Lowell's

Chaos: South Limestone Closure Lawsuit Details

When we initiated LexMobs to help businesses on South Limestone on Wednesday, we noted that the closure of the street seemed hasty and poorly-planned.  Well, now we've obtained the Fayette Circuit Court filing from a lawsuit intended to stop the work on South Limestone (first reported by Jake at Page One Kentucky).

And that filing reveals just how chaotic the closure process actually was.

Filed by the owners of several businesses and properties lining the route, the lawsuit seeks an immediate injunction to halt the roadwork and to reopen South Limestone to traffic.  It also seeks damages for the interruptions to business operations along the street.  The suit names the Mayor, LFUCG Urban County Council, and ATS Construction (the firm contracted to renovate SoLime) as defendants. 

And the filing tells a story of a poorly-communicated, hastily-assembled, highly-inconsistent project with an escalating price tag:

• Communication.  Initial letters from the LFUCG Public Works Commissioner to the affected businesses invited them to a open house to discuss "a streetscape design" and "utility needs", but didn't indicate a complete road closure was immanent. The actual details of the project (and of the changes to the project) were usually disclosed to owners through rumors or media accounts.
• Timing.  Owners had six days' notice before the first open house (May 18th), and there was no mention of a road closure.  A second "utility needs" meeting was held on June 3rd, and the full closure of South Limestone was disclosed.  But some owners didn't learn of the possibility of closing SoLime until the day before; The letter announcing that meeting didn't mention closing the street.
• Consistency.  In June 3rd discussions, South Limestone was to be closed from Euclid to High.  After voicing opposition, property owners were told on July 10th that SoLime would initially be closed from Euclid to Maxwell, opening up a full block between Maxwell and High Streets.  On July 21st - the day before the project began - owners learned from media accounts that SoLime was now to be closed all the way to High Street again.  That day, owners met with the Mayor and others from LFUCG to learn that ATS and LFUCG won't know what they're dealing with until they dig up the street.
• Price.  The "Downtown Streetscape Master Plan" proposed improvements to South Limestone costing more than $5.2 million.  The LFUCG council approved the streetscape plan in August 2008.  On July 7th, 2009, the council approved the $13.1 million contract with ATS.  Two weeks later, media accounts put the total at $17 million.

The patterns emerging from this (admittedly one-sided) account of the closure of South Limestone parallels with what we've seen recently from LFUCG on urban development projects:

• Projects languish for years, then are suddenly initiated.
• Decisionmakers seem to have little sense of the full scope or true impacts of their decisions.
• The true impacts of the project are only understood, if ever, after it is long underway.
• Communication with citizens is unclear, intermittent, and/or non-existent.
• The project changes direction suddenly.
• It is unclear who is accountable for the success or failure of such projects
• Because they are so committed to the (frequently noble) idea of the project, decisionmakers accept a series of concessions which cause the project's price to balloon to multiples of original estimates.

We've seen some or all of these elements in numerous recent urban development projects: CentrePointe, Tax Increment Financing (TIF), the Lyric Theatre, the Newtown Pike extension and, now, the South Limestone Streetscape.  

What results is chaos.

Business owners on South Limestone had 2 months to prepare to lose customers for 12 months.  Many owners had one day to figure out how to get customers and suppliers to their door.  The cost of the project is 3 times what was initially approved. 

And the results of the chaos are easy to predict.  Confused commuters and shoppers stay away from "the mess" downtown.  Downtown businesses die.  And, after fits and starts, Lexington ends up with a beautiful street.  To nowhere.

Chaos is no way to run a business.  And chaos is no way to run the business of our city.

LexMobs on South Limestone?

The South Limestone streetscape project gets underway this morning.  Using Twitter, Lexington's Mayor announced that the closure will result in traffic delays of up to 45 minutes. 

From a public point of view, the closure seems hastily and poorly planned, although the promised streetscapes look wonderful.  The project stems from a noble goal: to better connect the University of Kentucky campus with downtown Lexington. 

