Public Sector Unions

Financially Malled

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.

GD Star Rating
loading...

American Society / Municipal Finance / Public Sector Unions — 0 Comments
9
Mar 11

As Camden Goes, So Goes the USA?

The New York Times reported Monday on the police cutbacks in Camden, New Jersey:

…after the layoffs of 163 police officers, Camden is feeling the impact. Callers to 911 who report things like home burglaries or car break-ins are asked to file a report over the phone or at police headquarters; officers rarely respond in person. “If it doesn’t need a gun and a badge at that location,” officers are not sent, the city’s police chief, J. Scott Thomson, said last week.

Residents have taken their own precautionary measures….Police headquarters now sits nearly empty, its front reception window sometimes closed, as most of the department’s staff has been pushed onto the street for patrol duty. Detectives cannot devote as much time to investigations; a widely praised bicycle unit was disbanded. Even the canine unit lost two of its three dogs.

It is too early to tell if the police layoffs have allowed more crime to occur; in the first two months of 2011, there were fewer homicides than during the same period last year. But the number of assaults involving a firearm has more than tripled to 79 from 22 over that period. See Police Force Nearly Halved, Camden Feels Impact

A Scary Place to Live

Camden was my home in 1971 and 1972. Even then it was a crime-ridden, troubled city. The last downtown department store closed the day I moved in. There were no local supermarkets, all commerce ended at 5 PM, and the streets were deserted after dark. I routinely drove to the closest market, eight miles away in Cherry Hill. This was always a minor adventure, as I never knew if parts of my car would be gone when I reached it. It was a scary place.

Unlike some other major cities, Camden has the advantage of major employers within its city borders: Campbell Soup Headquarters, Cooper University Hospital, The Delaware River Port Authority, Lockheed Martin, The New Jersey State Aquarium and the Rutgers University Camden Campus. Despite this roster, this city of 80,000 has 52% of its residents living in poverty, the highest in the nation. Recently, Camden has been classified as the most dangerous US city to live in. It is plagued with drug trafficking, prostitution, street gangs, robbery, looting and homelessness. See City of Ruins

A Cautionary Tale

Unfortunately, Camden is the ugly urban visage of post-industrial America. Once a thriving city with thousands of good paying manufacturing jobs in ship building, electronics and food, the city has become an urban wasteland. What went wrong?

- Corruption – Within the past twenty years three mayors have been sent to prison. Members of the police department have also been sent to prison for planting evidence, invalidating hundreds of arrests and convictions.

- Public Sector Bargaining – Faced with job cuts or give backs, the police union voted against unpaid furloughs and instead opted a massive layoff:

In a 300-1 vote, the union rejected an offer that that would have saved 100 jobs. That offer called for three days a month of unpaid furloughs for patrol officers for six months, then one furlough day in each of the following 12 months. crime ridden environment the last thing that the city needed was a 50% reduction in its police force. See Camden NJ Police Union Votes to Reject Offer to Save 100 Police Officer Jobs

In addition the city cut one-third of its firefighters and 100 other municipal employees, including building code inspectors. See Bankruptcy Should be on City’s Table

- Severe Financial Problems – Only 12% of Camden’s budget of $163m comes from property taxes. The city is broke and bankruptcy may be the best solution. See Bankruptcy Should be on City’s Table

- Failed State and Federal Assistance – Governmental funds have been spent on large building projects: a new medical school, new law school and new state aquarium. Inexplicably, monies have not been used to improve life in the city:

In 2002 the state approved a $175 million recovery package to save the city, but according to a yearlong investigation by the Philadelphia Inquirer, only 5 percent had been used to combat crime, improve schools, provide jobs or bolster municipal services. See City of Ruins

The Municipal Crisis

Authors like Michael Shedlock and financial analysts like Meredith Whitney have been warning us of the crisis in municipal finance. Camden is a dismal look into the future, and a scenario of what happens when civic corruption, misspent funds, public sector unions and a declining tax base collide.

There are other Camdens lurking in our country: Harrisburg, Detroit, Houston and others. In the midst of a tepid economic recovery which threatens to revert to another (or some would say continuing) recession, police and firefighter layoffs imperil citizen safety. This is anything but a formula for reviving America’s cities.

As a final thought, we need to accept the reality that suburban enclaves are also at risk. If there is a collapse of government and law and order in Camden, how safe are the nearby more affluent Haddonfield, Moorestown and Cherry Hill bedroom communities? It is doubtful that the growing chaos that is Camden will be contained within its city limits.

GD Star Rating
loading...

