Financial Literacy For All

Would ENRON be an apt analogy? No, the NFL has not used mark to market accounting to distort profits, or has it? However, the bonds issued by municipalities, which are perhaps more in line with the 2007 mortgage backed securities collapse may be a better analogy.

A little history

Municipalities, since the 1950’s, have been issuing bonds and levying tourism taxes and property taxes to finance bonds which built stadiums, mass transit, and associated infrastructure for the professional sports industry in the united states. Prior to 1953 the sports industry provided its own financing, that all changed when the browns built their new stadium (http://money.cnn.com/2016/09/09/news/nfl-sports-stadiums-tax-breaks-taxpayers/index.html). As the tax subsidized income started flowing the industry inflated, sound like the housing market?

To date no one knows what the total municipal bond debt associated with professional sports venues may be. To be sure this is not an indictment of the NFL, all of the pro sports leagues suckle at the teat of the burdened tax payer, and their whorish federal cronies. However, due to the recent drop in ratings and the public outcry, investigation, and loss of govt revenue secondary to the “fake patriotism” investigation, it is my belief that the stadiums primarily used for the NFL and the associated debt obligations are bound to failure. This will start a landslide of collateral obligations, and may possibly bankrupt entire municipalities.

Between 2000 and 2016 the NFL had convinced municipalities to finance over $13 billion dollars in debt obligations to build stadiums and associated infrastructure for their franchises to use (http://www.foxbusiness.com/features/2017/09/28/nfl-spends-massive-amounts-taxpayer-cash-on-new-stadiums.html). It should be clear that the NFL and its franchise owners rarely, if ever, buy in to the stadiums they use. If this lack of confidence is not a red flag, I’m not sure what is. If a stadium is a “good deal” wouldn’t you want to buy it? Could I be wrong?

Well, according to city fillings Philadelphia still owes over $160k on veterans stadium, which was demolished over ten years ago. That is comparable to the “super dome” in Seattle, which the city finished paying off just 15 years ago long after its demolition date. The list of stadium debt obligations, which never seem to pay off the stadiums which don’t exist anymore, seems to go on forever (https://www.reuters.com/article/us-sports-nfl-stadiums-insight/with-nfl-rams-gone-st-louis-still-stuck-with-stadium-debt-idUSKCN0VC0EP). Of course the tax payers in the districts are still obligated, and will pay for the bonds.

Even more disturbing is that while the NFL continued to lose viewers, over 20%-24% in 2013-2015, the credit and bond obligations issued to the league continued to increase at an alarming rate (https://www.forbes.com/sites/briangoff/2017/10/23/nfl-losing-viewers-at-alarming-rate-but-faces-limits-on-its-response/#41ee79cf4212).

Just like anyone on the fringe of inevitable catastrophe the franchises took desperate measures, even though few if anyone seemed to notice. With a stated TV market value of over $18 billion dollars, similar to the mark to market accounting model Enron used, and a credit rating of A+ by FITCH, Wall Street bit down hard! The NFL hit Wall Street hard and right between the numbers so to speak, and the banks hit back with hundreds of millions of dollars of credit extended from JP Morgan chase and others (http://m.sportsbusinessdaily.com/Journal/Issues/2001/09/20010910/No-Topic-Name/NFL-Debt-A-Hit-With-Investors.aspx). 2001 was a great year for the NFL franchise owners and the credit flowed freely, and cheaply.

As the noose tightens:

As the salad years passed by, and the US military industrial complex needed good press, the NFL found another tax subsidized nipple on which to nurse. The military was all too happy to pay an undisclosed amount of discretionary money for “patriotic” events and displays during NFL games. The exact amount of funds disbursement will, most likely, never be known. However, data released by the senate armed services committee in 2015 after a discretionary audit showed that the US military had paid at least $6.8 million dollars to teams to spur patriotism the prior year

“For example, taxpayers paid $49,000 to the Milwaukee Brewers to allow the Wisconsin Army National Guard to sponsor the Sunday singing of "God Bless America." In another contract, the New York Jets were paid $20,000 to "recognize one to two New Jersey Army National Guard soldiers as hometown heroes." (https://www.npr.org/sections/thetwo-way/2015/11/05/454834662/pentagon-paid-sports-teams-millions-for-paid-patriotism-events).