But businesses lining South Limestone (SoLime) had little time to adapt to the closure, and I wonder how many can survive being starved of traffic for so long.  When Lexingtonians realize that there is a "mess" surrounding SoLime, they will stay away in droves.  (With a business just off of North Limestone, I'm concerned about the disruptions to our southside Lexington customers making it in to Lowell's.) 

There are a lot of great businesses along SoLime that would be a shame to lose: Sav's, Pazzo's, Tolly Ho, Failte, Sqecial Media, and many, many others.  Some (maybe all) of these are Lexington institutions.

How long could they operate without significant customer patronage?  How long could they retain employees?  How long can they make debt / rent payments?  How long can they pay bills?  How long can they survive?

So, here's a challenge for our readers: Let's go out of our way to demonstrate that we care about those businesses.

Beginning today, and continuing through the next month, let's pick one or two businesses to "flash mob" each day.  Let's get together to show, with our feet and our wallets, that we want those businesses to survive.  Let's show up.  And eat.  Or buy.  Or drink.  Let's refuse to let these businesses fail.

If our LexMobs get too big, that's OK - I'm sure that the plentiful nearby businesses would also love some of our overflow business.

Will this effort be well-organized and well-thought-out in advance?  Not a chance.  Will it be messy?  Yes.  Will it be chaotic?  Absolutely.  Will it be inconvenient?  Certainly.  Will you be too busy to interrupt your day?  Undoubtedly.

But that is precisely the point: to go out of our way to demonstrate we care for these businesses.

So... Let's LexMob South Limestone.  Look for more details on Twitter with the hashtags #LexMob and #SoLime.  See you there!

Update: The inaugural LexMob will be Wednesday, July 22nd @ Pazzo's Pizza Pub at 11:30 AM near Euclid on SoLime.  Can't make it?  We'll try for other times and places with future LexMobs!

What to look for in Lexmark's earnings release

Lexmark reports its second-quarter earnings tomorrow.  Since we've written about the decline and fall of Lexmark and the recent rise in its stock price, we thought we'd tell you what to look for tomorrow to determine Lexmark's health.

Under its current management, Lexmark has been very conservative in its earnings guidance (what it hopes to earn in the near future).  This conservatism has historically created two notable dynamics around earnings announcements:

• The vast majority of Lexmark's earnings announcements have exceeded analysts' expectations, primarily because management guided those expectations lower.  This is the epitome of "under-promise and over-deliver".
• Because the future guidance has been so low - with management essentially saying "we don't expect to make much money in the future" - the stock market's reaction has been overwhelmingly negative, driving Lexmark's stock price down the day earnings are released.

Update 7/21/2009: Lexmark announced earnings (before restructuring charges) that were 55 cents, while analysts projected 60 cents per share.  Lexmark management also provided lower 3Q guidance.  By both missing 2Q expectations and giving lower 3Q guidance, Lexmark was down over 20% in early trading, approaching 12-year lows.

So, tomorrow, don't be surprised if Lexmark beats Wall Street's expectations for the second quarter, and yet the stock price falls because of very conservative guidance.

But these regular dynamics around Lexmark's reporting dates tell us little about the true health of the company.  Here's what to really look for tomorrow:

• Failing to meet expectations.  If Lexmark fails to meet already-conservative expectations, it is a sign that earnings are deteriorating even faster than Lexmark's management anticipated.  It is also a possible sign that Lexmark is entering the death spiral we talked about here.

Update 7/21/2009: As mentioned above, Lexmark missed expectations by 5 cents (nearly 10%).

• Continued / accelerating declines in supplies, especially in PS&SD.  The majority of Lexmark's revenues (and the vast majority of its profits) come from its supplies business.  In other words, Lexmark makes much more from toner and ink than it does from the printers that use them.

