Cash Transfers and Hurricane Relief

rose_city_underwaterIn response to the extraordinary needs of their city after Hurricane Harvey, Houston philanthropists John and Laura Arnold first gave $5 million to the “Greater Houston Community Foundation’s Hurricane Harvey Relief Fund,” aka the “Mayor’s Fund.”

Following that gift, however, the couple made a second $5 million gift to an atypical organization named GiveDirectly one that had neither previously operated in the United States, nor had worked on natural disasters.

Through their philanthropy, the Arnolds are posing an important question – what’s the best way to deliver resources to a hard-hit community after a natural disaster like Hurricane Harvey? We won’t necessarily all agree, nor is there just “one way,” but it’s an important question to keep asking.

Before Harvey, GiveDirectly had only worked in East Africa. Their mission is to give money, unconditionally, to the most poverty-stricken people in the world. They don’t do “development work” the regular way by building clean-water wells, or houses, or hospitals, or give goats or chickens or food or clothing or solar-powered generators. They do “unconditional cash transfers” (UCT), and they trust the recipients know best how to use it to alleviate their own poverty.

GiveDirectly’s operation in Texas following Harvey is a test of whether that theory of “unconditional cash only, not stuff” could apply to disaster-relief in the United States.

As John Arnold explained to me, he and his wife’s thought process for supporting GiveDirectly was as follows:

First, the private sector can do a great job with the logistics of delivering needed goods and services to Texans, even in the face of catastrophic flooding, as occurred following Harvey. He marveled at watching ten fully-stocked Wal-Mart tractor trailers arriving early after the rains, ready to supply Houstonians.

give_directlySecond, the missing piece for many people hurt by the storm is simply: money. Wal-Mart, Arnold reasoned, will figure out how to provide the right stuff, as long as people have money in their hands to pay for that stuff.

Third, the best relief is probably a group that can just deliver money into the hands of people who need it.

“Everybody’s highest priority is different,”

Arnold told me.

“Some people’s car was damaged and they can’t get to work. Others had their work interrupted and they just need temporarily help to cover next month’s rent.”

So the Arnolds chose GiveDirectly for their $5 million.

Funded by the Arnolds and other donors, GiveDirectly set up a plan to deliver pre-loaded Visa debit-cards with a $1,500 value to impacted households in Texas. In Rose City, a badly-flooded town next to Beaumont that I wrote about last week, GiveDirectly arrived in October to deliver $1,500 to each one of the estimated 210 households, without conditions.

Rose City Mayor Bonnie Stephenson confirmed working with GiveDirectly to reach substantially all households in her town, holding town meetings and community gatherings to help get the word out. GiveDirectly reports successfully distributing 180 cards to the intended 210 households, according Catherine Diao, Communcations Lead for the organization.. In a few households, says Diao, they simply could not locate eligible recipients despite multiple efforts to do so.

Laura & John Arnold

GiveDirectly next expanded its giving to the Lakewood area of Northeast Houston. As of now they have handed out and estimated total of 1,200 pre-loaded cards of $1,500 each, with the intention of distributing up to 3,000 total.

Their methods are still evolving. In Rose City, the cards were meant to be “universal,” meaning that everyone with a household address in town qualified for the funds. In the Northeast section of Houston, GiveDirectly is attempting to target the $1,500 pre-paid Visa cards to only those who have demonstrated property losses.

As John Arnold explained, a classic problem of relief is to design a system that is restrictive enough to prevent fraud, but not overly restrictive that it prevents delivery of resources. It’s safe to say no system is perfect.

The normal model of disaster relief is that a combination of the federal government (primarily FEMA), big organizations like the Red Cross, and state and local officials coordinate major resources, while more locally-focused groups fill in the gaps with stuff at hand, like food, water and blankets.

Problems plague each of these responses, of course. One recurring problem with the smaller “stuff at hand” solution is that the stuff may not reflect what people actually need most, at any given time. The appeal of UCT is that recipients decide exactly what they need, not donors.