Since 2015 this practice has ended, and tax payers have decided almost en mass that they can no longer afford to finance the Romanesque circus of the ultra-wealthy. The recent tax legislation reflects this trend. It would change the tax free income generated by bondholders who lend money to municipalities to fund stadiums from a $3.2 billion dollar per year loss, to a $3.7 billion dollar a year income for the IRS (http://money.cnn.com/2016/09/09/news/nfl-sports-stadiums-tax-breaks-taxpayers/index.html).

Landslides happen all at once:

It is worth noting that before the collapse of the housing market, Enron, and almost any other financial catastrophe in the last 200 years those captaining whatever titanic disaster that was happening always deny anything is wrong, right up until the ship sinks. My favorite was the “wizard of finance” Allan Greenspan saying to reporters that the mortgage backed securities industry was in absolutely no danger, just days before major banks almost went bankrupt due to insolvent housing bond portfolios.

The NFL will be no different. Accounting can be used in many ways, and it can be used to make a dead company look alive. Enron used mark to market, the housing market used collateralized debt obligations, and denied the bonds in their housing portfolios were worthless paper.

As viewership drops, and regardless of what people say it has, profits will plunge. Wall Street investment banks will realize that their investments are not safe, and they will require more interest for loans. And since credit is all that is keeping this dying industry alive that will be the nail in the coffin. Stadium debts will start to balloon as people realize the industry is insolvent.

All of the hotel taxes, rental car taxes, restaurant taxes, property taxes and instruments normally used to pay the bond debt for pro stadiums won’t be able to pay the principal of the stadium bond debts, and eventually the bonds issued by the municipalities will go in to default (https://www.usatoday.com/story/sports/2016/08/22/nfl-mlb-stadium-tax-hotel-tourists-fans/88489236/). The story is sad, as the cities and state districts dependent upon the revenue of professional sports decline the debt collapse will spread in to other non sport related bond portfolios.

The students of the Ohio school system suffered a loss of over $119 million so that the Bengals could maintain their stadium. The budget shortfall for the Ohio public schools was just the tip of the iceberg, and to prevent default the state also cut $26.3 million from public health funding to keep the stadium and bond debt solvent (https://www.theatlantic.com/magazine/archive/2013/10/how-the-nfl-fleeces-taxpayers/309448/). As the debt collapse spreads out, and municipalities become insolvent they will not be able to borrow and pay the interest on the debt for even the other services for which they have issued bond debt.

It would be overly speculative and simplistic to say that any city or state with bond debt that is related to the construction and maintenance of stadiums will default and fail to pay their other bond debt obligations. However, I would not be surprised to see this trend in the future.

Of course, it is entirely possible, and indeed probable, that govt will step in and prevent collapse. Again, as in the 2008 crisis, the tax payer will be put on the hook for the speculation of the ultra wealthy franchise owners. Just as they were for the auto industry executives, and the banking lenders……

I have not been able to find any finance blogs with anything about NFL bond debt defaults looming. If you have an opinion, with data to back it up, please send it my way.

Thanks,

Zach

From Flintstones to Jetsons: how labor pushes technologic innovation

Ask any employer, employees are expensive. Long gone are the days when a whip, and a few indentured servants, or slaves could be called upon to toil their lives away in inhumane conditions. Today’s laborers demand, through legislation, unionization, and social pressure safe and reasonable working conditions. Recently there has been a societal move resulting in an increase in minimum wage in many states, and a proposed federal minimum wage increase. That is what will be dissected within this work. A move to increase the minimum wage in the United states from $7.25 per hour to $15 per hour. This would amount to an increase of 100.68% in wage expense per hour in some states (www.dol.gov).