Lexmark's inkjet division (Imaging Solutions Division, or ISD) has seen continuous erosion in its supplies sales, which implies that the installed base of Lexmark inkjet printers is shrinking.  Because of the upside-down economics of the printer business, a decline in supplies business can rob the division of its ability to fund future growth, and signal the impending doom for that business. 

If the Printing Solutions and Services Division (PS&SD - ISD's larger sibling) continues to lose supplies sales - a trend which started within the last year - then Lexmark's decline will be even more pronounced.  Without the supplies-driven profit to 1) maintain its existing business structure and 2) invest in future growth, the company will continue to spiral downward with little prospect for pulling out.

Update 7/21/2009: Overall supplies sales dropped by 18%, and dropped in both PS&SD and ISD (both major divisions).  This is a very troubling sign that Lexmark is entering the death spiral we've written about previously.

• Additional restructuring.  Over the past few years, Lexmark has announced a series of "restructuring" efforts: Closing plants, reducing headcount, shifting resources, reducing costs.  Unfortunately, those efforts have done little to stem the bleeding at Lexmark.  If they announce similar moves tomorrow, it is a sign that management is still flailing and failing.

Update 7/21/2009: No additional restructuring was announced this morning.

It is tough to gauge the health of a company from a single quarter of earnings, and tomorrow will be no different.  But if some (or all) of these items find their way into Lexmark's earnings report, it will be another nail in Lexmark's coffin, and will be troubling confirmation of the continuing failure of Lexmark's executive team.

Update 7/21/2009: Second quarter earnings indicate that Lexmark is continuing the long, downward slide that we have seen over the past 5 years.  As they have 1) invested in ways that don't promote real growth at the company, and 2) made continual strategic missteps, Lexmark's management has slowly bled economic vitality from the company, and robbed it of its ability to invest in the future.

Why has Lexmark's stock price jumped?

Since we chronicled the implosion of Lexmark on June 25th, Lexmark's stock has seen a remarkable run-up in its stock price.  In less than 4 weeks, the stock has moved up over 22%: from just over $15 a share to $18.61 at Friday's close.

So does the run-up prove we were wrong on our assessment of the failures of Lexmark executives?

No.

While a 20% increase in a single month seems impressive, Lexmark needs to turn in a 1000% increase to overcome the failures of the past 5 years.  And even after the gains of the past month, Lexmark's market value is still down almost 90% from where it was five years ago.

But such an aggressive jump in price still begs the question: Why has Lexmark's stock price jumped?  The question is especially interesting given that there has been no significant news coming from the company.

There are three plausible explanations for such a run-up in stock price:

1. Earnings Surprise.  Lexmark announces its earnings on Tuesday.  It is possible that some traders believe that Lexmark will have higher profits and better future prospects than are currently expected by Wall Street analysts.  In the past couple of weeks, there has been a heavy increase in options calls - bets that the stock price will rise.  This could be in anticipation of much-better-than-expected earnings.
2. Takeover Speculation.  As we mentioned in the Implosion post, Lexmark's ability to generate cash has led to the company being seen as a potential takeover candidate, with Dell, Xerox, and Lenovo frequently cited as potential suitors.  Lexmark takeover rumors pop up occasionally, with the last batch in late 2007.  Traders could be speculating that such a takeover would include a "buyout premium" - a buyout price well above the current trading price to help "seal the deal".  This could also explain the unusually high activity in options calls.   
3. "Window Dressing".  Over the past five years, Lexmark executives have bought back the company's stock on a massive scale.  The $3.2 billion of stock buybacks have been a catastrophic failure - losing over 70% - which destroyed Lexmark's mountain of cash.  In our last Lexmark post, we talked about how such buybacks could boost stock price while simultaneously insulating the company's failed management from takeovers.  Lexmark's management could be buying back stock as a form of "window dressing" to improve their stock price in advance of Tuesday's earnings announcement.

