giving them to the old while promising the young their eventual turn at passing the generational buck.

Herb Stein, chairman of the Council of Economic Advisers under U.S. President Richard Nixon, coined an oft-repeated phrase: “Something that can’t go on, will stop.” True enough. Uncle Sam’s Ponzi scheme will stop. But it will stop too late.

And it will stop in a very nasty manner. The first possibility is massive benefit cuts visited on the baby boomers in retirement. The second is astronomical tax increases that leave the young with little incentive to work and save. And the third is the government simply printing vast quantities of money to cover its bills.

Worse Than Greece

Most likely we will see a combination of all three responses with dramatic increases in poverty, tax, interest rates and consumer prices. This is an awful, downhill road to follow, but it’s the one we are on. And bond traders will kick us miles down our road once they wake up and realize the U.S. is in worse fiscal shape than Greece.

Some doctrinaire Keynesian economists would say any stimulus over the next few years won’t affect our ability to deal with deficits in the long run.

This is wrong as a simple matter of arithmetic. The fiscal gap is the government’s credit-card bill and each year’s 14 percent of GDP is the interest on that bill. If it doesn’t pay this year’s interest, it will be added to the balance.

Demand-siders say forgoing this year’s 14 percent fiscal tightening, and spending even more, will pay for itself, in present value, by expanding the economy and tax revenue.

My reaction? Get real, or go hang out with equally deluded supply-siders. Our country is broke and can no longer afford no- pain, all-gain “solutions.”

CCT has determined, based on a review of town records, that the strategy for this nitrogen removal project engineered by Town Manager Hinchey and Director of Health & Environment Duncanson had as a key component NEVER to put the full Comprehensive Wastewater Management Plan (CWMP) project calling for a big city centralized sewer system before a town meeting for a vote. Their decision to do this was no doubt because of the huge cost which they did not want taxpayers to focus on, to say nothing of the disruption caused over 20 years of construction. They wanted to avoid the question that would naturally arise, "Can't this problem be solved less expensively?"

Records of the Citizens Advisory Committee from 2007 had Duncanson telling CAC members that the full CWMP would never be put before a town meetng. CAC members had wondered whether such an expensive plan could get through town meeting. Apparently at least some CAC members questioned that strategy, so Nathan Weeks of Stearns & Wheler was brought into the next meeting to assure CAC members that some towns did it one way, some another, so the "piecemeal" approach would be just fine. So, innocuous-seeming bits and pieces would be put before successive town meetings (e.g., funds for determining the extent of nitrogen pollution and how much needed to be removed) until some key vote by an unknowing and uninformed town meeting, would become the point from which there would be no turning back.

Director of Health & Environment Duncanson considers the Article 14 vote at the 2009 Annual Town Meeting (ATM) to be that point of no return for proceeding with the entire CWMP that would cost taxpayers hundreds of millions of dollars. We know that because he told state bureaucrats that in an official document this year.

What voter knew that? If Duncanson is right, how were the voters tricked into in effect voting for the entire CWMP calling for expenditures of $240 million plus interest and inflation, 110 miles of sewer piping, 88 pump stations and more than a thousand seven-foot tall grinder pumps for the 4000+ properties to be sewered?

CCT's investigation has shown that false information was provided in the 2000 ATM Warrant and what the SEC calls "misrepresentation by omission" occurred. Material information that is important in decision-making was withheld from the Warrant.

Town officials did not disclose in the Warrant or in oral discussion (or in any official document CCT has seen) that their plan was immediately, in two years, to enlarge the capacity of the wastewater treatment plant to its 20-year capacity; what that means is for the plant to operate efficiently sewer piping of the entire planned area would have to be installed for it to operate efficiently and to remove the nitrogen from the wastewater it is supposed to. In other words, town meeting voters would be forced to vote for more sewer expansion at subsequent town meetings for the entire $240 million plan, whether they wanted to or not. So voters and taxpayers would be stuck. According to engineers with whom we have consulted, there could be no turning back without substantial additional cost to unwind much of the enlargement which had been done.

CCT formally called these misrepresentations to the attention of the Secretary of Energy and Environmental Affiars. The misrepresentation that everyone can see for himself is on pp. 105-106 of the Warrant. Charts provided to show projected debt service costs for the sewer in the nature of bar graphs understated the 2007 $240 million principal lcost estimate of Stearns & Wheler by one-third. In addition, no interest or inflation was included in the bar graphs for the decades of financing and repayment. At that time and now there is no such thing as zero interest loans.

As a consequence, the vertical bar graphs supposely showing the impact of sewer financing and repayment over decades should have been 2.7 times taller than were shown. These falsely short bar graphs were compared to bar graphs representing current debt service to make it appear that the sewer costs would not be too bad for taxpayers. In fact, they should have been almost three times as tall as was shown.