The history of minimum wage began in 1938 when the first federal minimum wage was established at $0.25 per hour. According to CNN money watch with adjustments to match inflationary CPI markers this would have been the modern equivalent of $4.19 per hour (money.cnn.com) follow the link in references for a delightful interactive graph! Before 1938 wages were decided between the employer and the employee.

Benefits:

Employees: An increase in wages nationwide would create an undeniable ripple effect. After all, one would be hard pressed to more than double their income and not notice a change in their financial situation. At $15,080 (7.25hr x 40 hrs. wk. x 52wks) a dual earning household would gross about $30,160 per year in the present system. When the new minimum wage is instituted the household income will rise dramatically. A single income earner will have a yearly income of roughly $31,200 ($15hr x 40hrwk x 52wks) per year. This will increase household income as well yielding $62,400 respectively. This data, though crude is commensurate to what most statisticians report (www.statisticbrain; gapminder.org ). For a great graph on income wealth disparity, see gapminder.com in the references section.

As the work environment becomes more mechanized technology will become more important in filling the role of unskilled labor. There will be many technical positions opening up to provide services to these machines. There will be growth in technically skilled maintenance positions.

Employers: Increased pay will allow employers to seek out highly talented and experienced individuals to fill positions, which they may have not considered to be worth their time before. It will also allow opening of more part time positions, thus reducing the benefits that usually accompany a standard full time position. Laborers will be more likely to take a part time position if they can earn double what they used to for doing the same work. This example is readily evident in Wall Mart, who after increasing wages, immediately reduced their full time work force to save on accompanying liabilities. Their potential labor force increased, even as hours available to each employee decreased.

Governments:

Revenues: Although each state is different, many states maintain a progressive tax on income. Though some have a regressive tax system, like sales tax, the most popular taxation methods are the progressive ones. Governments will reap a windfall of increased taxable income. Since each state government taxes differently it is easiest to address federal taxation, and for this discussion state tax revenues will be left out. The 2016 IRS tax guidelines would apply to the incomes discussed above and are as follows for those filing single:

Taxable Income	Tax Rate
$0—$9,275	10%
$9,276—$37,650	$927.50 plus 15% of the amount over $9,275
$37,651—$91,150	$5,183.75 plus 25% of the amount over $37,650
$91,151—$190,150	$18,558.75 plus 28% of the amount over $91,150
$190,151—$ 413,350	$46,278.75 plus 33% of the amount over $190,150
$413,351—$415,050	$119,934.75 plus 35% of the amount over $413,350
$415,051 or more	$120,529.75 plus 39.6% of the amount over $415,050

This results in an income tax deduction of $4,261.25 for most minimum wage earners, leaving them with a net income of $26,937.75 after federal taxes. This yields a $12,717.75 increase in net income.

The most likely bracket for those effected by a minimum wage increase are highlighted. For those filing jointly at $62,400, presuming they are both minimum wage earners the IRS table for 2016 is as follows for those who are Married Filing Jointly or Qualifying Widow(er):

Taxable Income	Tax Rate
$0—$18,550	10%
$18,551—$75,300	$1,855 plus 15% of the amount over $18,550
$75,301—$151,900	$10,367.50 plus 25% of the amount over $75,300
$151,901—$231,450	$29,517.50 plus 28% of the amount over $151,900
$231,451—$413,350	$51,791.50 plus 33% of the amount over $231,450
$413,351—$466,950	$111,818.50 plus 35% of the amount over $413,350
$466,951 or more	$130,578.50 plus 39.6% of the amount over $466,950

The most likely brackets for those filling jointly are highlighted above. The first bracket yields a net income of $53,976.50. This is a net increase of $27,413 in annual income. This is of course presuming both partners are earning minimum wage, or better. These tables and more are available at the IRS web site if you follow the clickable link in references (www.irs.com). It should be noted that rates and brackets are subject to change.