At the larger scale, FEMA and Red Cross have far more capacity than local groups to deliver resources. But one recurring complaint about the bigger organizations is whether the big infrastructure and big dollars are efficiently spent. In addition, qualifying for substantial FEMA grants, or even $400 Red Cross payments, involves engaging with a bureaucracy that may seem confusing or overly strict, a bundle of “red tape,” to use a word I heard repeatedly from folks in Rose City, including Mayor Stephenson. GiveDirectly’s attempt with UCT is to make delivery simple.

GiveDirectly, by their own estimation, regards their efforts in Texas as exploratory, but in line with their dual purpose of giving relief and pushing for more efficiency among relief organizations.

As President and co-founder of GiveDirectly Michael Faye wrote me,

“Recipients prefer cash and are frustrated with the opacity and efficiency of the traditional options, and want a direct giving alternative. With donors wanting it, and recipients preferring it, why shouldn’t it exist? At worst, it’ll help people rebuild their lives, and at best, it will force a conversation and potentially shift the [philanthropic] sector.”

John Arnold also explicitly called out the dual purpose of his gifts. First, there’s the charitable reason, which he defined as just providing help to people in Texas who need it the most. Second, there’s the philanthropic reason, which he defines as attempting to be thoughtful about solving problems at their root causes. The combination of charity and philanthropy, I gathered from our conversation, is why GiveDirectly appealed to him and his wife.


See related posts:

The Populist Approach to Hurricane Relief

The Red Cross and Other Disasters

GiveDirectly and Unconditional Cash Transfers

Universal Basic Income – A Radical Right Wing Idea?


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Need Transparency Taken To Eleven

In my last post I mentioned the terrible scores Houston and San Antonio governments received for transparency in their economic development programs, according to a report by Good Jobs First.

One reason the stakes for transparency are high is because the amounts of subsidy are so big. How big? Well, we’ll soon find out. In 2017, for the first time, cities and counties nationwide will have to disclose how much in total subsidies they provide to private businesses, due to a new accounting standard known as GASB 77.

A study by the New York Times in 2012 found that governments in Texas provided the most economic subsidies to private business of any state in the nation, at $19.1 billion.

Texas Monthly writer Erica Grieder makes the point in her book Big, Hot, Cheap and Right: What America Can Learn From the Strange Genius of Texas, that “free-market capitalism” in Texas has, ironically, long relied on strong government intervention and subsidies for private business.

But with that high subsidy comes – I would argue – a heightened duty to keep the public informed of programs and results.

The current way of reporting on economic development subsidies, officials in each of the City of Houston, City of San Antonio, and Bexar County all told me, is that, once a year, the economic development department sends a spreadsheet over to someone at the newspaper, either the Houston Chronicle or San Antonio Express News. Beyond that once-a-year data dump, either an enterprising citizen or more likely a bored reporter on a fishing expedition working on deadline would need to submit a specific request to the economic development department of the city or county.

Since the information is deemed public, this request presumably would be fulfilled with little muss or fuss. All of the officials with whom I spoke reiterated that no formal “Freedom of Information Act” request (a “FOIA” for the cool kids) needs to be filed.

But you can probably see why, although that constitutes a minimum standard of public disclosure, it falls far short of what we should reasonably expect in 2017. What if the reporter or editor at the respective paper had a full plate of stories that week and didn’t really want to make use of the information? What if – as is likely every year – no particular economic development deal jumped out as worthy of newspaper coverage? What if – as shocking as this will sound to all of you reader-types – a citizen doesn’t actually read the newspaper? How would they learn about this? For each of these reasons and more, an annual newspaper data dump isn’t the right level of transparency at this point in time.

good_jobs_firstAll of the economic development officials I spoke with agreed with me in theory on this point, but obviously it will take some effort and resources in their respective departments to improve the situation.

And we can agree that improving searchable websites for ease of transparency can be difficult. Bexar County’s Executive Director of Economic Development David Marquez pointed out to me that certain (not to be named) newspaper websites can be notoriously un-searchable. That’s a fair point, my man. A fair point.

Anyway, I hope they will all take a look at Austin’s searchable database, to see what good disclosure and transparency looks like.

