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The rolling thunder of the housing, oil, dollar, credit and food crises is being heard in homes across the nation. Also included are the "homes" of our emergency equipment and the crews that staff them. Emergency services organizations (ESOs) are more sensitive to the crises than many want to contemplate, although a failure could be devastating to a community. If the economy worsens, some ESOs may find themselves in need of financial rescuing with nowhere to turn.
ESO financial stress has resulted from many factors, including insufficient insurance reimbursements, decreased public contributions and operational expense increases. Many ESOs continue operations by reducing spending, reducing savings or increasing revenue by way of non-core business activities such as carnivals. Some ESOs approach their municipalities for increased stipends with mixed success. Others take advantage of public and private grants and some have been fortunate to be named beneficiaries in community members' estates. Most of the ESOs that were managed by less financially savvy individuals have ceased operations and their assets were absorbed or liquidated.
While recently attending a National Incident Management System (NIMS) ICS-300 class; I thought about the potential impact on ESOs by an extended economic downturn. After a long day in the financial markets, I was mentally exhausted. My eyes shifted between the wall clock and a photo of a derailed train containing hazardous material cargo near a city. The instructor encouraged the participants to shout out their concerns and any actions that should be taken. Resident safety and the need for a large scale evacuation were quickly prioritized. As the class members worked through the scenario, they ordered close to a million dollars' worth of supplies, personnel and equipment, all assuming someone will pay for it. Considering that few municipalities would be able to pay for this type of response, I suggested that the simulated elected officials sign a disaster declaration, thus gaining access to a ladder of disaster funding -- from local to county, county to state, state to federal.
I continued to think about the funding for the everyday emergencies. Would the same funding occur if the locals faced lower tax revenue and could not afford the growing costs of their ESOs? I assume not, based on local history in which ESOs struggled financially, ceased operations and their territories were acquired by other ESOs. By failing to intervene, the municipalities potentially placed themselves and other municipalities at greater safety and financial risk if the acquiring ESOs succumb to financial hardship.
Post 9/11, the federal government made sure funding for emergency services skyrocketed to an all-time high. ESOs purchased everything from the vital to the insane. Although most ESOs truly needed the new-found money, some did not. This funding opened the door for ESOs to enter into all kinds of purchasing arrangement to include mortgages on new facilities and other term obligations like apparatus payments.
The housing crisis is being fueled by sub-prime adjustable-rate mortgages (ARM). These loans were created to let people buy homes with much lower interest rates for a period, typically three years. At the end of the defined period, the interest rate is "adjusted," as the name implies, and principal repayment begins. The result is a major increase in the monthly mortgage payment and no room to negotiate. In all fairness, ARMs are not just used by low-income buyers in urban centers, but also include "Alt-A" loans used to buy higher-end suburban "McMansions."
For the purposes of this commentary, please disregard any of the potential ARM loan clauses or special situations. We will also assume the following: the buyer is unable to afford the new monthly payment; the buyer was unable to secure a long-term fixed-rate loan because the loan-to-equity or value ratios are too high; and the buyer is unable to sell the home due to a declining market. Most buyers anticipated a market value increase in their home and assumed they would use this increase as equity toward refinancing.
To keep up with the demand for money, some lenders sold these mortgages to investment banking firms (IBFs), which in turn serviced the mortgages or "packaged" them into investments products, specifically residential mortgage backed securities (RMBs). Because RMBs are backed by homes and it was the mindset of the masses that homes never lose value, they were regarded as high-quality investments. To increase the credit rating on RMBs, the IBFs purchased bond insurance. The IBFs did not remove the risk of sub-prime borrowers, but rather shifted the risk to the insurance companies.
The investors in RMBs included hedge funds, private and municipal pension funds, insurance companies, banks, and private equity firms. The investors' intention was to collect interest on the mortgages and then receive the loaned amount at the end. However, when the borrowers are unable to afford the payments, refinance the loans or sell the homes, the loans are defaulted. The bank forecloses and the owners of the RMBs are stuck holding the bag. What bag, you ask? The bag containing defaulted loans collateralized by homes that lost significant market value. But that's OK, the RMBs were insured, right?