Liabilities: Many government agencies will benefit from reduced liabilities with an increase in wages. With wage increases many people will no longer qualify for government entitlements. Using the USDA FNS screening tool this author was informed that as a resident of Washington State and a parent of 3 children with an income of $15 per hour he would not qualify for any assistance from the Economic Services Administration. This includes subsidized housing, food assistance, or child care assistance (dshs.wa.gov; snap-step1.usda.gov). To calculate your own eligibility for these programs follow the SNAP link below and select your state in the top right menu bar. Reduction of entitlement payments will reduce state, and federal liabilities. Since entitlement estimates vary wildly, depending on the source used, we will not furnish an estimate in this article.

Foreign markets: The manufacturing industry in foreign markets will certainly reap a wind fall of low end manufacturing jobs as those that cannot be mechanized are moved abroad. It is unlikely that corporate entities will willingly absorb marginal losses from the increased cost of unskilled laborers. Most employers able to avoid a 100.68% increase in labor will do so.

Costs:

Workers: The reduction in entitlements will primarily effect those who, at the present time, rely on them. Most single people without children under the age of 24 do not qualify for SNAP benefits or any other type of gov’t assistance. Those whose household economy has come to depend on these benefits may face a sobering reality when the high cost of private healthcare, instead of the gov’t subsidized health care under which they are now covered, is brought to bear upon them. Certainly the insurers, who are not averse to profit taking, will use this as an opportunity to bolster their earnings. Of all of the first world economies, private insurance enjoys the highest revenues here in the United States (theincidentaleconomist.com).

Students: It should be noted that federally subsidized student loans and grants FASFA eligibility is heavily weighted on income. This article will not explore this aspect. The student loan industry, and the collegial education industry in general is both convoluted and rickety. With practices and laws changing regularly, it would be foolish to attempt a meaningful analysis. The Pell grant is designed for low income earning students. We were unable to find the exact income requirements for the grant which are listed on the federal web site as “variable by individual.” . The limited information available indicates that “In the 2009-2010 school year, for example, nearly 80 percent of those students who attended a community college with the help of a Pell Grant had a family income level of less than 150 percent of the federal poverty level, according to a report published by the American Association of Community Colleges. Similarly, of those students, 60.7 percent had family income levels that were $20,000 or less, which is below the poverty threshold for a family of four (simpletuition.com).” This would seem to indicate that students will be more likely to pay tuition and related expenses by using student loans, or cash as their income base increases. Cash of course would be the preferred method, presuming the cost of education remains constant and the student is employed. The continued, and socially accepted practice of retaining large amounts of student loan debt in in conjunction with grants and financial aid, could greatly benefit lending institutions since student loan debt is not escapable via bankruptcy and is often insured by the federal gov’t.

Small business: Although larger firms may be able to outsource some or all of their work, or survive on lobbied means of corporate welfare, like subsidies. Small businesses will have a precipitous decline in revenues, secondary to increased labor costs. For many of them this decrease could easily push them past their break even threshold. The most obvious industries effected will be those that employ the large amounts of unskilled and uneducated labor: food service, agriculture, forestry, and retail sales sectors. Mechanization will be essential for survival. Large chain restaurants like Wendy’s, which have the ability to raise capital to mechanize will lead the way in technological innovation as the work force is re shaped. Recently the Wendy’s CEO unveiled a plan to reduce overhead starting in its NYC stores by instituting self-service ordering kiosks, which will replace clerks in many of their locations (finance.yahoo.com). While not cost effective in years past, with an increase in its NYC market share of over $5 per hour (amounting to $10,400 per year per worker), Wendy’s has decided that the time to mechanize has arrived. Smaller restaurants will be unable to issue the multimillion dollar corporate bonds needed to raise investment capital for mechanization. Necessity being the mother of invention, technologic innovation and a reduction in unskilled labor will likely progress farther and faster as momentum for an increase in wages continues to grow nationwide, and as business struggles to maintain thin profit margins in a recovering market.

