Never assume until the fat lady sings: A Few Highfalutin Concepts to Remember

Long ago I disclosed that I dabbled in game theory from time to time. An application of those broad concepts are found in Public Choice Theory. Here is a salient snippet:

Public choice theory is often used to explain how political decision-making results in outcomes that conflict with the preferences of the general public. For example, many advocacy group and pork barrel projects are not the desire of the overall democracy. However, it makes sense for politicians to support these projects. It may make them feel powerful and important. It can also benefit them financially by opening the door to future wealth as lobbyists. The project may be of interest to the politician’s local constituency, increasing district votes or campaign contributions. The politician pays little or no cost to gain these benefits, as he is spending public money. Special-interest lobbyists are also behaving rationally. They can gain government favors worth millions or billions for relatively small investments. They face a risk of losing out to their competitors if they don’t seek these favors. The taxpayer is also behaving rationally. The cost of defeating any one government give-away is very high, while the benefits to the individual taxpayer are very small. Each citizen pays only a few pennies or a few dollars for any given government favor, while the costs of ending that favor would be many times higher. Everyone involved has rational incentives to do exactly what they’re doing, even though the desire of the general constituency is opposite. Costs are diffused, while benefits are concentrated. The voices of vocal minorities with much to gain are heard over those of indifferent majorities with little to individually lose.

While good government tends to be a pure public good for the mass of voters, there may be many advocacy groups that have strong incentives for lobbying the government to implement specific policies that would benefit them, potentially at the expense of the general public. For example, lobbying by the sugar manufacturers might result in an inefficient subsidy for the production of sugar, either direct or by protectionist measures. The costs of such inefficient policies are dispersed over all citizens, and therefore unnoticeable to each individual. On the other hand, the benefits are shared by a small special-interest group with a strong incentive to perpetuate the policy by further lobbying. Due to rational ignorance, the vast majority of voters will be unaware of the effort; in fact, although voters may be aware of special-interest lobbying efforts, this may merely select for policies which are even harder to evaluate by the general public, rather than improving their overall efficiency. Even if the public were able to evaluate policy proposals effectively, they would find it infeasible to engage in collective action in order to defend their diffuse interest. Therefore, theorists expect that numerous special interests will be able to successfully lobby for various inefficient policies. In public choice theory, such scenarios of inefficient government policies are referred to as government failure — a term akin to market failure from earlier theoretical welfare economics.

Rational Ignorance? Politicians have depended upon it since the dawn of civilized society.  All of the above applies all the way down to your local government. So does the concept of concentrated benefits and dispersed costs.  And all are currently on display here in the Bay in fact.

Fillingame Administration a going concern: Auditors explain to City Council why the City is getting a very bad report.

Last night’s Bay St Louis City Council meeting was a spectacle folks so it is only right we kick start coverage with a reader request:

So let’s begin with a slightly misleading headline:

Auditor: Bay St. Louis’ funding reserves dwindling ~ Justin Mitchell and Jennifer Lenain

The slightly misleading part is the use of “Dwindling” which implies the City actually has a reserve at all when the fact of the matter is the reserve has been gone for well over a year with accompanying deficit, fueled by out of control spending, parked on a loan with The First that the City made without any statutory authority. But it is worse than all that because Mayor Fillingame, who has steadfastly denied the City had any financial problems to begin with, remains in deep denial:

Mayor Les Fillingame said he doesn’t think Guel’s findings are troubling.

Methinks Hizzoner Continue reading “Fillingame Administration a going concern: Auditors explain to City Council why the City is getting a very bad report.”

Analysis: It sure is sunny here at Slabbed

But first, a timely word from a sponsor:

Labor, as a percent of Bay St Louis Water and Sewer Find Revenue: Source Annual Single Audit Reports
Labor, as a percent of Bay St Louis Water and Sewer Fund Revenue: Source Annual Single Audit Reports

Continue reading “Analysis: It sure is sunny here at Slabbed”

Since everyone likes a nice graph

If the City of Bay St Louis only looked at revenues and continued to allow General Fund salaries to be paid by the Water and Sewer Department here is a graphic representation of the new $60/month minimum billing broken down by current unfunded liabilities.

Source: Slabbed New Media notes, other external media accounts
Source: Slabbed New Media notes, other external media accounts

My brother Darryl tries leading my other brother Darryl down the primrose path: A Going Concern Update

Last Thursday evening the Bay St Louis City Council held a recessed meeting that was devoted almost entirely to the troubled state of the City’s finances. Audit report excerpts were read, sweeping proclamations regarding accountants being meek were declared and into nonsalient side subjects was the discussion frequently steered. And yet through it all the public still managed to learn a few things.  I thought Geoff Belcher did a great job with his recap of the meeting for the Seacoast Echo so it is there we start:

Kolf said one of the reasons the city’s mandated audit is being held up is because the auditor is concerned that the utility rates aren’t high enough to pay everything and are a “going concern.”

