Sunday, August 23, 2020

Tournament Level Sports Fields--Appraisal of Forest Hill Property

As I listened to the most recent BMA meeting, I realized that I needed to request the City-ordered appraisal of the property being considered for the tournament long fields. The entire meeting may be found on the City website. Scott Sanders made a number of interesting points about the appraisal in the meeting. He moves to postpone this decision until after the election, when the new Board can have a full work session about the project.

Here is the appraisal- link 

Page 2 The subject property has been offered for sale for more than 20 years.   

Page 4 Prolonged disruptions in financial markets may impact commercial real state markets

Page 4 COVID is a unique event that is expected to be temporary, a reliable estimate of the impact on commercial real estate is not possible,  

Page 22 The site characteristics are as follows:  Gross land area 44.06 acres, Usable Land area, 31.06 acres, usable land % is only 70 %,   

Page 24 According to discussions with the city of Germantown there will be a required detention basin PLUS an additional 5 acres of non-disturbance area and is estimated to cost AT LEAST $1,000,000

Page 41 A review of online data indicated that the subject property taxes were delinquent as of the date of the property appraisal.

Page 55 The appraised value of the property is $3,310,000 but is adjusted by the cost of the detention basin as discussed, which the city estimates as $1,000,000 leaving a value of 2,310,000 

Page 56 If the actual cost of the detention basin differs, it could alter the value conclusion,   

Sanders further states that this is a six million dollar project and there will still be the need to find a corporate partner to build the fields, install lighting, concession stands, restrooms etc., and states that we shouldn’t gamble with the taxpayers money.

Our Master Park Plan indicates that a long field complex will never be a revenue generating facility, in fact it will cost the taxpayer approximately $330,000 to maintain the facility each year.

Dean Massey seconded Alderman Sanders' motion.

The motion failed 3-2.

I am a big proponent of having adequate sports fields in the community, but I feel that we need to consider more than this one exceptionally costly option, given the underfunded pension plan liabilities and infrastructure needs of the community.

The third reading of the budget is tomorrow, August 24. If you want to voice your opinion about the sports fields, or anything else in the budget, email You must include your name, address, and telephone number.

Thursday, August 20, 2020

City Pension Fund Underperforms; Needs Injection of Capital

Abstract: A substantial number of the City's long-standing, loyal employees are nearing retirement age, and the City must ensure their pensions are secure, supported by a properly managed and funded retirement plan. The City pension fund lost money in the last fiscal year, and it has significantly underperformed comparable indexes for the past ten years. Furthermore, current estimates of future performance (for actuarial purposes) are, as acknowledged by the City's own plan advisor, inflated beyond reasonable expected returns. If the fund's future returns simply match historical performance over the past ten years, the City will need to contribute ever-increasing amounts to the fund each year. This will either constrict future City budgets or require tax increases.  


I shine a light on the following: 

*Losses this past fiscal year were significant, while the benchmark was up 5.6%

*The past ten years showed pension fund returns lower than the benchmark.

*Alderman Sanders asked about increasing contributions to pension fund in the budget in BMA work session, and Patrick Lawton obfuscated in his answer.  I heard no discussion of the difficulties the fund faces at the either the FAC or the regular BMA meeting.

*The expected returns from the pension fund are overstated, but lowering the expectations to a realistic level would clearly reveal the gap the City will need to fill in order to honor its commitments.

*Due in part to underperforming assets, the RPAC  this year voted for changes in the allocation of the funds investments, against the advice of the fund manager.

*Late this year, the actuary will compute the amount the City should put into the pension fund. One estimate suggests it could be as high as two to three million dollars.

*Alternative investments could be considered to try to increase the returns, but that could increase risk or decrease the liquidity of the fund.



I glanced over the budget prior to the most recent BMA meeting, the public hearing on the budget. My eyes suddenly stopped at the Pension Fund page (p. 110).  From the column "FY 20 (year ending June 30, 2020) Estimate": 

Pension Revenues Fair Value Appreciation (Depreciation)  ($7,327,000); Realized Gain (Loss) $3,645,000, Interest ($97,000), and Pension Expenses Trustee Fees $245,000.

As can be seen, these figures show an estimated net loss for the year of approximately 4 million dollars, or a loss of over 5%. Yet both the S&P index and bond indexes were up well over 5% for the same period of time.  

