Notable Quote

"Like the generals who are always trying to fight the last war, the regulators are always trying to fight the last crisis."

- Heiner Schultz, Assistant Professor, Univ. Penn.

Update Mid-March 2009

If anyone was wondering, I haven't gone away!

I've been catching up on "business" and dealing with issues out there in the "real" world.

I also wanted to give the economy and our new congress and President some time to allow the "dust to settle". There has been more info available in the popular press than has been possible to digest.

The economy continues is decline, in fits and starts, toward a 10% national unemployment rate, and our government continues to throw the bulk of its financial support to the banks and financial institutions. The experts, who for the most part missed all of the signals leading to the current situation are now saying it may be late 2009 or 2010, or later for a recovery to begin, in earnest. Why should I believe them now?

Today the U.S. Labor Department reported that in January four states had unemployment rates above 10% and two other were close behind. Highest unemployment reported:
California 10.1%
Georgia 8.6%
Michigan 11.6%
North Carolina 9.7%
Oregon 9.9%
South Carolina 10.4%
Rhode Island 10.3%

Note: If you want a job, go to Wyoming. The jobless rate was reported as 3.7% for January, 2009, which is the lowest in the nation!

The stimulus promoted by the government, including the new Obama administration, includes what I would classify as a lot of "earmarks" which will not stimulate the economy and will burden our future with debt. Is it any wonder that many people are so morose?

My "personal" recession began in 2006 when my clients, all of whom are involved in heavy industry as it applies to construction, rapidly cancelled or postponed projects and contracts. MBA programs have been teaching the technique which Jack Welch of G.E. fame used during the period 1981-1985 and the related recession. Jack cut jobs deep and hard; it is my understanding that 100,000 jobs were eliminated by "Neutron Jack " as he was called, apparently in reference to his similarity to the Neutron Bomb, which destroys people but leaves factories intact. CEOs and managers emulated this technique in the 1990s and it worked very well, and I also think it contributed to the depth of that recession, as it is, now.

An associate made the statement to me on Monday "Don't I know what's going on out there?" Wake up, Virgil, as the saying goes, I have not been sleeping nor has my head been embedded in the sand! I suspect that associate hasn't been listening during our conversations, or simply rejected what I was saying at the time. He does have the opinion that I am off my rocker, most of the time.

So I'll be posting my updated perspective on the economy in the very near future. However, we are on track per my blog of October 21, 2008:

http://letmethinkaboutthis.blogspot.com/2008/10/how-bad-recession.html

Meanwhile, while our politicians debate, the government continues to send money to bail out banks, bankers and investment companies. Very little of this is apparently finding its way to the millions of distressed homeowners. In Obama's stimulus package, there is $75 billion earmarked for "distressed homeowners". I am not entering the debate about whom deserves or doesn't deserve government bailout money. It is apparent that a lot of people were greedy, a lot of people made mistakes or were simply stupid, and a lot of people perpetrated various frauds.

I am looking at this from the perspective of spending as little as possible to resolve the problem. We have about 7.3 million homeowners who have defaulted or are at risk of default. If these people were given a stipend by the government which was applied against their mortgages, this money would be passed to the banks who would be forced to lower the balance on their mortgages, it would find its way to those who hold the notes, etc. and should stabilize the system.
But how much money would it take? Or, how far could a trillion dollars, which is the amount routinely used as fodder for the pigs at the toughs, go? I'll round up the number of mortgages to 10 million. Well, one Trillion dollars = $1,000,000,000,000. If I were to divide that by 10 million distressed mortgages (10,000,000) I would have $100,000 per mortgage.

So which has been more effective? Throwing several trillion dollars at the banks and investment bankers, or throwing $50,000 at each homeowner? We could bail out 10 million homeowners and the entire banking system directly tied to these failed mortgages, using "only" one-half trillion dollars, which is $500 billion.

So now you know why am so cynical about our politicians. they could get the job done and they should know what I know. But they don't operate accordingly. So looking beyond all the rhetoric and the politicians and their media pundits, who is really being served? I'll let you draw your own conclusions.

Note: one trillion is a really big number. How big? Let's do a little arithmetic and answer the question "how many seconds is a trillion?" There are 365 days each year, 24 hours each day, 60 minutes each hour and 60 seconds each minute. So a year is 365 x 24 x 60 x 60 seconds = 31,536,000 seconds. If I divide 1 trillion by the number of seconds in a year, I'll know how many years contain 1 trillion seconds. The answer is 31,709 years.

Update to Mileage Statistics and Gasoline Costs

I have updated the gasoline costs and related information for my automobile:

http://letmethinkaboutthis.blogspot.com/2008/09/cost-of-gasoline-for-my-subaru.html

An Alternative Method for Arriving at Assessment Adjustments

I am a condominium unit owner. I have observed the planning process used by our association in determining assessments. There are a range of emotions displayed by the board and by unit owners when the subject of assessments is discussed. I concluded there must be a better way and I have written to the board about analysis I have made and of my opinions derived on how we got to where we are. In October, 2008, I began a study to assess using different techniques to determine our monthly assessments. I determined that there was an alternative method that would have yielded lower assessments had the boards consistently adhered to a simple schedule of adjustments using data published by the U.S. government.

What follows is that method which can provide a simple, reliable tool for use in determining assessment adjustments. Of course, board members and unit owners may choose to ignore the data.