Beyond the amount of money involved, why else do we need a high degree of transparency with respect to economic development deals? Just this. There is nothing quite like conferring a public good – a generous tax break – to a private company that gets my spider sense tingling about potential conflicts of interest. You don’t have to be paranoid or a cynic like me (although I invite you to be) to believe that a natural symbiosis exists between public officials who need money and have the ability to award valuable subsidies and private enterprises who would happily return the favor.

going_to_elevenWe – not just writers, but also citizens – should be able bring up an online database showing, just to pick an example, political campaign contributions, and compare that database to public subsidies of private companies. Are there any connections? Does a company that contributes to a campaign show up as a beneficiary of public subsidy? That’s the very definition of conflict of interest, and we need the tools to prevent that. If there are any dots to connect, everyone should have the power and ability to connect them, from the comfort of their own laptop. If there are no dots to connect, then we all sleep better at night.

This is in no way a Republican or Democratic Party issue. But if you want to see it that way, just consider the importance of making sure officials from that other party (the one you most distrust) can’t get away with it. We need you on that wall, people, guarding against that other party’s nefarious conflicts of interest!

I believe the right volume of transparency for economic development tax breaks for private companies is a “SHOUT IT FROM THE ROOFTOPS, CONSTANTLY” level of transparency. On a scale of one to ten, I want transparency that goes to eleven. Because you see, it’s that one bit louder, isn’t it?

The next best thing to a transparency volume turned up to eleven is an online searchable database. Properly understood, that’s strongly in the interest of public officials and private corporate recipients as well. They also want and deserve the legitimacy that goes with transparent economic development plans, free from charges of influence peddling or conflicts of interest.
Please see related posts:

A version of this post ran in the San Antonio Express News and Houston Chronicle.

Need for Transparency in Economic Development Part 1

Economic Development Subsidies: Turtles All The Way Down

Book Review: Big Hot Cheap and Right, by Erica Greider

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School Finance FrightMare in Houston

choice_between_two_evilsVoters living within the Houston ISD catchment area on November 8th face a “Scylla and Charybdis” vote – and it’s not Clinton vs. Trump – but rather equally terrible public school funding choices.

What’s happening in Houston gives Texans everywhere an insight into a complex problem with no easy solutions, as Glen Read the general manager of budgeting and financial planning for HISD explained to me in a conversation recently.

A “yes” vote on the ballot question in Houston will authorize “the board of trustees of Houston Independent School District to purchase attendance credits from the state with local tax revenues,” which means sending an estimated $162 million from the state’s largest school district to a state education fund, known as the Foundation School Program (FSP). It also means future payments from HISD in increasing amounts in future years, as Houston’s property values increase.

A “no” vote – barring legislative intervention this Spring – triggers something that has never yet happened in Texas, which is to separate commercial properties from HISD’s tax rolls and assign them to other school districts. Like I said, neither of these choices feels good.

houston_isdIt’s also an opportunity – albeit a painful one – for Texans to learn more about a financing system which the Texas Supreme court in their May 2016 ruling named “Daedelean,” “Byzantine,” “Augean,” and an “ossified regime ill-suited for 21st Century Texas,” while simultaneously declining to over-rule previous legislative decisions.

These upcoming payments from HISD have been mislabeled “Robin Hood” and “recapture.” But “Robin Hood” is a terrible nickname for this upcoming process, for two reasons, having to do with the definition of “wealthy” and for the specific meaning of “recapture.”

First, labeling HISD a “wealthy” district is odd. The “wealthy” designation that triggers HISD’s payment comes from a math formula – specifically the ratio of total real estate property values to student population, with a few adjustments to the population number for attendance rates plus specific student designations. The “wealthy” label does not take into sufficient account a measure that seems more important to me, like the fact that 76 percent of HISD kids are designated “economically disadvantaged.” Robin Hood – the mythical man in tights – did not after all make a habit of stealing from the poor.


Second, also unlike our mythical Robin Hood that “recaptured” money does not necessarily get redistributed to poorer school districts. Now, this is the point where Texans everywhere should sit up and pay special attention. Right here. Ready?

