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Balance Capital Advisors Jan 2011

Balance Capital Advisors Jan 2011

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Published by Ron Tadross
I update you on my experience in my own village of Garden City, NY. This has become a form of primary research that has given me an unexpected degree of conviction in my investment views. I am sure similar things are going on in your town or village. The bottom line is that I expect the stock, bond, and commodities markets to continue to discount U.S. government debt repayment problems over the next few years. This could have profound effects on our lives, and I offer suggestions on how to hedge for it. As always, if you need help with your investments then please contact me.
I update you on my experience in my own village of Garden City, NY. This has become a form of primary research that has given me an unexpected degree of conviction in my investment views. I am sure similar things are going on in your town or village. The bottom line is that I expect the stock, bond, and commodities markets to continue to discount U.S. government debt repayment problems over the next few years. This could have profound effects on our lives, and I offer suggestions on how to hedge for it. As always, if you need help with your investments then please contact me.

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Categories:Business/Law, Finance
Published by: Ron Tadross on Jan 03, 2011
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01/05/2011

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If This U.S. Village Cant Fix It, No One WillJanuary 2011
“It’s such a fine line between clever and stupid”
Spinal TapIt’s been a while since I updated you on my efforts to try to raise awareness regarding thebad financial trends in my own town, Garden City, NY. Despite the fact that GardenCity, NY is a relatively affluent community, the government shenanigans and financialtrends are almost a perfect microcosm of what is going on in America. Sadly, the GardenCity government increasingly passes the buck, tries to discount “critics” like me, andkeeps taking on debt (Figure 1) to hide the truth from the people. This and the apathyamongst most residents (latest voter turnout was below 10%) give me conviction torecommend that investors continue to reduce their bond weighting. I will explain.
 During the approximately two years that Mr. Tadross and Mr. Rudolph haveoffered their opinions on village and school issues, not once has there been even ascintilla of positive advice. They have criticized every facet of village life. Last  year they predicted a 10 percent increase in village taxes when in reality it was2.2 percent. They constantly harp on pension and health care costs which are not controlled by the village.New York State comptroller, Thomas DiNapoli,administers the N.Y.S. pension system. The health care system is the "EmpirePlan," which government employees are entitled to join.
-Dennis Donnelly currently serves as a village trustee, representing the easternsection of Garden City.
Figure 1. Garden City Village Property Taxes Have Been Up 10-15%Per Annum, When Including Borrowing
($8)($6)($4)($2)$0$2$4$6$8$10
1996199719981999200020012002200320042005200620072008200920102011B
   Y  r .   /   Y  r .   C   h  a  n  g  e   B  o  n   d  s   &   T  a  x  e  s   (   $  m   i   l .   )
-10%-5%0%5%10%15%20%
 e a /   e a %  C  an g ei  n u e ax e s
Yr./Yr. Bonded Debt (Reduction)/IncreaseYr./Yr. Property Tax Increase/(Decrease)True Tax Increase (Yr./Yr % Change)
Sources: Garden City financial filings, www.gardencityresidents.org calculations.
Mayor RothschildMayor BeeMayor LundquistMayor Miller Mayor LewisMayor Hecken
 