Contrary to what the above figures show, the fund manager's report on returns through June 30 reveals there was a FY 20 loss of only 1.7%. With the information available to me, I cannot reconcile these amounts-- there likely could be timing differences in the accounting entries and/or the reporting, or perhaps the budget figures overestimated the loss prior to the actual returns becoming available. But, either way, both figures are well below the benchmark amount reported by the fund manager for the period (FY 2020), which was a positive 5.8%. Below are the full manager's reports, for the first and second quarter of calendar year 2020.

I saw no reference in this year's public budget to additional City payments into the pension fund due to these losses, but perhaps I missed it in the extensive amount of material provided. Nor did I hear any discussion of the pension fund in the Finance Commission meetings on the budget, or in the most recent BMA meeting. This is surprising, as the need for increased payments into the pension fund over the next five years would affect the five-year capital funds budget passed by the Finance Commission and BMA as part of the overall budget.

There apparently was a reference to increased payments to the pension funds in the 2021 budget in the material given to the aldermen. At the July BMA Work Session on the budget, Alderman Sanders asked the following, 

Alderman Sanders:
I did have a question on these individual budget detail sheets. You had one thing that really stuck out to me was our additional money we were putting into our retirement and our cash balance.  It looks like we are adding $828,900 into our retirement and $74,600 in our cash balance plan. I don't know what's going on there, why we are adding so much into those two.

You may listen to that question, and Patrick Lawton's rambling, non-response in the video below.
He offered no specifics about the performance of the fund; nor did he address the need for increasing future payments into the fund. These two issues, needless to say ,bear heavily on the discussion of the FY 2021 proposed budget, particularly in light of the proposal in the budget for adding a tournament sports complex likely costing well in excess of $6,000,000, a complex which should be noted, which would have to be subsidized by the City, to the tune of $300,000 per year.

There was, of course, extensive discussion of the returns in the pension funds, as well as the likelihood of future payments into the funds, in the Retirement Plan Advisory Commission (RPAC) meetings on April 1 and August 12. These video meetings are available on the City website. Because I wanted to link to a few discussions in these meetings, I uploaded the audio of the two meetings to YouTube. This file is embedded below.

Gerber-Taylor has been the investment advisor for the pension fund since 1988. Since inception, they report higher returns than the benchmark-- 7.9% versus a benchmark of 7.5%. The bulk of the higher performing years were concentrated in the first years of the fund, when the pension fund was much smaller than it is now. Unfortunately, none of the returns in the reported periods in the last ten years (6.4% per year average overall), beat the benchmark (8.4% per year over the ten year period). This screenshot of performance of the fund is from this year's fund manager report ending 6-30-2020, which is linked above. 
Click to enlarge and see the fund returns vs. the benchmark- 65% MSCI World and 35% BBGBarc Aggregate Index

Discussion in the first RPAC meeting centered around the performance of the fund through March 31, which at that point was a negative 14% due to the abrupt slide in the stock market. The causes of the fund's underperformance were discussed, and  some changes in the asset allocations were approved at the meeting, which was not the recommendation of the fund manager. With the recovery of the capital markets, the August meeting focused not only on allocations within the fund, but also future expected returns of the fund. The fund manager stated that returns of 7.0% to 7.5% (as indicated in the actuarial reports) were unrealistically high due mostly to the plunge in interest rates and other market conditions. He recommended that the City use a lower expected rate of return, and steadily infuse the pension fund with more money each year, so that the budget hit in one year would not be too difficult. 

Some of the members of the Commission suggested alternative investments that could get the fund to perform nearer to the actuarial figure used (7.25%). At one point the fund manager called the pension fund fairly "high beta", meaning wide fluctuations are possible, which in layman terms means "risky". He also stated that a longer meeting with the actuary would be needed before committing to alternative investments such as private equity. Although they could yield higher returns, alternative investments could also mean higher risk and lower liquidity.


A few of the specific points and conversations in the meeting are linked below:  

April 1 meeting 

Link Alderman Rocky Janda leaves meeting for an emergency as investment advisor discusses poor returns on some investments such as pipeline partnerships and investments in Japan. 

Link Member asks how the losses will affect the budget if there is no improvement. Patrick Lawton states that the City would have to make contributions to the fund like we did in 2008-2009. Another member makes a statement that we should stay the course with our plan like we did in that period of time, and not make the mistake of getting out of the market. 