Seniors: Although the evaluation of the CPI (consumer price index) and an accompanying COLI (cost of living increase) may occur within two years of a minimum wage increase, it is likely that if hyperinflation (inflation over 100%, which in this case would be slightly less than the proposed increase) occurs cost of living increases may be delayed in order to maintain solvency of the SSI fund. This has historically been the case when past COLI have threatened the solvency of the SSI fund (www.ssa.gov). Though an increase in taxation of wages would eventually bolster the SSI fund, it is possible that the increase in cost of goods produced and sold would consume the surplus rapidly after an accompanying increase in COLI for SSI recipients. This would leave seniors in a precarious position. With a fixed income, and increasing prices, tough choices would have to be made *see my article about Puerto Rico*. This could be bad news for the retirement, and long term care sectors. Historically senior retirement homes have had reliable revenues, with guaranteed gov’t payment of benefits. However, with a decrease in buying power, this could make profit margins slim.

Stocks related to this article:

WEN: Wendy’s Inc.

Senior living:

HCP (NYSE: HCP); Ensign Group (NASDAQ: ENSG); Almost Family (NASDAQ: AFAM)

Manufacturing and mechanization:

(NASDAQ: WEN), that’s right! Wendy’s has its own tech lab to increase mechanization in the fast food biz!

Lending: Though I have total confidence in the market place, it is likely that the 1.3 trillion dollars of student loan debt will move further towards default in an economy where the student loan interest rates are greater than the rates of compensation received by most new college graduates. It would be irresponsible for this author to recommend purchasing these securities.

Disclosure: The writer has no competing interest in these companies, or their subsidiaries, and has no plan to purchase an interest in the near future, nor does the author recommend purchase of any security.

References:

https://www.dol.gov/general/topic/wages/minimumwage

http://money.cnn.com/interactive/economy/minimum-wage-since-1938/

http://www.gapminder.org/world/#$majorMode=chart$is;shi=t;ly=2003;lb=f;il=t;fs=11;al=30;stl=t;st=t;nsl=t;se=t$wst;tts=C$ts;sp=5.59290322580644;ti=2013$zpv;v=0$inc_x;mmid=XCOORDS;iid=phAwcNAVuyj1jiMAkmq1iMg;by=ind$inc_y;mmid=YCOORDS;iid=phAwcNAVuyj2tPLxKvvnNPA;by=ind$inc_s;uniValue=8.21;iid=phAwcNAVuyj0XOoBL_n5tAQ;by=ind$inc_c;uniValue=255;gid=CATID0;by=grp$map_x;scale=log;dataMin=194;dataMax=96846$map_y;scale=lin;dataMin=23;dataMax=86$map_s;sma=49;smi=2.65$cd;bd=0$inds=;modified=60

https://www.irs.com/articles/projected-us-tax-rates-2016

http://www.snap-step1.usda.gov/fns/

https://www.dshs.wa.gov/esa/benefit-eligibilities?sid=164968

http://www.simpletuition.com/pell-grant/income-limits/

http://theincidentaleconomist.com/wordpress/private-vs-public-health-care-cost-control-faq/

http://finance.yahoo.com/video/wendys-introduce-self-serve-kiosks-134210988.html;_ylt=A0SO8ySREjxX89MABYxXNyoA;_ylu=X3oDMTEyZTFpZ2pmBGNvbG8DZ3ExBHBvcwMyBHZ0aWQDQjE5MTBfMQRzZWMDc3I-

https://www.ssa.gov/policy/docs/ssb/v67n3/v67n3p73.html

http://www.fool.com/investing/general/2015/07/16/3-top-stocks-in-senior-living.aspx