If the city fails to raise rates, he said, that could make the bank trustees in charge of the bond nervous and they could legally require the city to pay the funds back immediately.

Falgout countered that the auditor is concerned about far more than the city’s utility budget.

So we getting this folks, we have the City Clerk blaming the Going Concern opinion on just the Utility Fund while the Auditor’s are telling the City Council they are concerned with the entirety of the City’s dismal financial situation. Kolf used that misconception in an attempt to strong arm the City Council into adopting the Mayor’s Utility rate hike, a proposal that according to Councilman Joey Boudin the council saw for the first time just before the start of the recessed meeting.

But there is more because the finger wagging from Clerk Kolf and City Attorney Rafferty was just beginning:

City attorney Donald Rafferty told the council he felt the proper thing to do would be to announce to the bank trustees that the city likely not be able to make the first payment on the refinanced bond.

This is too rich folks it really is and one has to wonder who Mr Rafferty’s client is at this point.  You see folks it would be one thing if this was just a simple case of the pot trying to give the bums rush to the kettle but the level of dishonesty in the “advice” that was being dispensed last week to the council was simply stunning. The scare tactics worked too: Continue reading “My brother Darryl tries leading my other brother Darryl down the primrose path: A Going Concern Update”

Proposed Bay St. Louis utility rate hike fails

Last night, the $9/month water and sewer rate increase proposed by Mayor Les Fillingame failed to gain the support of four of the City Councilmen. Councilmen Doug Seal, Lonnie Falgout, Mike Favre and Joey Boudin all voted no on the Mayor’s proposal.

City Clerk David Kolf addressed the outstanding FY 2013 audit, specifically the proposed going concern opinion on the City’s FY 2013 Financial Statements, which Kolf blamed solely on the Utility Fund as he attempted to use the proposed going concern opinion to justify the Mayor’s rate hike. Kolf was countered by Councilman Falgout, who indicated the Auditors’ proposed opinion, per his discussion that day with Auditor Jennifer Bell, was derived from the overall poor financial condition of the City.

Falgout, explaining his no vote on the rate hike, wants to undertake a comprehensive review of the City’s finances as he indicated the latest financial reports show that several revenue sources in the City’s general fund, including sales tax collections, continue to decline year over year.

Public input on the issue of the Utility rate hike was mixed.  In a particularly colorful symbolic display, local Realtor Avra O’Dwyer scolded the Council Continue reading “Proposed Bay St. Louis utility rate hike fails”

City Auditors considering Going Concern Opinion on Bay St Louis Financials

Four hours into a marathon Bay St Louis City Council meeting that lasted almost five hours, City Clerk David Kolf disclosed to the City Council that the municipal auditors have been in discussion with City officials regarding the issuance of a going concern opinion on the September 30, 2013 City of Bay St Louis financial statements that are included as part of the annual Single Audit of the City’s finances and compliance with applicable laws and regulations. The single audit report for the City is due on June 30, 2014, a due date which Kolf admitted would not be met as the auditors are still waiting on the Administration to provide the firm with crucial information needed in order to complete the report, a complete list of which was provided to the Mayor on  May 6, 2013 when Auditor Jennifer Bell presented the audit firm’s preliminary findings to the City Council.

Mayor Fillingame, who has previously steadfastly maintained the city’s finances were solid, made no public comments on the City’s dire financial situation to the Council before Slabbed’s deadline for publication instead relying on Clerk Kolf to explain the auditor’s proposed  opinion.  Kolf blamed the City’s Utility fund for the financial problems leading to the rare proposed audit opinion, which essentially means the City’s solvency is doubtful absent a bankruptcy filing within one year of the date of the opinion.

Douglas Handshoe, a CPA that is publisher of the Slabbed New Media website explains:

Auditors are reticent to issue going concern opinions as it often represents a financial kiss of death for the entity being audited.  While the academic research on this topic has been fairly exhaustive, it mostly focuses on the instances where an entity fails without the auditors ever issuing  a going concern opinion.  Business solvency, bankruptcy and auditor reports are closely intertwined by operation of the legal system so there is a compelling interdisciplinary interest in this topic.

The academics find that reticence in their study results. Handshoe noted that in a Wall Street Journal article on the topic, Anne Simpson, senior portfolio manager and director for corporate governance at California Public Employee’s Retirement System (CalPERS) said “A going concern warning from an auditor is rarer than a hen’s teeth, you have to be dangling off a cliff, hanging on by your fingernails before the auditor blows the whistle.” Continue reading “City Auditors considering Going Concern Opinion on Bay St Louis Financials”

Onwards we turn…..

I have a part two coming on Muckraking Job Security plus I hear heated words were exchanged last week at the Bay St Louis City Council between certain interested citizens in the presence of the Sun Herald reporting duo assigned there to.

Man o man is it raining cats and dawgs but the summertime heat is on down here in Soggy Bottom. All that and more on tap.