So which of these explanations is most likely?  A chart of Lexmark's stock price (below, from Google Finance) shows that almost all of the recent increase came in July, with a conspicuous jump in price on July 1st.  July volumes have also been nearly 50% higher than average.  The July 1st pop in price was the first significant move up after drifting downward throughout June.

Why would the price jump on that date, and continue to increase through July?

July 1st is the first day of the third quarter.  More importantly, it is also the first day after the second quarter, and second quarter financials will be reported on Tuesday morning. 

The timing and volume of the surge in Lexmark's stock price make us suspect that Lexmark's management has been buying back even more of the company's stock - the "window dressing" explanation above.  By buying back stock beginning July 1st, they could improve stock price while not having to report buybacks until September (and not having to include those purchases in Tuesday's report).  If management is buying back a lot of stock, that could also account for the increase in options calls as traders try to feed off of the temporary boost in stock price.

The recent run-up in stock price is probably not due to improved business fundamentals at Lexmark.  All outward signs show that those fundamentals are deteriorating.  Instead, our bet is that Lexmark's stock price has risen because of share buybacks, a traditional crutch for Lexmark's management.

And, historically, buybacks have been a failed long-term strategy for Lexmark.

Update 7/21/2009: After Lexmark's earnings announcement this morning, Lexmark stock has given up all of the gains from the past month.  If Lexmark's management did buy back stock early in July, it would fit the long-term pattern of failed buybacks.

Toward a Better Lexington

"It has taken five years on Council to understand what we can and cannot control."
Lexington-Fayette Urban County Council Member Kevin Stinnett, 7/2/2009

How do we make Lexington a better city?  Really better?  I have some ideas, but first we need to understand some of Lexington's fatal flaws in order to design something better...

A Broken City
As a relative newcomer to the inner machinery of our city (but a lifelong resident), I have spent a few months trying to figure out how Lexington 'works'.  As a downtown business owner, my focus has been on how we craft a functioning, vibrant, and livable city: How do we create a better Lexington?  And it has been a maddening exercise.  The more I delve into how decisions are made in Lexington - the more I understand what is actually going on - the more perplexed I become.  I am forced to conclude that our city is deeply, systemically, and utterly broken.

Lexington is an uncoordinated tangle of overlapping agencies, boards, task forces, committees, departments, rules, and processes.  Within this messy system, each organization is charged with its own distinctive - but often overlapping or conflicting - mission, mandate, authority, ability, accountability, and expertise.  Some of the organizations consist of long-term government administrators, some of elected officials, some of volunteers, others are quasi-governmental public/private agencies, and still others are fusions of all of these.

This highly fragmented machinery yields a city which fosters turf battles, redundant effort, convoluted processes, secrecy, uncertainty, and, as we have seen most recently, corruption.

The ultimate result is a profoundly inefficient city with an effectively paralyzed government. 

Scandalous
Lately, our local news has been rife with scandals and poorly-conceived, -designed, and -executed projects:

• Out of control spending sprees at the Airport, the Library, the Kentucky League of Cities, and the Kentucky Association of Counties.
• The scar of CentrePointe's failure with its phantom financier, phantom tower, phantom business model, and phantom jobs.
• The seemingly hasty and disorganized pending closure of South Limestone.

All of these scandals fit a disturbingly regular pattern: Inadequate oversight which leads to lax controls which permits gross mismanagement and/or outright waste of taxpayer dollars. 

Behind this pattern of scandal and appalling inefficiency lies Lexington's deeply flawed governing apparatus.  And when we observe that apparatus in action, we can begin to understand the root of the scandals.

Laurel and Hardy
Many Urban County Council meetings bear an astounding and troubling resemblance to a Laurel and Hardy "Who's on First?" sketch.  A prime example of this was last Thursday's Economic Development Task Force meeting (See Ace Weekly's wonderful reality-show spoof here for further examples).  A central question of last week's meeting was "Who is (really) responsible for economic development in Lexington?" 