American Society / Economics / Political / Public Sector Unions / Regulation / The Federal Reserve — 0 Comments
4
Jan 11

From Under-Reaction to Over-Reaction

DC Beltway insiders, abetted by their friends in academia, are expert at identifying and recommending political curatives for the ills of society. At the most sophisticated and effective level, punditry has a predictable genesis and trajectory. First, from the chaos of all manner of the environment’s input, whether in universities or “think tanks” academics identify a societal problem that needs correction. Many times, what follows is often widespread agreement that a problem exists and needs correction. When that occurs, the process gains momentum, traction, attention and support from different constituencies. Politicians whip up widespread public support. Pundits produce inspirational articles and editorials in support of the corrective action. Myriad examples emerge of the consequences of the unsolved problem. Some examples may emerge of solutions to the problem, albeit solved on a finite, boutique, scale. Soon we have groundswell support to “do something.” We lobby, pass legislation, establish agencies and write regulations. At the beginning all goes well, but soon problems arise. We experience administrative overreach, which is often worse than the original problem. So what has begun as a good idea becomes misshapen beyond recognition and becomes its own societal problem. Some examples:

- The problem: discrimination on the basis of race or sex. The solution: Passage of the Civil Rights Act of 1964. Starting with a simple corrective of ending discrimination we have built an administrative Rube Goldberg empire: the Equal Employment Opportunity Commission, the Office of Federal Contract Compliance, state anti-discrimination agencies. Soon class action and affirmative action programs were introduced as mandates. Further, the Obama Administration now desires to expand the scope of anti-discrimination laws regarding the concept of equal pay for equal work to a new more troubling concept of “comparable worth.” Employers are now beset with charges of discrimination and class actions. See ‘Comparable Worth’ Rears Ugly Head in Age of Obama

- The problem: America lacks universal health care coverage. The solution: The passage of Obamacare. The law is byzantine beyond explication:

…the health system is complex, yes, but also ornate. The new law creates 68 grant programs, 47 bureaucratic entities, 29 demonstration or pilot programs, six regulatory systems, six compliance standards and two entitlements.

Getting that massive enterprise up and running will be next to impossible. So Democrats streamlined the process by granting Health and Human Services Secretary Kathleen Sebelius the authority to make judgments that can’t be challenged either administratively or through the courts. See Obamacare Only Looks Worse on Further Review

The law has other consequences: 117 million current health care plan participants may need to change plans in 2013; 16 million new participants may be forced into Medicaid: Medicare benefits will be reduced to pay for the program; a 3.8% additional tax will be imposed on investment income; a 40% excise tax on “Cadillac” health plans and a $2100 increase for families buying private insurance plans.

- The problem: Public employees need employment workplace protections. The solution: In 1962, President Kennedy extended collective bargaining rights to federal employees. While federal employees could only bargain over working conditions, not salary and benefits, this precedent set the stage for widespread collective bargaining rights for public unions. At the state and local level bargaining occurs over all issues. Politicians have recognized the efficacy of acceding to union demands.

Thus, we have had an explosion in public sector salaries and benefits, especially lucrative pension plans. As states and municipalities face huge budget deficits and massive pension plan underfunding, these entities are considering benefit cutbacks, bankruptcy and large tax increases. The public, facing job insecurity or unemployment are revolting against increased taxes. See Strained States Turning Laws to Curb Unions; Cash-Strapped States Seeks Laws to Curb Labor Union Power

- The problem: The financial crisis threatens the solvency of US banks. The solution: The government ignores its own advice to the troubled Japanese financial system. Instead of forcing the banks to write down bad assets, the government undertakes a costly and legally and economically dubious program of buying trouble assets. It has forced $700b dollars of funds on troubled banks, and continued to guarantee bankrupt Fannie Mae and Freddie Mac, and maintain a zero interest rate policy for over two years. The economic consequences have been enormous: unemployment near 10%; savers and retirees punished; oil and other commodity prices exploded and the dollar substantially lower.

Taking it to the Limit it Too Many Times

We have lost the ability to identify a societal problem and implement a measured and thoughtful solution. We have also lost the ability to forebear, take no action and let the problem work itself out. We move from under-reacting to over-reacting. Over-reacting imposes enormous costs on society. Thus, we have backlashes against affirmative action, a move to repeal Obamacare, tax revolts against the privileged financial protections afforded to public employees, and simmering resentment toward Treasury and Federal Reserve policies which favor Wall Street over Main Street.

Perhaps in matters of important policy, more thoughtfulness, realism and humility, rather than brash hubris and impulsiveness, would restore confidence in both our government and our economy.

GD Star Rating
loading...

Prophet Without ProfitThinking Non-Linear