In addition to taking on debt to mask tax increases (Figure 1), the Garden City, NYVillage Board has cut infrastructure maintenance to the bone (Figure 2). If this doesn’tsmell of typical government enough, the village appeased residents three years ago bysetting up a Citizen’s Budget Review Committee (CBRC) that it regularly ignores. TheCBRC has actually had very good suggestions, which I support. I have been asked to join the CBRC, but refuse to be put in a cage and instead have been accused of fightingthe system. It’s a no win situation, so far, and maybe apathy is the correct response.While sympathetic to the box Garden City is in, largely because it is almost the same asthat of GM’s years ago, a small but growing group of residents keep me energized to helptry to effect change. A least one like-minded individual and I will likely run for GardenCity Village Board this year, as we did last year. Still, my biggest concern is that theoutlook for the U.S. dollar is as relevant to Garden City as is our own efforts. I willexplain.
Figure 2. Instead Of Cutting Labor Costs, Garden City Village RoadMaintainance Has Been Cut by 65%
0%1%2%3%4%5%6%7%19981999200020012002200320042005200620072008200920102011B
   S   t  r  e  e   t   M   i   l  e  s   R  e  s  u  r   f  a  c  e   d  a  s   %    T  o   t  a   l
45%50%55%60%65%70%
 a b  o C  o s t   a s % R ev en u e s
Street Miles Resurfaced as % Total Street MilesLabor Cost as % Revenues
Sources: Garden City financial filings, www.gardencityresidents.org calculations.Note: labor costs include wages, benefits, and workers comp.
Figure 2 above shows that Garden City, NY labor costs have increased to 65% of ourspending from 55% roughly 10 years ago. Figure 3 (below) illustrates the pension andhealthcare component of our village’s labor costs has more than doubled over the last tenyears and the rate of increase is accelerating. These costs are the primary reason for thehigher overall labor costs. Put another way, Garden City’s total labor costs haveincreased 91% over the last 15 years compared to a 43% increase in the U.S. ConsumerPrice Index. Higher tax rates, service/infrastructure maintenance reductions, andborrowing have been tolerable for residents up until now.
 
Figure 3. Nearly $0.20 of Each GC Village Tax Dollar Goes to EmployeePension and Healthcare Costs, and This Cost is Skyrocketing
$0.00$0.01$0.02$0.03$0.04$0.05$0.06$0.07$0.08$0.09$0.10$0.11$0.12$0.13$0.14$0.15$0.16$0.17$0.18$0.19$0.20$0.21$0.22$0.23$0.24$0.251996199719981999200020012002200320042005200620072008200920102011B2012E2013E
   P  o  r   t   i  o  n  o   f   E  a  c   h   $   1   i  n   V   i   l   l  a  g  e   T  a  x  e  s   t   h  a   t  g  o  e  s   t  o   P  e  n  s   i  o  n   &   H  e  a   l   t   h  c  a  r  e
Sources: Garden City financial filings, NY State forecast, www.gardencityresidents.org calculations and estimates.
Garden City Village employees havebeen constant at approximately 300,but the portion of resident's taxdollars going to employee pension andhealthcare costs has nearly tripled.
As said above, the Garden City pension plan is administered by NY State and GardenCity’s only way to deal with this is to reduce headcount. This has not been done at all,and NY State has told us our pension costs will be up 40% in each of the next two years.The village’s own CBRC suggested that the village increase employee healthcare costsharing to the 30% range (American private sector average) from currently 5%. ThisCBRC idea has been ignored. Maybe this is because our labor negotiators are our long-time village administrator, whose pay and benefits are more generous than that of theunion, and a general practice lawyer that is just trying to keep his retainer agreement. Asa result, it is increasingly looking like our village will need to massively cut back onservices at some point in the not too distant future. I am growing to believe that we willnot get this chance, and instead the currency market will call general U.S. governmentbankruptcy sooner by pushing the dollar’s value down precipitously. This is my latestthinking and I will explain further. Needless to say, cash could be trash.Instead of supporting a NY property tax cap (a NY Governor Cuomo platform) to sendthe message to the unions that we cannot pay anymore taxes, our village board recentlyadopted a resolution stating that it wants to see state mandate reform (i.e. changes tounion rules especially) before a property tax cap. Our mayor tagged on that we may notget mandate reform in our lifetime, but was still against the property tax cap first(unbelievable). Maintaining the social order by keeping services seems as important inGarden City as it does in our state or federal government.Even Garden City’s government officials are likely representative of what is going on inAmerica. Garden City’s government has been infiltrated with local lawyers and bankerstrying to further their career and union members trying to protect their turf. As a result,

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