At the outset, one councilmember stated, "It has taken five years on Council to understand what we can and cannot control."  Re-read that statement, because it is a profound indictment of our city's overcomplicated decisionmaking infrastructure.  Five years.  It takes five years for a councilmember to "get it" when they are steeped in it day-to-day?  How long will it take for an ordinary citizen? 

And by the way, despite the councilmember's assertion, I don't think the Council yet understands what they can and cannot control, as the ensuing conversation demonstrated.

The Task Force (Consisting of Urban County Council members) debated the Council's role in economic development relative to Commerce Lexington ("CLex", Lexington's semi-private chamber of commerce) and the Downtown Development Authority ("DDA", a corporation commissioned by the city and charged with helping redevelop downtown).  Both CLex and DDA have a board of directors and a staff of professionals.

What emerged from the discussion (chronicled best by Debbie Hildreth on her new blog about acclimating back to Lexington) is that the councilmembers have little clarity and little agreement on the respective roles, responsibilities, plans, and accountability of the Council, CLex, DDA, and the CLex and DDA boards.  Reading through Debbie's transcript, the councilmembers' statements are filled with stale bromides, helpless complaints, quick answers and utter confusion.  It all becomes tragically comic when you see how our elected officials are not even remotely on the same page.

And it is no wonder that our Council is befuddled.  The situation is actually far more complicated than just the Council, CLex, and DDA.  Within the Council itself, there are a bewildering array of committees and task forces, all of which could lay legitimate claim to economic development.  There is, of course, the Economic Development Task Force.  But there is also the Infill and Redevelopment Task Force.  There is the Planning Committee.  But there is also the Budget and Finance Committee.  And the Outside Agency Oversight Committee.  And the Corridors Committee.  (But wait, there's more!)  There are staff professionals within Lexington's Division of Planning.  There are volunteers who serve on the Planning Commission.  And with CentrePointe, there is the Courthouse Area Design Review Board, which issues the building permits for the site.

Within this ridiculous balkanization of our government, who has the jurisdiction, the responsibility, and the accountability for building a better Lexington?  Everyone and no one at once.  And therein lies the problem.

All of these organizations can claim they spearhead Lexington's development into a better city.  All of them "own" a piece.  But ultimately, none appear truly accountable for actual on-the-ground progress. 

The Lyric
With a noble project like the restoration of the Lyric Theater, who is in charge?  Who takes the lead on coordinating and executing the Lyric's redevelopment?

The Lyric could plausibly fall under the auspices of the DDA.  Or CLex.  Or the Infill and Redevelopment Task Force.  Or the Economic Development Task Force.  Or the Planning Commission.  Or, even, the Corridors Committee.  Ultimately, though, responsibility fell to another shard in the splintered machine: the Lyric Theater Task Force (who, by the way, appeared to do a great job).

And while the Lyric task force optimized the project for the theater's redevelopment, it isn't at all clear where this project falls within the wide array of potential development opportunities in our city.  It isn't clear how the Lyric was connected to our other urban initiatives.  In a fiscally-strapped economic environment, was the Lyric the best possible allocation of public funds?  We can't really tell, because we haven't really prioritized such development projects by return on our public investment.

Destination 2040: Destined to Fail
Some councilmembers have pointed to the Destination 2040 report as a roadmap for Lexington to follow in its development endeavors.  Destination 2040 is an admirable vision of the future constructed by our citizens.  It is filled with interesting ideas and initiatives to help improve our city.  But it is most certainly not a roadmap. 

Destination 2040 lacks clear prioritization of the initiatives it proposes.  It fails to identify adequate operational details of how to fund, structure, and execute the components of the Destination 2040 vision.  And, most of all, it fails to address the profound structural inefficiencies within Lexington which have long hampered such well-intentioned visions.

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Toward a Better Lexington

What kinds of structural changes are needed in Lexington?  I have a few ideas.  I hope that you will add more. 

Transparency
When I began to look at how our city works, I quickly joined the chorus of advocates for greater transparency in how decisions get made in Lexington and throughout Kentucky. 

