Focus on Finance: A Great Incubator in Memphis

Brian Collins has been Director of the Finance Division for the City of Memphis, Tennessee since September 2012. Previously, he taught finance in the MBA program at the University of Memphis, in addition to a long career in the finance industry and as a trial lawyer. He has a Bachelor’s degree from DePaul University, a JD from Loyola University, and an MBA from Ohio State University.

The US Census Bureau has rated Memphis as the poorest city in the country. How did this happen?

It really goes back 150 or 200 years. It’s always been a basic farming economy. The Mississippi delta has historically had a high percentage of [agricultural] labor, as the center of slavery, and there has been a cycle of illiteracy and racial prejudice that we have just never been able to overcome. Memphis in particular is the largest city around. The closest largest cities are Little Rock to the west and Birmingham to the east. So all of that rural poverty keeps coming to Memphis. We have this out-migration of highly educated, sophisticated people, and they are replaced by a never-ending migration of rural poor looking for a better life.

The US Chamber of Commerce Foundation released a report in September recognizing Memphis as one of the seven model cities nationwide for economic revitalization. How is Memphis pushing the conventional wisdom in this regard?

One of the things about being so far behind is that you’re more open to trying just about anything. Memphis is a great incubator right now for a lot of terrific ideas. The city had a vision of trying to develop Midtown, specifically a stretch called Broad Avenue, into an arts community—some art galleries, small retail, antiques shops, bars, restaurants. Previously, there was nothing but empty, boarded-up places. We contacted the landlords for permission and started doing weekend after weekend of pop-up retail events. Entrepreneurs would set up a Potemkin village along this two-block strip, and they generated a lot of activity. Slowly but surely, people were showing up even when it wasn’t happening, and one after another of those buildings got renovated and filled. Now Broad Avenue is growing. It’s gotten some more grant money, and it’s going to put in an outdoor amphitheater. We’ve been doing that around the city—pop-up retailing, taking abandoned strip malls and seeing if we can create something.

There’s an entrepreneurial spirit that is deep in the DNA of Memphis. Our history hasn’t all been good, but we’ve always been a center for trade and transportation. FedEx is here, and companies like Holiday Inn were born here, but there’s also a lot of government and private-sector investment in things like business incubators.

Speaking of trade and transportation, Delta just pulled back substantially from Memphis International Airport, which had already seen a decrease in passengers. How could this affect Memphis’s historical status as a transportation hub and impact economic development?

It’s a double-edged sword. Delta’s leaving, but Southwest and others are arriving. It will probably diminish the total volume through the airport, but we were mostly a pass-through anyway, so the impact on the local economy will be relatively small. And FedEx is the 600-pound gorilla at the airport. They’re paying all the bills. We are going to maintain our place in commercial transportation because we’ve got the best railroad intersections from east, west, north, and south, we’ve got a port on the Mississippi, and then we’ve got the intersection of some of the biggest interstates. That’s trucking, rail, air, and sea.

In Mayor A C Wharton’s most recent budget, he said that the citizens of Memphis had to make some hard decisions in terms of what they wanted government to pay for. How does the city see its priorities possibly shifting over the next few years?

We recently had to restructure debt, and so for the next eight years, our debt service payments are going to go up. So we’ll need to be frugal. On top of that, we have this whole unfunded pension liability problem. This is going to be my full-time job—to get us to a point of long-term stability over a five-year period.

Regarding the pension obligation, we have to decide for ourselves if we’re going to be in the defined benefit business. I don’t think it’s a sustainable model. I tell people we are in the pothole business, not in the retirement business. We need to find a middle ground; a sustainable pension plan that doesn’t expose us to all the inflation, longevity, and market risks associated with defined benefit plans.

Then, on the side of retiree healthcare, we simply have to get out of that business, again over a five-year period. The world has changed, and with the Affordable Care Act there are now a lot of other opportunities for these folks. Retiree healthcare is also a vestige of a very lopsided period over the last 30 years when so many goodies were given to retirees in exchange for keeping wages low. We just cannot afford that, and we have the same problem as other cities have, which is that people in the prime of their lives retire in their early 40s, and we’re giving them full pensions and healthcare. There’s a real equity problem between taxpayers on the one side and government employees on the other.

I think in Memphis we’re going to resolve it incrementally. I’ve designed a five-year framework to leave our pension plan: if you’re vested, you get to keep your pension plan; if you’re unvested, we’re going to cash you out of what you’ve got, and we’re going to roll you into something that reflects more closely what the rest of the community has.

The third rail in this whole thing is that, like a lot of municipalities around the country, we don’t have social security. The problem with social security is that it’s so expensive, and the benefit is so lousy. I’m constantly being asked, “Why don’t you make this simple and move everybody to social security?” But that’s almost 12.5 percent of wages, and you’re burning almost all of it, because the benefit is so bad. If we are just wise in the way we approach this, we can take that same amount of money, plus some, and the workers will be so much better off.

So it’s a complicated thing right now for the average person out there, and it is so far over everybody’s head. It’s not a conversation susceptible to the 15-second sound bite.

Speaking of conversations that aren’t susceptible to the sound bite, there’s a lot of talk about the Fed possibly raising interest rates sometime soon. Do you see that negatively or positively impacting Memphis?

Well, I think it’s going to be tough on everybody. But keep in mind, historically speaking, the ten-year notes are still at a third of what a normal rate is. So even as the Fed changes policy, the next ten years aren’t going to be that big a problem, because we’ll only finance or refinance one-twentieth of our debt each year at the higher rate. This is good right now, because we need all the help we can get. From an interest-rate standpoint, we’re going to continue to enjoy quite a long period of low rates, but we better start planting the seeds to return to a normal economy.