The Secretary stated that their regulatory process had been completed and that the misrepresentations at town meeting were outside their regulatory review process, even though the misrepresentations with respect to that town meeting vote were the single most important step in advancing the sewer project from the planning stage to implementation. In other words, the Secretary decided to ignore misrepresentations that, if deliberate, are fraudulent, even though they were the key step moving the CWMP from planning into implementation. Our conclusion is that the misrepresentation was deliberate.

UPDATE: Additional investigation has revealed that the same misrepresentation was made to the Board of Selectmen earlier at its meeting of March 17, 2009, thus strengthening the case for this being a deliberate understatement and therefore misrepresentation of the costs of the CWMP.

A retired executive now living on the Cape but not in Chatham who spent years professionally concerned about municipal projects and their costs has sent us two warnings that we thought should be shared with you.

One warning came several weeks ago and one just a day or two ago after state bureaucrats defended their review process of this hugely expensive, wasteful, unnecessary, environmentally damaging centralized sewer project. Excess nitrogen that detracts from the health of Chatham's coastal waters can be removed at far less cost and in an environmentally superior manner by alternative means which are in common use throughout the United States and are preferred by the EPA, national environmental organizations such as Clean Water Action and the Clean Water Fund and the Massachusetts Conservation Law Foundation.

So what is our retired accounting executive warning Chatham taxpayers about? Here are the two messages we referred to:

I have been retired for several years but continue on as a consultant in the preparation of projected capital expenditure projects for government. After graduating from Yale University I accepted a position with one of the "big six" accounting firms in New York City. I spend a great deal of time in the field and can assure you that a project such as the one proposed is without doubt is an impossibility to fund through taxpayer contribution in a town such as the size of Chatham, or anywhere for that matter With five to six thousand property's sharing the potential cost in the billions, it is totally impossible through taxation without bankrupting every property owner. When towns such as Chatham propose to "sell" to taxpayers such a project, the figure they throw out is the START PRICE TAG as I often liked to say. What is meant by that is the price such as Chatham is purporting of $300 million is if the project started today and finished tomorrow. What officials don't want you to know is the projections of costs over years of long term capital expenditure projects. As an example, I followed a project a year ago which was a municipal water system funded in 2007 and the costs alone of piping and concrete had increased 44% in the course of one year as the result of the reconstruction of Iraq and materials were being shipped there and became a premium price here in America. The increases over a project with a duration of 20-25 years will increase several hundred percent, and that may be a conservative estimate in today's economy. The costs associated with material increase's, job order changes, unforeseen job problems, contractual labor costs, weather interruption costs, equipment costs, security and police details, interruption of business and industry, and the enormous costs associated with repaving streets and private property are only a few of the many considerations that go into the overall total project cost estimates. Another area monetarily is the interest on loans and notes which can run in the millions on a project such as this.

I would suggest you study the costs associated with the "Central Artery Project" also known as the "Big Dig." This has increased 1,000 % from 2.3 billion to at last count is projected at 23 billion.

There have been many of these same projects that have ended unfinished as the result of no more funds were available or taxation ran amuck and municipalities folded up the projects. The sad result was huge wasteful taxpayer spending that was literally flushed down the toilet.

It is my opinion that NO MUNICIPALITY today can undertake such a project at the cost of such HUGE TAXATION to support. Frankly, it is an impossibility.

Many of these projects are presented by overzealous, power hungry and in many cases for monetary gain by corrupt officials. Many are unwarranted with absolutely border line justification or no justification at all. Many are unscientifically proven to be needed and many are just pie in the sky outrageous spending of taxpayer money.

I only hope that this information is helpful in advising the taxpayers of Chatham of what exactly they are getting themselves into, and give them insight into the huge taxation required to fund. It also appears that this project has not been justified and alternatives are in the wings.

After the Secretary of Energy and Environmental Affairs (speaking through Ms. McDevitt) brushed aside CCT’s complaints about the faulty bureaucratic review process, he wrote CCT again:

To the good people of Chatham and its Concerned Taxpayer Group :

Don't abandon your fight to eliminate this wasteful spending and taxation.

The key now is to get the vote out and put your candidates in office, replace the town manager, file a class action suit against the woman whose final approval continued this project and repeal the town's decision at town meeting to stop this total waste of taxpayer money.

Mark your calendar and present tax bills to follow the money and severe increase in your tax bills over the duration of this outrageous unnecessary spending and taxation.

If not successful in putting a stop to this project, it will cost 10 times the cost that was projected by these irresponsible people in power. Hold them personally and financially responsible in the future.

Don't kid yourself, to complete this over the next 20 years the cost your organization projected will also grow from half a billion to between four and five billion. This equates to somewhere close to half a million per property.

Taxes will escalate to an unsustainable amount each year as properties will decline significantly in value and there will be no purchasers as owners will not be capable of selling due to such a huge tax burden. People will then walk away to foreclosure and town coffers will drain to bankruptcy.

Please post and keep this to refer to over the years as chaos will prevail as more and more taxpayers will realize too late to what happened to Chatham in early 2010, when irresponsible people in power started the demise of the beautiful town of Chatham.

Thanks for your concern.

Bob Jxxxx

We should heed his messages.