The following charts are derived from spread sheets I have made, which included the actual assessment amounts, the percentage of adjustment voted by the board each year, and the COLA or cost of living adjustment determined by the U.S. government. The U.S. government has different legal and economic bodies that generate this information. Most COLA data is backward looking, i.e. published after the fact. My spreadsheets and the resulting charts use data which is forward looking. They use the Social Security Administration annual benefit adjustment. This is a percentage, issued in the fall of each year by the SSA, which determines the increase in SS benefits for the following year. It is an attempt to anticipate cost adjustments on a year to year basis. For example, in 2008 this was published as a 5.8% increase, applied in 2009.

Each chart has two trends. One is derived from the actual decisions made by the board. The other is an alternate, derived from the COLA adjustment, and indicates the result if the boards had based the annual assessment adjustment solely using the government COLA adjustment.

The first chart is a comparison of the monthly assessments using the two methods. It has two trends; one is the actual, average monthly unit assessment and the second is an alternative COLA based assessment. The alternative assessment replaces the percentage increase voted in 1982 by the board, with the percentage calculated by the U.S. government for SS benefits in 1982. This is repeated each year from 1982 to 2008. This is chart No. 1 “The High Price of Avoiding Assessment Increases” so named because prior to 1995 the board chose zero or negative adjustments for several years. You will note that the trends cross in collection year 2001. Prior to that time, our assessment increases consistently lagged those deemed necessary by the government COLA method. If left unchecked, this would result in deficits, i.e., the inability to meet financial needs. Later boards, anticipating this, have since 2001 raised our assessments annually by a rate above that of the COLA percentage. This resulted in today’s higher monthly assessments as compared to using the alternative, COLA method. I chose 1982 to begin because this is the first year the board chose a negative or zero assessment adjustment. Assessments began in 1979 and the interval until 1982 provides too unstable a starting point, as boards attempted to find their footing and establish assessments that would fund ongoing needs.


Chart No. 2 “Annual Assessed Amounts Collected” depicts the total assessments collected annually from the period 1983 to projected 2009. The amounts collected annually are trended using the two methods, and the trends cross in 2001. The amounts collected using the percentages chosen by the boards were lower during the years prior to 2001 than the amounts that would have been collected using the U.S. government percentages. As the assessments have increased each month, so too have the amounts collected. The amounts collected annually are now much greater than they would have been had the U.S government percentages been used. However, the space between the trends to the left of the point of crossing is nearly equal to the space to the right of that point.

Chart No. 3 “Accrued Amounts Using Actual Assessments and Alternative COLA Method” shows the long term effects, the sum of all assessments collected from 1983. It compares the sums collected using the board selected percentage adjustment to the sums collected using the U.S government SSA COLA method. The U.S. government COLA percentages consistently grew the savings at a higher rate. By December 31, 2009, the actual, total assessments collected at the association, for the period 1983 through 2009 is projected to be $16,028,211. During that same period, using the COLA method $15,910,181 would have been collected. This is a difference of 0.74%. The trends do not include interest accrued on saved funds.

Chart No. 4 “Monthly Assessments Using Actual Method and Alternative COLA Method“ compares the average monthly amounts collected per unit using the board selected adjustment method and alternative COLA adjustments from 1982 to the present. If it looks familiar, it is! Chart No. 4 is identical to Chart No. 1 and I repeat it here to provide this information: In 1999 the assessments at our association began to rise at a faster rate. Prior to 1999 the assessments consistently lagged those which would have been collected, had the U.S. government COLA SSA adjustment percentages been used. In 1999 the average assessment was about $135 and had increased to about $291 by 2009. Today, my actual assessment is $308.57, but had the U.S. government alternative percentages been consistently used, my actual assessment today would be a much lower $216.90. The reason is simply this: our current assessments are an attempt to collect in the period 1999 to the present, the sums of money that were not collected in the prior period 1983 to 1998. This difference is the space between the two trends on the graph below: The final chart trends the assessment adjustments as percent change voted by the board, compared to the percent change which the U.S government COLA method used for the same period of 1982 to 2009. You will observe that the percentages voted by the board were quite erratic prior to 1995. You will also observe that the U.S. government method was nearly always below 5%, and was as low as 1.3% in 1986 and 1998. There is one caution. In the period 1978 to 1982, prior to the trends and during a period of pronounced inflation, the U.S. government COLA percentages were above 8.0% for four years.

All of this is exploring possibility using “what may have been”. However, several observations and conclusions can be drawn from the data shown in the charts.

1. Had the association boards used a simple method of calculating assessment adjustments based on U.S. government SSA COLA and collected assessments consistent with inflation increases, we would have today achieved the same balance sheet. However, in the process we would have had smoother, consistently smaller assessment increases and would today have lower monthly assessments.
2. Using assessment increases below the COLA percentages is an inferior method.
3. The pace of assessment adjustments should moderate to the COLA rates, and has.
4. The COLA method may not assure sufficient funding for large capital projects, such as the planned roofing and paving projects. This is because specific, actual costs are unknown. Further analysis is required.
5. The association is now collecting funds at a rate greater than the COLA method would, because our monthly assessments are higher. The impact on future balance sheets cannot be determined with certainty until the true costs and timelines of capital projects is known.
6. To avoid large “spikes” using the COLA method (e.g. 14.3% as in 1980) and consequential disruption to the budgets of unit owners, it is advisable to adjust very low COLA percentages upwards to provide some short term smoothing and avoid large increases. This requires analysis of future, anticipated balance sheets.
7. This data can empower condominium boards to consider using the U.S. government COLA percentage increases as basis for the minimum for assessment adjustments, if that method is not now used.

I provided this data to our board on March 4, 2009 and I hope that this is useful and will have some influence on the predilection of the board when the time comes to vote for assessment adjustments. I will be doing additional analysis and I welcome comments.

The following is the SSA website which includes the COLA data I used.

http://www.ssa.gov/OACT/COLA/colaseries.html