An inside page item in last week’s Wall Street Journal caught my attention: Faded Malls Leave Cities in the Lurch. The article focuses on the recession’s effect on retailers and the decline of sales tax revenues affecting municipal budgets. What we have is another cautionary tale about overly optimistic spending on urban malls. Apparently, retailers have been willing to build even in the face of a glut in retail space, and now they are suffering the consequences.
A Litany of Woe
Sales tax receipts account for 23% of all state and local tax collection. Unfortunately, in 6 of the last 10 years municipalities have witnessed worsening declines in this revenue source, with a decline of 6.6% in 2009 and 5% in 2010. Much as experts would love to blame this sad state of retail affairs on the bad current economy, the facts of the decline may go much deeper and last longer:
…it is problem that will persist after a recovery, as demand for retail complexes is whittled by online shopping and the waning popularity of the big-box store selling everything from groceries to electronics.
“I am not sure cities can go back to playing the retail game the way they have over the past 25 years,” said William Fulton, mayor of Ventura, Calif., and editor of the California Planning and Development Report newsletter. See Faded Malls Leave Cities in the Lurch
Neighboring cities have engaged in dysfunctional escalating competitions to build ever bigger malls. To entice owners, cities have offered sales tax revenue sharing agreements, real estate tax abatements, development bonds with municipal guarantees and infrastructure improvement such as roads, and exit ramps from highways.
This largesse is now catching up with cities faced with worsening budget shortfalls. In one example, Independence, Missouri, has used public funds to make a $3.5m debt payment for a local mall. It expects to make another $4m payment this year. Plus, the city was forced to lay off and furlough employees to fund these payments. In another case, Tracy, California, is paying Macy’s $2.7m to move into a local mall, this to prevent the mall from closing altogether for lack of an anchor store.
Goldilocks and the Wolves
Financial media trumpeted the 2000’s as the decade of the “goldilocks economy”: a virtuous cycle where low interest rates spurred the growth in the housing market, and then, derivatively, gains in other industries as well: mortgage bankers, investment bankers, second mortgage lenders, attorneys, appraisers, appliance dealers, builders etc. Sales tax revenues increased, municipal budgets expanded, municipal workers hired and generous wage, pension and other benefit increases flowed. The Federal Reserve not only spurred this cycle with low interest rates but kept them too low for too long. This party continued unabated until the economy hit the wall in 2008.
The Wall Street Journal article failed to complete the story of the malls and municipal finance. Not only are malls in trouble, but the homeowners who shop in them are in trouble. The two failing markets are symbiotically intertwined. Foreclosures and falling prices only cut real estate taxes and collections. The municipalities who extrapolated out endless prosperity now suffer the aftermath: insufficient revenues to make bond payments, obligations under union contracts for wage increases, and underfunded pensions, and active and retired health care liabilities. The “virtuous cycle” of the “goldilocks economy” is now pernicious with a downward spiral of increased fees, reduced services and threatened defaults.
Finally, the article begs the question of what should be the proper role for government. We can argue about whether it is to secure individual freedoms and rights, or to ensure the safety of the citizenry. Philosophy aside, I would argue that government has no legitimate role in incenting shopping mall construction or wooing mall tenants. Revenue sharing deals, tax rebates, infrastructure improvements and other incentives seem to transcend the proper role of government. Private entrepreneurship is just that, private.
The Wall Street Journal item is just one microeconomic issue in our post financial crash economy. Unfortunately, there are many more stories to tell like the follies of the mall.
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