EDMOND — We’ve all heard the expression, “It’s like rearranging the deck chairs on the Titanic.” Contrary to some rumors, I wasn’t there — but I get the concept. The underlying meaning we all understand is doing something that makes no difference in the final outcome. Here are a couple of “rearranging” examples.

Harrisburg, Pennsylvania has a problem.Actually, they have a devastatingly large problem  Over the course of several years and through many bad decisions, the city got itself on the hook for a $280 million trash incinerator.  

I imagine there were reasons that seemed like a good idea at the time, but that’s not important now. The problem is this fading town of 47,000 has absolutely no way to make good on its general obligation debt. This situation is not a surprise to anyone. For years Harrisburg has been steadily moving toward financial disaster, and they finally arrived.

The new Mayor, Linda Thompson, recently sent word to the bond insurer that the city would miss its current interest payment of $3.3 million.  

This is huge. The capitol of Pennsylvania is financially insolvent, as it cannot make good on its obligations.

The mayor said she had to make painful choices, however, it’s not clear exactly where the pain was felt. The mayor chose not to cut costs or shift  funds  to pay the interest.  

True, it would have taken a major cut in services to do such a thing, but that was the job. Payments to bondholders are supposed to take precedence over operating costs. The mayor was choosing winners and losers without regard to the law.  

For those who recall the situation with GM, does this sound familiar?  

Hang on to your wallets, because a lot more of this will go on in the months and years ahead. Sorry, but I digress.

At the last minute, Pennsylvania Governor Ed Rendell came to the rescue, sending Harrisburg $4.3 million to be used for the interest payment and to pay a consultant $850,000 to develop a financial plan for the city. Barring the obvious question of, “Who needs $850 K to say the word “bankruptcy,” there is another question that comes up.

Where did the money come from?  

Pennsylvania is in financial trouble also.

The governor said it was money due to the city anyway, plus a grant and a loan. The interesting part is that the money due to the city was already slated for other things, including $1 million for fire protection (paying firefighters) and $2.6 million to assist the city in making pension payments.

 In effect, Mayor Thompson has made a difficult choice, and the one she is legally obligated to make.  She used money earmarked for other things to pay bondholders.

Unfortunately, all of this is akin to rearranging deckchairs. The ship is doomed, and this is just postponing the inevitable.  Where will the money for the next interest payment come from?  

The sooner that fact is recognized, the sooner the city can go about changing course, perhaps finding a more sustainable path.

The city of Los Angeles is taking a different approach.  A previous mayor and an investment professional co-wrote an opinion piece in the New York Times on Sept. 16, “How Pensions Can Get Out of the Red.”

They suggested cities and states take a clear-eyed account of their problems, quit making rosy projections, slash benefits, increase contributions by employees, force all new hires into 401k plans, create fiscally responsible budgets for paying their debts, and then borrow the necessary money to pay pensions from the U.S. government.

All of these are good ideas except for the last one. Out of all of the suggestions, my guess is the only one that might actually get done is borrowing money from the U.S. government to pay pensions.

Cities and states already borrow to pay pensions, as odd as it seems. They are called pension bonds. The problem is that investors are not too interested in these types of bonds anymore, especially from issuers that are ridiculously underwater on their overall budgets.  

To skirt this problem, they want investors to buy U.S. government bonds, and then have the money funneled to cities and states. This spreads the risk of failure to repay to all U.S. taxpayers, who would still be on the hook to repay the U.S. government bonds.

Each of these situations has the same theme – an entity cannot pay its bills and looks for a way to borrow required funds.  

Unfortunately the entity is looking to another source that is also underfunded, so all of the entities are traveling the path to fiscal failure together. We continue to rearrange, hoping that putting revenues and obligations in a different order will somehow change the laws of basic math. We all know it won’t work.

I have made the case in this column that we will see very slow economic growth for at least a couple of years to come. The economic rebound due to the inventory cycle is over. Employment and consumer spending remain weak.  Deflationary forces are gaining momentum as the private sector aggressively tries to reduce debt.  Housing is too overburdened with excess inventory to rebound anytime soon.  State and local government spending and employment are retreating.  And meaningful export gains are unlikely as economic growth abroad slips.

The good news for us here in Edmond, Oklahoma is that our city leaders have done a pretty good job of being fiscally responsible and not committing us to future obligations we have no hope of meeting.  Not that some people haven’t tried.  It will be very important for us to keep spending in line with revenues until the economic picture has clearly changed.  There are no Titanics here in Edmond.  Let’s keep it that way and we’ll all prosper together in due time.  Thanks for reading.



Nick Massey is a financial advisor and owner of Householder Group Financial Advisors in Edmond, OK.  Nick can be reached at  HYPERLINK “www.nickmassey.com" www.nickmassey.com. Securities offered through Securities Service Network, Inc., member FINRA/SIPC.