An Analysis of Prop. 200

Posted by AzBlueMeanie:

I am reproducing below an exchange of e-mail correspondence which has been widely disseminated (I have received it from several sources) between Frances M. Merryman, CFPR and Vice President of Wealth Strategies Group, and Bill Arnold, chairman of the Public Safety First Initiative (Prop. 200), and copied to a host of community leaders. Any confidentiality has been waived due to the fact that this e-mail has been widely disseminated and forwarded before it ever arrived to my attention. It is my understanding that members of the local news media have also received forwarded copies. (No original content has been edited, only addresses are deleted.)

From: Bill Arnold
Date: 09/07/2009
To: Frances Merryman
Subject: Re: Prop. 200

Ms. Merryman:

I was in attendance last Thursday evening and heard your comments regarding Proposition 200. Out of respect for you I chose not to respond … a decision which was met with unhappy police and firemen. I hope that you will give me a few moments to provide you with additional information. My hope is that you will consider the data with an open mind.

In a word, the City's numbers are wrong (incorrect) due to some key assumptions that were made early on. There are three key assumptions (the number of police officers, the resulting number of new arrests and the capital improvements). The City's errors have been picked up and accepted by the County as well. One other key assumption that has been made, in regard to the way the City has framed this discussion, is that no new revenue (of any kind) can, or will be considered (including state shared revenue or sales taxes), for all FIVE YEARS of the ramp up to full compliance (e.g., they have "anchored" the entire discussion on the "costs" side of the equation with no consideration for any offsetting revenues from an improving economy).

I've attached a spreadsheet for your review which outlines the number of police officers and resulting assumptions for the arrest rate. You will see that the error in year one is 99.7%, and that it isn't until year three (FY2013) that the tables flip and begin to catch up. The Police Chief told me last week that his numbers "match" our numbers. The City's Independent Audit and Performance Review Subcommittee (IAPRS) has been tasked by the City to review the data … the full Committee meets today to take up the issue of whether or not to include the "revenue" in the discussion (that's right, none of the numbers you've been quoted include any offsetting revenue). I've attached a copy of an email update I sent out this morning to the Campaign Committee of the highlights of the conversation I had with the Chairman of the IAPRS this morning.

I've attached the "corrected budget" numbers as well … You'll see that the actual costs (year five … and using all of the actual numbers provided by the City staff) are no more than 35% of the number being trumpeted by the City Manager.

When you look over the spreadsheet you will see that it will only take an economy with a feeble 2.25% GDP to generate the needed revenue to fully fund the increased costs (all things being equal). With the way we intentionally "phased in" the requirements we believe > that the economy will have recovered in sufficient time to generate the needed new revenue (without need for increased taxes or reduced services). We are still calculating the revenues generated by police and fire (they make a "profit" of at least $4 million in terms of the overhead through Courts … it may be more). Once those numbers are in we may well be able to demonstrate an even weaker economy can fund this.

I'm more than happy to sit down and discuss this in more detail if you are so inclined. And, I hope that you find this information persuasive enough to reconsider your position.

Thank you.

Sincerely,
Bill
William Arnold

Note: The draft Independent Audit and Performance Review Subcommittee (IAPRS) Report is linked on this site under "Mike's DEL.ICIO.US LINKS" and here Draft_Report_Potential_Costs_PSFI.pdf – Google Docs

From: Frances Merryman
Date: 09/20/2009
To: Bill Arnold
Subject: Re: Prop. 200

Dear Bill,

I am sorry that it has taken me so long to get back to you, but I wanted to be sure of all of my facts before I responded. You will note that I have copied the TREO board of directors of which I am a member. The Public Safety Initiative has been a topic at the last 2 board meetings. At the meeting last Friday, during the discussion I relayed the meeting at the Stillwill Twigg house and the responses that I have received as well as another meeting on the same topic that I had attended at Randolph last Monday. The board asked to be copied on my response to you and I agreed.

Let me begin by providing you a bit of my background so you may perhaps better understand my position. I have lived in Tucson for over 37 years – all but the first 6 months within Ward 6. I have an undergraduate degree from the University of Arizona majoring in finance and entrepreneurship with a minor in accounting. I have a Masters of Science degree with a major in finance. I had a 4.0 GPA in both. I am a CFPR and have Series 7 & 66 securities licenses. I grew up in a very entrepreneurial family and I owned and managed with my former husband my own business in Tucson for over 15 years before my career in the financial services industry. I have been in the financial services industry for 21 years. The 1st dozen were as a commercial lender, ending as the head of Commercial Lending in southern Arizona for Northern Trust. For the last 9 and a half years, I have headed the Wealth Strategies Group at Northern.

During my career as a commercial lender, I never had a loan that went bad and was not fully collected and I made hundreds of millions of dollars of loans during that time frame. I will tell you that I would never have made a loan to an entity whose FTE was by mandate with no consideration for revenues or evolving best practices in their industry. It would have assured me of breaking my record of never having made a loan that went bad. That is why it disturbs me so deeply that the business community in Tucson is supporting an initiative that would do just that to the City of Tucson and by unintended consequence to Pima County as well.