To reduce debt service and save taxpayers money, some municipalities insure their bonds with highly rated insurance companies. Bond insurance lets them take on the higher credit rating of the insurer and not the rating of the municipality. Herein lays the part of the problem: the municipal bond insurers that entered into the RMB business miscalculated their exposure. These are the same insurers that failed to keep their previously awarded high credit ratings and are struggling to generate enough capital to secure new business or, even worse, protect investors.
Remember who purchased RMBs? Yes, they included municipal and private pension funds. When a municipal pension plan's returns exceed the required distribution, the excess is returned to the municipal general fund. But when the returns are short of the required distribution, the municipality is required to supply the unfunded portion, possibly triggering significant decreases budget wide. Although the foreclosure epidemic has started, it can only be viewed as small scattered campfires. The wildfire has yet to burn because in many cases the loans have been sold several times, leaving the identities of the true mortgage holders undetermined. This scenario may sound unrealistic or even confusing to the novice, but rest assured that many experts are just as confused.
As foreclosures accelerate, so will the decline in real estate taxes, earned income taxes, building permits, housing prices and of course ESO financial support. On April 29, 2008, CNN Money reported foreclosures in the United States increased 112% in the first quarter of 2008 compared to the first quarter of 2007 and just may be the tip of the iceberg. As housing prices fall, so does the appraised property value of your borough, township and county. That in and of itself may affect debt-to-appraised-value ratios, which may in turn affect your municipality's own credit rating.
When tax revenues are compromised, municipalities may be forced to cut spending for essential emergency services. They may be forced to borrow money at higher rates or raise taxes to offset shortfalls. Unfortunately, lenders are not as liquid as they used to be and their requirements are much more stringent. When communities are inundated with abandoned businesses, vacant homes, rising unemployment, decreased tax revenue, and increased pricing of essential goods and services, they face a whole new set of challenges.
The impact on ESOs could be dramatic, to say the least. Increased arson, burglaries, robberies, domestic violence and suicides are just some of the potential situations to contend with. People who live on fixed incomes may take drastic measures to ensure their immediate comfort. Choosing a heating or electric bill over prescription medication is already commonplace and may worsen. Creative and unsafe methods to heat homes start to emerge with disastrous results. Non-reimbursed ambulance trips to the hospital may increase because residents may seek comfort versus medical attention. The pressure is placed on the ESOs to manage the increased volume with less funding and fewer reimbursements than previously seen.
Now let's look rising energy costs. Considering that oil directly impacts electricity, heating, apparatus maintenance and production, protective equipment, medical supplies and just about everything else associated with running your ESO, it is only a matter of time before things get out of hand. The rising cost of energy will create additional volunteer and staffing issues. Volunteers and staff members may seek second jobs in order to afford their own living expenses and to provide for their families. These second jobs may cut into your volunteer or pool of available part-time staffers. Also consider that some of your volunteers and staff may be running on such lean personal budgets that extra trips to the fire station or responses around your district become difficult. As the costs of oil and gasoline rise, your community will be much more vigilant in their use. This too will have an impact on your municipality's budget and its ability to assist your ESO with increased operational expenses.
In addition to decreased local funding, state and federal grant programs could easily slow and their recipient lists shorten. While many ESOs are prepared for an economic downturn, there are far more that are not. Some ESOs may not be able to meet increasing operational expenses if revenues flatten or even slightly increased, let alone decreased. Hopefully, your ESO is prepared financially, but you must ask whether your mutual aid ESOs are prepared as well. A neighboring municipality's failure to support its ESO is its problem, but it can quickly becomes your problem too. To control liability exposure, your municipal officials should be consulted prior to changing any mutual aid agreements or box assignments.
MICHAEL J. ABRAMS is a securities trader at Ridgeway & Conger and serves the Board of Supervisors of North Whitehall Township, PA, as an appointed deputy emergency management coordinator. He also is a paramedic who has served in career and volunteer agencies.