HISD’s “recaptured” money goes into the state’s primary education fund – the FSP – but that money is not doled out subsequently to poorer districts. This is the key point. The math ratio of property value to student population determines which districts pay money in to the FSP and which districts take money out of FSP, but none of that determines whether the state, as a whole, allocates sufficient money to the FSP. In fact, as property values rise locally – and you, the taxpayer, pay more – you’re not really funding your local district, or even the poorer districts. You are relieving the state of the obligation to pay more for education. More money into the FSP from higher property values means less the state has to pay. That’s the finance trick you need to know.

And that’s really nice if you’re trying to save money at the state level, but not exactly Robin Hood-style redistribution, nor a great plan for funding great public education.

For these reasons, The Houston Chronicle editorial page has twice urged a “No” vote, and which would trigger either the never-before-enacted property-tax-separation method or daring the state legislature to try something different before July 2017 – when property rolls would shifted. To be clear, a “No” vote is a sort of game of financial chicken between the voters of Houston and the state, with unknown consequences.

We can do what we usually do about this type of thing, which is to shut off our brains in order to take comfortable refuge behind pre-existing ideological prejudices, and take potshots at the other side’s idiocy. But if you are under the impression that you could start a conversation about school finance with “All we need to do is…” then you are mistaken. This subject does not admit of easy solutions.


Hacking our way intelligently through the overgrown jungle of public school finance, we have to hold a number of contradictory thoughts in our head simultaneously. For what its worth, my process goes like this:

  1. The socioeconomic background of an individual student appears to affect student outcomes far more than funding-levels-per-student at a school or district. As a result, poor performance at poor schools and higher performance at wealthier schools can persist indefinitely, despite roughly equal funding-levels per student. “Social reproduction” – or a society with little economic mobility – can’t be undone easily by throwing more money at the problem.
  2. And yet, just giving up on the idea of economic mobility – our hope that poorer kids have a chance to get ahead in life through a combination of hard work and a good education seems – I don’t know, what’s the word? Maybe: Un-American?
  3. When we talk about public school finance in Texas, really what we’re talking about is educating poorer kids: 59 percent of kids in Texas public schools overall are classified “economically disadvantaged.” The school districts subject to ballot questions that I’m writing about this week and next week, in the Houston and San Antonio ISDs, educate 76 and 92 percent economically disadvantaged kids, respectively.
  4. To which I conclude that we can’t fix this quickly with more money, or by simply equalizing scarce resources, but at the same time, to not try to improve it some how, some way, some day is to resign ourselves to a bleak future of haves and have-nots with no end in sight.

I have no sodaedalean_mazelutions. I’m just trying to educate myself on one of the most complex finance problems out there.

I can see that the HISD ballot question is a terrible choice to make.


A version of this ran in the San Antonio Express-News and Houston Chronicle


Please see related post

The San Antonio ISD ballot question (upcoming)


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Hello Houston

The Houston Chronicle recently started running my stuff, and I’m excited.

In honor of my introduction to Houston, I’d like to offer a personal story about my very first trip to Houston. Best of all, this anecdote has a pithy financial moral at the end.

In Spring 2001 I lived in New York City and sold emerging market bonds for Goldman Sachs. “Emerging markets” means Latin American, Asian, Eastern European, Middle Eastern and African bonds – all very volatile products. It was a super-fun job. I had recently picked up a new client – a couple of clever guys who operated a hedge fund within a successful pipeline company in Houston.

houston_chronicleI set up a visit to Houston because, of course, I already knew this company’s reputation. They dominated not only their pipeline business but had financially engineering their way into oil and gas trading, water-rights and paper-trading, and now a sophisticated, relative-value, emerging market bond hedge fund. (If the words “relative-value emerging market bond hedge fund” make perfect sense for you, then congratulations. If they don’t, then this column is for you.) Anyway, Fortune Magazine named them “America’s Most Innovative Company” for six years in a row. These guys were my kind of client.

First trip to Houston

We drank cocktails together in a fancy Houston bar while I listened to my clients describe the keys to their success.

“We just have the smartest guys in every business we tackle, and we know how to go after a business and make money off it.”

I was so convinced. I’m not kidding.