Link Pension fund is fully funded at $90 million dollars. Actuary looks at 25 year returns which is around 7.5%. 

The Commission discussed and voted for several tweaks to the allocations in the fund, contained in the minutes which can be found here:  Minutes

August 12 meeting 

Link Meeting begins here 

Link Member asks "How achievable is  the  7.5% return, in your opinion?  Advisor: It is a pretty tough nut, when you are thinking about equity valuation levels where they are today with expected returns in the 5% or so range. We are going to need to see value added from our managers to be able to get there, when you talk about bonds sort of in 1.0 to 1.5% returns. It is a pretty tough nut.................. Mathematically from a probability standpoint, no question, it is the math we are all facing, a low return environment, so what does that mean, higher contributions. The one good thing this means for Germantown is that this fund is frozen, that was a great move, years ago, but what it means for investors and for pension funds is higher contributions, relatively speaking, and for endowments and foundations, probably need to watch your spending policy, you know, lower it to the extent that you can. We are dealing with that with our clients across the board, it is a tough situation.  

Link Where does the portfolio protect itself if we have another Q1 or some semblance? Answer: Well, yeah, we have a fair amount of beta in this portfolio. 

Link Member:We have to fund the pension fund in November or December............ This is now August............I am guessing this is probably about a two or two and a half million dollar.into this account from the City. Rocky Janda: I hope not but I think you are probably right. This is one of the biggest contributions we have ever done and we are still using almost eight percent. (turns out this is 7.25% assumed return). Advisor: My point earlier, I counsel. that this probably needs to go lower and I know this increases the liability and increases the funding.but it is probably the prudent thing to do. It does not have to be done in one fell swoop but it is really hard to see how we get a 7.0% return with tools in the toolkit. 

The balance of the discussion was about how to get the returns higher with different types of investments. 

Germantown is not alone in its issues with pension fund shortfalls. Here is a larger discussion of the problems facing states and municipalities:

Local Government Pension Funding

Thursday, August 13, 2020

No Expansion of Middle School Unless City Restores Funding

If the City fails to restore funding to the Houston Middle School expansion project, there will be no expansion of the middle school.

The City Administration gives two reasons for cutting the funding for the expansion of Houston Middle School, and postponing it for one year 1. The pandemic has led to uncertainty over City revenues, and 2. Now is not a good time for the City to issue bonds in the capital markets.

The 2021 budget proposal, which includes capital improvements projects (CIP) for the next five years, will have its third reading at the next BMA meeting. The plan includes 2.5 million dollars in the 2022 budget for Houston Middle School expansion, which is just 50% of the original commitment. 

Another item in the City's CIP for 2022 is 5.5 million dollars for the purchase and development of land for tournament  long fields south of Winchester off Forest Hill. That project, when completed, would add about $300,000 to the City's operating expenses.


While Alderman Rocky Janda regularly states that GMSD has plenty of reserves to to build the addition, GMSD representatives dispute that, because those reserves are committed to specific projects. As an example, a large amount of reserves are needed because state money is not available for the district for several months after school begins, and it is needed to pay bills from September through the end of the year.

Another hit in the GMSD budget this year is the $355,000 annual payment to Shelby County Schools. Previously, the City has covered this expense, but the City left this payment out of its budget this year, stating GMSD must cover this commitment for the remaining six years.

You may read additional details in this Daily Memphian article: 

Listen to the Board of Mayor and Aldermen Work Session on July 23, to hear the entire discussion of the school budget. 

In this excerpt, Alderman Sanders asks the GMSD representatives if there will be a school expansion at all if the City fails to contribute the full $5.0 million dollars promised. The answer is a resounding  "no".  Later, Patrick Lawton states that the funding could always be revisited in next year's budget if financial conditions warrant.

Sunday, August 9, 2020

Beacon Center Lists Germantown Last in "Cost of Government" Index

The Beacon Center of Tennessee is a non-partisan, libertarian, non-profit that acts as a watchdog for government spending and individual freedoms. It ranks Germantown #30 out of 30 Cities in "Cost of Government", behind even Nashville, which rates #29 in that category, and Memphis at #28.

