Economy Fragile, Delay New School

Letter to the Editor
Published: March 20, 2008

I am responding to supervisor Teri Pace’s column in the latest Orange County Review newspaper and request for input in the current budgeting process.

First let me say, maintain your position on the building of the new middle school. At a minimum, if some compromise is required, at least try and delay an implementation of the program for a year.

Let me share my experience as a former investment banker on Wall Street with a major investment firm, a commercial developer, financial officer, and currently an investment partner. We look at commerce strictly in a top down perspective. While my affiliates are in Chicago and New York, and our focus is international, the same forces that I am about to describe, and are in use with our forward-looking five-year cash management models, affect Orange County just as well.

Simply, our banking system is gravely weakened. U.S. banks and many of our trading partners are way over-leveraged and are being forced to re-evaluate their assets on a “mark to market” basis. I could write three pages on this subject.

But suffice to say, the Federal Reserve, which we follow behind the scenes very closely, is figuratively in a “pure panic.” To save the system, the feds keep having to drop interest rates, insert liquidity, and now call as they did last week for the banks to give up some of their capital structure for reduced mortgage principal. However, reducing bank capital plants seeds especially for medium size bank failures. Thus, the Fed clearly is indicating that it is trapped.

Bank failures seem to be least costly than a massive countrywide economic meltdown. All this causes the dollar to sink and maintains if not accelerates the spiral towards systematic mass bankruptcy, both in commerce and state/municipality operations. Right, wrong, or indifferent, the potential is there and we individually have to plan for it. That means Orange County Supervisors, too.

Turning to the state level. There is no evidence in the Richmond Times to suggest that the state legislature sees any risk of a train wreck coming. I am not speaking of just the funding morass for transportation, which seems to be their main focus now. If our banking system and the Federal Reserve become greatly constrained, the state which has been like a “drunken sailor on a spending binge for a decade” will be greatly surprised and forced into a painful retreat.

You can bet that the funds Orange County receives from the state will significantly dry up. Plus, new state income taxes will certainly follow and further be a burden on our residents. Most significantly, the monies will not return to the local level. Even in the best of times, the state has a record of reneging and has capped funds (i.e. the car tax) to the county. We have been forced to increase local taxes such as the personal tax element. You can envision the downward spiral for our schools, services, etc., if on the national level, credit and commerce tank, followed by the state. Thus, it is important for the county to consider this possible risk in this year’s budget process.

Even if I am only 50 percent right, you will not see the population growth rate that will support building a school with the massive overcapacity programmed as now described in the local paper. This alone should stop any progress until levelheaded (plain common sense) projections incorporate the economic climate we find ourselves in today, and project probable funding and default risks, which can last well into the future.
Secondly, with no end in sight with the dollar slide, the construction costs now promulgated are too low. Plus, I believe the debt servicing costs that you stated and were published will be much higher.

As a sidebar, we do not build or buy properties that will have much human activity for long periods close to high voltage lines. I do not know the truth in the matter as to the danger, except the studies that we have examined and say such proximity is of no consequences; most have been written by the electrical industry. What was reported in the Orange County Review did not satisfy me as to the expertise in the evaluation of safety for the school in terms of the electric lines.

In summary, as you indicated, our first priority should be to get the textbooks, etc. to our present schools and satisfy the elementary school requirements.

Moreover, as a professional financier, I strongly support at minimum delaying the release of any major funding to this middle school project until we definitely see how our national finance system shapes up.
Fighting for time, the banks estimate that they need at least a year to stabilize. Unfortunately, this is not just old-fashion banking of 30 years ago, not with all the derivatives spread all over the world. No one, including the Fed, has a clue to how much debt there is outstanding and how it can be repaid. I believe that we will need at least several years to rebuild out of the present brutal financial mess.

Thus, when some say that we should build the school now, because it will cost more in the future, I suggest that by waiting, the future costs are simply today’s cost of buying insurance. Because, if the banking system severely contracts, the state defaults, only our county citizens will be left holding a debt for what can become quickly a “white elephant.” The county administrator’s 20 percent-plus tax increase proposal this year will seem minuscule compared to what can come.

Bruce L. Brown
Locust Grove