And that advocacy has begun to pay dividends (whether the results of our actions or not).  As local officials take their first baby steps on Twitter, and as more of our citizens engage in local decisionmaking through attending meetings in person, watching them on public access television (GTV3), or following vibrant discussions on Twitter, one fact has become abundantly clear to me: Transparency is not enough.  Not nearly enough.

While transparency has helped reveal the scandals and issues facing our city, transparency alone won't really solve them.  Don't get me wrong - we're now starting to see into the machine.  It's just that we're learning that the machine is completely dysfunctional.

Comprehensive Urban Development
Whatever 'system' we have in place today, it isn't one which promotes sustained urban development.  I use the term urban development purposefully here: It is more than mere city planning; It is more than simply promoting our city; It is more than just economic development.  Urban development looks at our city as a functioning engine of economic and social progress, and strategically deploys our city's 'fabric' - spaces, corridors, amenities, people, businesses, buildings - to maximize sustainable advancement in our economy, in our social lives, in our physical environment, and in our aesthetic surroundings.

In short, it looks at how we intentionally design a better-functioning, vibrant, and livable city.

Simplification
It is clear that the splintered approach to bettering our city is failing.  Our continuous scandals and perpetual lack of progress cement that conclusion, as does the bewildering overlap of dozens of separate well-intentioned but poorly-conceived organizations.

My proposal: Eliminate today's governmental tangle by collapsing the DDA, Planning Commission, the Division of Planning, and the LFUCG Economic Development Office (for starters) into a single, centralized, and well-staffed organization with the clear mandate, clear authority, and clear accountability for successfully implementing our city's urban development initiatives.  

Focus
Concentrating urban development authority in a single organization will only work if we provide them with crystal-clear priorities on what is important.  With dozens of possible initiatives, visions like the Destination 2040 report lack clear priorities.  In essence, it declares that everything is important.  And in trying to do everything, we'd fail to accomplish anything.

We need to provide such an organization with guiding principles on what's important (and what isn't).  Is the organization designed to maximize tax revenue, jobs, infill, downtown density, or something else? 

From out of these principles, we should set realistic and quantifiable goals: "3000 new jobs by the end of 2010"; "$30 million in new tax revenues by 2012"; "10% higher residential density in downtown by 2014"; etc. 

My initial thoughts are that the core principles and the goals attached to them should be outlined by the Urban County Council.  That said, I'd like to see a way to balance continuity and change: As a city, we probably don't want long-term initiatives derailed by short-term political changes.  But we also don't want to 'lock in' failing projects merely for the sake of continuity.

From these principles and goals, staff professionals should derive the best 4 or 5 initiatives for achieving the established goals.  Would the Lyric Theater have emerged as one of the 4 or 5 best possible urban development projects?  I don't know, but I have my doubts.  It doesn't appear to scale very well on "jobs" or "revenues" dimensions.  But, of course, neither does CentrePointe at present.  Would we risk destroying surrounding businesses to "beautify" South Limestone's streetscapes?  I don't know, but I have my doubts.

Accountability
When the Economic Development Task Force met last week, councilmembers bemoaned the $400,000 provided to Commerce Lexington to bring new business to the area.  To date, there's little proof that this 'investment' has paid dividends.  How much business?  How many jobs?  What new tax revenue?  CLex really isn't accountable to the Council, so there's no real penalty for not delivering.  Where'd the $400,000 go?  The Council would like to know, too...

When we make the transformation to a simplified and focused urban development authority, we must have accountability for progress on these development initiatives.  Do they adhere to our principles?  Are they meeting our goals?  Are they successful?  If so, who gets rewarded?  If not, who gets fired?

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Do I expect my proposed system to be adopted?  Not really.  But I would like for our leaders to begin to discuss seriously reforming how our city's decisionmaking machinery functions.  And the system which emerges must be more transparent, more simplified, more focused, and more accountable. It must help us build a better Lexington.