The smartest guys, with the best ideas, and all this awesome financial engineering? What could possibly go wrong? Personally, I planned to invest in the stock of that pipeline company as soon as I got my next bonus. Which, fortunately for me, was many months away.

For the next few months I spent a fair amount of my free time researching the company on my Bloomberg terminal. The amazing thing about Bloomberg terminals – for those of you who haven’t worked on Wall Street – is that I could find anything and everything about the company I could ever want or need. Historical earnings data and future projections. Analyst reports. News stories. Key executive bios. Charts and graphs and comparisons. I even personally knew key executives there! I loved my clients, and I loved this stock. And I couldn’t wait to get paid, so I could start investing in all those smart guys with all their innovative financial techniques.

enronBetter lucky than good

One of the most important lessons I learned in my Wall Street years is that it’s far better to be lucky than good. (That’s not the previously-promised pithy moral lesson, but it is true.)

Enron collapsed in the Fall of 2001 – before I got paid my bonus – so I never poured my own money down that rat hole. But boy was I eager to do it – only weeks before they collapsed.

Ever since then, whenever I hear people tell me about an individual stock they have bought, or plan to buy, and their reasons for doing so, I think of my clients at Enron.

What I learned from this Enron experience is that – not unlike Lord Commander Jon Snow – I know NOTHING when it comes to picking a good stock to buy. I thought I had access to EVERYTHING. And yet, I was completely wrong.

What I’d like you to know also – that promised pithy financial moral is right here – is that when it comes to picking individual stocks, you also know nothing.

My “I believe” speech, Bull Durham-style

annie_savoySo, I don’t believe in individual stock-picking when it comes to money matters and being smart.

“Well now,” you, as Susan Sarandon’s character Annie Savory in Bull Durham, might ask, “what do you believe in then?”

“I believe in getting wealthy,

Markets, cost discipline, the power of compounding,

Aggressive allocations, never selling, and neighborhood poker (if you like to gamble),

That Jim Cramer’s finance shows are self-indulgent, dangerous, garbage fires.

I believe Lee Harvey Oswald could not have acted alone.

bull_durhamI believe there ought to be a constitutional amendment outlawing variable annuities and the carried interest loophole.

I believe in index funds, entrepreneurship, selling investments only when you have to have the money and never for ‘timing” or ‘tax’ reasons, and long, slow, deep, soft automatic retirement-account dollar-cost averaging that lasts five decades.”

“Good night,” I whisper, as I turn and walk out the door, Crash Davis cool.

Leaving you/Annie/Susan Sarandon character breathless to say anything but:

“Oh my.”


A version of this ran in the Houston Chronicle and the San Antonio Express News.



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Houston We’ve Got a (Pensions) Problem

danger_will_robinsonHouston’s three public pensions may not be in total distress today, but some of the instrument panels are beginning to flash orange.

One of the warning signs is the hit to the city’s credit-ratings earlier this year, as

Moody’s Investors Service downgraded the City of Houston’s debt on March 16 2016.

You might guess that the main problem with the City of Houston’s credit rating is the slowdown in the oil services business, and that’s certainly a short-term issue.

But Moody’s specifically cited large unfunded pension liabilities as one of the four main reasons to downgrade city debt to Aa3 and keep it on “negative outlook,” calling the liabilities “among the highest in the nation.” Lacking a plan to address the pensions, Moodys wrote in March, could lead to a further downgrade in the city’s bond rating.

moodys_houstonLet’s review some statistics on the pensions for firefighters (acronym: HFRRF), police officers (acronym: HPOPS), and municipal employees (acronym: HMEPS).

Things to monitor

Remember, the first two things to monitor, with respect to the health of a pension plan, are the funded ratio – roughly how much of future payments are already covered by investments – and years to amortization, otherwise known as the time needed to pay down debts. I’ve previously said that an 80 percent funded ratio is considered ok, although closer to 100 percent would be preferred. For years to amortization, a 15 to 20 year time frame seems manageable, while 40 years to infinity invites state monitoring and restrictions.

So what do we worry about the Houston plans in particular when we see the funded ratio and the years to amortization?