In the course of verifying the various costs, estimates, governance polices and impact, I have spoken directly to or listened to them speak to others: Marshall Vest, Joel Valdez, Jim Kolbe, Joe Kalt, Mike Letcher, Chuck Huckleberry, Taz Villasenor and Pat Reilly.

At the first of the 2 meetings that I was invited to at Bert Lopez' house, it was represented that we were getting together to find solutions for better governance for Tucson in a nonpartisan fashion. We were asked to come together again the next week at the Stillwill Twigg House for the same purpose. Toward that end, I invited a broad spectrum of concerned citizens, so we could truly work in a nonpartisan fashion toward a better Tucson . The meeting was decidedly partisan and given the premise that it was about improving governance of Tucson, I felt impelled to speak out about the Public Safety Initiative. I fully support our police and fire. I do not support handicapping and crippling our City and County by unfunded mandates. This is what has caused our state budget to be such a mess. Voter mandates will require our state budget to be at $11 billion next year, but we will have only $7.1 billion of projected revenues. How can any business leader in good conscience inflict this same damage to our City as well?

To address your specific statements in your e-mails to me: Your first e-mail stated that our crime rate is one of the worst in the United States. At the time that statistic was first reported, TREO did some research and discovered that different communities report crime differently and in an apples to apples comparison, we were not as bad as you portray. In fact, the crime rate has declined steadily over the past 3 years, including violent crime. This is not a change in reporting, as the total service call numbers are down as well over the same time frame.

Between 64% to 66% of our current city budget is currently spent on public safety. This means that the cost of Prop 200 will have to be found in the remaining one third of the budget. Think in a time of declining revenues what the impact of that will be on the rest of the budget. Think if you were a sub-contractor during the housing decline and you had to maintain your peak level of employees as your revenues dropped from $10 million per month to $500 hundred thousand, as happened to one of my clients. It is unreasonable to expect that in our current economic environment there would not have to be belt tightening in all areas of City Government. The current council has repeatedly stated that public safety is their primary focus. Do I agree with everything this City Council has done or the way they have done it? Absolutely not and I have made my opinion known when I disagreed, as they can well attest.

In your second paragraph, you state that "the City's numbers are wrong (incorrect) due to some key assumptions that were made early on". There is a difference in timing in your assumptions and the City's. They took the total number of police officers required at the end of 5 years and divided by 5. Whereas your assumptions build more slowly in the early years and pick up in the later years. So there is a flip or crossover point where your numbers exceed the City's. It would require the same total $, just allocated differently over the time frame. Taz agreed that his hiring would more likely reflect yours in the beginning, because there is no money to hire additional officers. Both the police and fire department are working on building toward the national standards in a financially sustainable fashion, as they have been charged to do by the City Council. The police are currently at 1.97 per thousand and the fire response is currently on average at 4.1 minutes. The 2004 NFPA 1710 standard is to meet this response time 90% of the time. Our fire response currently meets this standard 60% of the time. They are working on a financially sustainable model to get to the 90% standard. What happens in 2010 when a new standard comes out, and Prop 200 has locked us into 2004 standards with no avenue for adjustment for changing best practices without going back to the voters? By changing the City Charter in this way you completely handicap the professionals to manage their departments and our public safety in an evolving world by handcuffing them to an already outdated standard. How can this be considered good governance. It is certainly absolutely lousy business practice.

Another point you make in that same paragraph is, "One other key assumption that has been made, in regard to the way the City has framed this discussion, is that no new revenue (of any kind) can, or will be considered (including state shared revenue or sales taxes), for all FIVE YEARS of the ramp up to full compliance (e.g., they have "anchored" the entire discussion on the "costs" side of the equation with no consideration for any offsetting revenues from an improving economy)." Of course it should not be considered. Prop 200 has NO REVENUE attached to it. It mandates increases in costs only, so why should potential revenues be considered when coming up with the costs to the City and the County?

You go on to state,"…that it will only take an economy with a feeble 2.25% GDP to generate the needed revenue to fully fund the increased costs (all things being equal)." First of all GDP is not computed for cities or states. 2.25% is not a "feeble" GDP for a developed country. It is a sustainable GDP for a developed society. Since we can't use GDP, we can try to consider what Tucson 's growth rate may be by looking at our population growth. In the past, prior to the housing bubble bursting, Tucson 's population growth was a bit in excess of 2%, driven primarily by in-migration. Our current population increase is less than 1% and is driven by births exceeding deaths, not in-migration. It takes decades for population growth driven by a positive birth rate to have any kind of meaningful impact on household formation.

When you say the following quote, I am unclear what you mean: "We are still calculating the revenues generated by police and fire (they make a "profit" of at least $4 million in terms of the overhead through Courts … it may be more). Once those numbers are in we may well be able to demonstrate an even weaker economy can fund this." By GAAP, "profits" are what is left after accounting for all expenses. I believe that you are referring to fines levied for parking and traffic violations. Don't you think these numbers are already accounted for in the City's budget?