Besides "cost of government", three other categories were measured (Germantown ranks in parenthesis) --free enterprise (#20), private property (#14), and individual liberty (#16).

Overall Nashville, and Memphis and its suburbs are at the bottom of the rankings. Memphis ranks #25, and Germantown #26.

"Germantown did poor because it spends a lot on taxpayer funded lobbying money. Its debt is very high per person. It’s actually higher than Memphis believe it or not," said Shultis.  Link 

This poor rating comes out at an opportune time, as there is a small window of opportunity for citizens to express their feelings about the City budget. Instructions for commenting are at the bottom of this post.  

In this year's budget, tucked away in the capital expenditure budget for the Parks, is a mere $50,000 for due diligence and down payment on acreage south of Winchester for a sports complex. This complex is projected to need an annual subsidy of $200.000 to $300,000 per year. I understand that the City needs more athletic fields to meet the needs of the citizens, but the City should make the case for that need, and also give citizens a range of options that do not necessarily include tournament level fields. The City already supports other enterprises, such as GPAC, and GAC, the Great Hall, the Pickering Center, and The Hay Barn. All of these will need funds from general expenditures because of the pandemic. They also suffer during recessions.  The good news I guess is that at least our "cost of government" rating cannot go lower than dead last. Because of budget issues, the City has cut back and put off promised renovations and expansion of the middle school. Shouldn't those funds be prioritized above an athletic complex that will cost the City hundreds of thousands of dollars a year?

The time is NOW to express your opinion on these issues. There is an on-line meeting tomorrow on the budget, and the City is seeking public comment. From the City--
The budget does not include a merit increase for general government employees. There are no plans for layoffs. Vacant positions will be left open.  

Perhaps this would be a good time to abandon the vacation buyback policy. Under that policy, employees can substantially increase their pay by foregoing vacation days. This has the added expense of inflating retirement pay, which is computed on the last three years of salary, and that includes vacation buybacks.

I wonder what a "general government employee" is. My feeling is that employees at the managerial level should not receive raises when the "general" employee does not.

However you feel, please be a good citizens and express your viewpoint. From the City:

Anyone wishing to speak for or against this request is invited to participate. Submittals, 500 words or less, emailed to prior to noon on August 10 will be delivered to all members of the Board of Mayor and Aldermen prior to the 6 p.m. meeting. Comments must include the name, address and phone number of the person submitting. 
Board of Mayor and Aldermen Meeting August 10

Sunday, August 2, 2020

Vote by Mail Arguments heard by Tennessee Supreme Court

I saw nothing in our newspapers about the State's appeal of a lower court ruling that would force the State to allow vote-by-mail due to the pandemic. I therefore call your attention to The Nashville Tennessean, which covered the arguments made last week:  

Absentee Ballot Battle 

In short, the state shifted its argument to allow those with pre-existing conditions, or those who care for people with pre-existing conditions, to vote by mail this year. Previously, in lower courts, its arguments ignored the pandemic altogether, and no allowance was made for voting by mail due to the pandemic. The State, in its Supreme Court argument, did not specify any pre-existing conditions that would qualify, and it appears the honor system would be at play if the Court adopts the State's current argument. One would just sign that, under the threat of perjury, there is a pre-existing condition which prevents a safe in-person vote. 

The plaintiffs argue that limiting voting access goes against the rights of voters as guaranteed by the state and U.S. Constitution.Tennessee is one of the few states that requires a voter to have a specific reason to be able to vote absentee.

Currently, the list of reasons for voting absentee are on the application--and on the Shelby County Election Commission website. At this point, the language re: the pandemic reads as follows: 

  • You are hospitalized, ill, or physically disabled and cannot vote in person and/or I have determined that it is impossible or unreasonable to vote in-person due to the COVID-19 situation.
  • You are a caretaker of a person who is hospitalized, ill, or disabled, and/or I have determinted that it is impossible or unreasonable to vote in person due to the COVID-19 situation.

Presumably, if the Supreme Court accepts the State's current argument, there will be the requirement of having a pre-existing condition added to the above language.    

Blue and Black Ink 

Just a bit of a heads up if you are voting absentee-- I was a bit confused by the instructions sent with my absentee ballot. One piece of paper said to use a blue or black ink pen, not a pencil or red ink. The ballot itself said only black ink is allowed. To be on the safe side, I used the more restrictive instruction-black ink.