Here are the two measurables on the three Houston pension plans:

HFRRF – 86.6 percent funded ratio, 30 years amortization

HMEPS – 54 percent funded ratio, 32 years amortization

HPOPS – 79.8 percent funded ratio, 23 years amortization

Honestly, using just those measurements, only the HMEPS funded ratio makes me worried. If you’re not frightened by the first two measurements of funded ratio and amortization – and when I look at them I don’t personally get panicked – the next thing to monitor gets trickier.

You see, the firefighters’ and municipal workers’ plans assume an 8.5% annual return on investments, while the police plan assumes an 8% return. Not only do all three assumptions seem too high, but the first two plans are complete outliers. In a survey done by the National Association of State Retirement Administrators in early 2016, only 1 out of 127 plans assumed an 8.5% return. So, Houston firefighters and muni workers have an aggressive – actually my preferred word would be unrealistic – set of assumptions.

Last Fall, the Chairman of the HFRRF Todd Clark defended their outlier return assumptions in the Wall Street Journal, saying “We strongly believe, and past history shows, we can continue to achieve the 8.5% long term.” Clark resigned in July. HFRRF Executive Director Ralph Marsh declined to comment on my questions about the assumed return, or others posed about their pension fund.

houston_we_have_a_problemThe last 20 years’ average pension returns were 7.47 percent, according to the Wall Street Journal.

As a finance guy, I wish I could intuitively explain to the non-finance reader the uncomfortable tingly feeling in my toes that I get about that math. The effects of being wrong by just 1 percent, compounded over decades in a pension plan, are huge. We can see some of the scary implications from a presentation done by the Houston plans for the Texas legislature in June.

In that presentation, they showed that if you shift the return assumptions on Houston’s police and municipal employees down by 1 percent, suddenly the police pension plan only has a 54.6 percent funded ratio, while the municipal employees plan goes to a 49 percent funded ratio. So, like, only half the money needed to pay out retirees is currently available in the plans. Ugh. The instrument control panel not only shows blinking green lights turning into red lights, but sparks are starting to shoot out of the dials. Danger Will Robinson!

Now you start to get a sense for why Moodys downgraded the City of Houston in March, and why the Chairman of the Pension Review Board is trying to sound the alarm on Houston pensions.

City Budget Constraints

You see, the next big problem is that fixing pension shortfalls begin to eat into city budgets, a process already underway in Houston.

Josh McGee, who serves as both the Vice President of the Laura and John Arnold Foundation – a Houston think-tank focused on public finance, as well as the Chairman of the Texas Pension Review Board – points to a worrisome trend for Houston’s city budget.

houston_pensionIn 2001, required pension contributions made up just 6.7 percent of general fund revenue, or the amount of money in the city budget not otherwise allocated to specific purposes. By 2015, the required pension contributions have climbed to 19.2 percent of the general fund.  The trend here, tracked by McGee, has been steadily upward.

McGee compares Houston’s situation today with Chicago’s situation a decade ago. In Chicago, the comparable pension payment to the general fund rose from 19 percent to a stunning, and devastating, 54 percent today.

That means city leaders can’t decide to pay for stuff in a city without dedicating half their discretionary budget to fill in holes in pension plans – money already owed to workers, for work already performed. You have to rob Peter to pay Paul. Chicago is in a terrible bind today, and McGee openly worries Houston will follow down that path without a course correction.

So what happens if these plans stay in trouble? Realistically, political leaders don’t just say “Whoops” and send a shrugging emoji to pensioners. They especially don’t do this with politically sensitive pensioners like police, fire and city employees.

No. Instead, they fund the plan, and then taxes go up. Or they fund the plan, and other discretionary city services go way down.

The only other fix is to significantly reduce benefits for future employees.

Either way, residents previously blissfully unaware of such boring actuarial minutia as funded ratios, amortization schedules and actuarial unfunded liabilities unhappily begin to care, deeply and late, about such problems.


A version of this post ran in the San Antonio Express-News and the Houston Chronicle.


Please see related posts

The Dallas Police and Fire Pension Mess

Pension Plan Heuristics

The Big Four Texas Pensions



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