Your statement that, "…we believe that the economy will have recovered in sufficient time to generate the needed new revenue (without need for increased taxes or reduced services)", I don't think is born out by most economists. Consider, if you will, that the long term sustainable housing starts for Tucson is roughly 4500 per year. At the peak of the overbuilding, we approached 12,000 per year. We are currently permitting less than 1000 per year. We have not reached the end of the peak in foreclosures. They are now spiking in prime loans, which are up over 6% and sub-prime is running at 25%. People from other states cannot sell their homes to move here, so in-migration will not assist our growth for quite awhile until other parts of the country have recovered as well. How long do you think it will take us to get back to the 4500 starts per year? My estimation is 5 to 7 years. That does not augur well for your argument that the economy will have recovered in sufficient time. We are already cutting services and it will get more drastic as the state cuts shared revenues in the years ahead in order to balance its budget, which will require an increase in taxes at the local level for both the City and the County to maintain the current level of services, not grow them. The ill-advised tax cuts that the state legislature is arguing for will only compound the cuts to state shared revenue.

When Mike Letcher met with the bond rating agencies in San Francisco last quarter, one of them downgraded Tucson and the other 2 put us on a negative watch, with the caveat that if anything more impacted our revenues, we would be downgraded. The same will happen to the County. Once a municipality gets into a downward spiral like that, it will take years to reverse. The people who work the numbers in the municipal bond rating agencies are not fools and they are also under greatly increased scrutiny because of the failures of the rating agencies with regards to sub-prime debt. Letcher has to meet with the rating agencies again before the election and he will not be able to dance around the impact that this unfunded mandate will have on the City's budget going forward. Have you factored into your equations the increased borrowing costs to both the City and the County for an extended period of time given the unintended consequences of a lowered debt rating for both the City and County of your unfunded mandate?

In your forwarded e-mail, you include several points: "3.) He believes that at least $40 million of the capital costs that the City has added will be "stripped out" due to the fact that those #'s relate to "current unmet needs which are not related to Prop 200." Don't you think that if the City already has needs that are not being met related to Public Safety, they will have to be met using the same revenues that you will be diverting to Prop 200 expenses. Chief Villasenor currently cannot fill posts that go empty due to lack of funds.

I have spent the last 15 years of my non-day job time dedicated to economic development, including retention, expansion, creation and strategic recruitment. We do not have a balanced economy. For years, Tucson 's economy has been based upon selling cars and houses to the next person to move here. I can tell you that the old economy of Tucson is gone and it is not coming back. We have not educated the workforce for the 21st century marketplace that will make up the new economy. And that is the criteria, an available educated workforce, that drives companies' expansion, retention and relocation plans. Talk to Lee Smith at TREO about the primary concerns of companies looking to relocate here. Crime is nowhere near the top of the list. Education and workforce are. Talk to Robert Shelton about the 3 terrific young professors he is losing to California, because they have school age children and they don't want to put them into our schools. They are taking jobs at equal or lesser schools than the U of A in order to have access to a quality education for their children. Talk to the scientist who selected BIO5 over Tufts University about the remarks made to her when she told them of her decision. They told her she was being an irresponsible parent by choosing the U of A, because she has elementary school age children. Look around the country at states that currently have a population that we expect to have in 2025 and see what kinds and quantity of higher education options they have. It will take us billions of dollars of infrastructure development to reach the level we will need to educate our own population. We will have to grow our own, because we can't recruit from the outside because of our dismal education system. We have some shining examples here of education in Basis and San Miguel and the Vail School District, but it is not nearly enough. Talk to Daisy Jenkins at Raytheon about her problems in recruiting high wage job seekers to Tucson. This is the only Raytheon facility in the country that didn't meet it's hiring goals in 2008. What does that tell you about the quality of our workforce?

We are probably the only, if not one of the very few, states in the country that does not have a state workforce development program. We used to have one that was the model for the country. It is supposed to be funded with businesses' SUTA taxes, but the legislature has swept those funds to balance the budget and yet the Arizona Chamber still argues to cut $350 million plus in taxes. When Joe Snell was in Denver, he did not have to provide incentives to companies looking to relocate there, because they had the number 1 or number 2 most educated workforce in the country. With 10% of the population of the City of Tucson and 29% of Pima County having college degrees, it is no wonder that we currently have 2200 unfilled jobs at our 180 largest private sector employers due to a lack of a qualified workforce. Your focus on crime is very much misguided given the real causes of our inability to recruit talent to Tucson.

I would be more than happy to sit down and discuss this issue with you. But I have to forewarn you that your arguments have not caused me to reconsider my position. They have in fact alarmed me greatly about the future of our City and County.

Sincerely,
Francie Merryman

PS. Hopefully I have recorded accurately all of the information I accumulated for this.