Newshoggers.com

Gambling matures and declines

By Fester:

Nothing is recession proof if a recession is harsh enough.  The gambling industry has long contended that it is close to recession proof, but the Wall Street Journal is reporting on some of its problems (h/t to Johny G in Null Space comments)

Rising gasoline prices, the housing crisis and other economic troubles are prompting consumers not just to gamble less, but to spend less at the luxury boutiques and restaurants where casinos draw most of their profits. Struggling airlines are cutting service to Las Vegas. And pressures are building on casinos that cater to local residents, who have been hard hit by economic troubles.

"This is the toughest environment we've faced," says Gary Loveman, chief executive of global gambling giant Harrah's Entertainment Inc., referring to the economic challenges roiling the entire industry....

The public-debt market, spooked by four casino bankruptcies this year, reflects the concerns. Bond prices for a half-dozen casino companies, from Harrah's to small, Las Vegas-based Herbst Gaming, are trading at distressed levels, frequently below 60 cents on the dollar, on debt totaling about $5.3 billion....Credit-rating agencies have been hitting casinos hard. Moody's Investors Service, which rates $79 billion in debt at casino companies, has downgraded 17 casino companies this year. Eleven more are on review for possible downgrade,...

These debt market issues are having significant impact in Pennsylvania and Pittsburgh as the PITG group, which owns the slots parlor license for Pittsburgh, has not paid its construction crews for two months and has yet to present a final financing plan to the Pennsylvania Gaming Control Board.  PITG has taken on a new partner and is stopping construction on its casino for a short time period. 

A representative from PITG Gaming says the group has a new major investor in the Majestic Star Casino, and construction at the site will temporarily stop in the coming weeks.

Bob Oltmanns, of PITG Gaming, announced that the group had secured Walton Capitol out of Chicago as a major investor.

State and local governments, including Pennsylvania, have long counted on gambling revenues to be acyclical.  They 'never' go down as people will gamble in good times with their bonus money and in bad times with their core budget money.  Even as times worsen, the hope of a $50,000 jackpot to bail out troubles is a tangible and real dream for most people, and it could be worth the twenty bucks into the one arm bandit. 

However if gambling as a mature industry  turns out to be cyclical in that its revenues increase when the economy grows and revenues decrease when the economy stagnates or shrinks, then state and local budgets are in more trouble than previously thought. State and local governments are cycle matching financial entities.  Primary sources of government income are various income and sales/use taxes that track income and employment changes and property taxes.  Property taxes are counted to provide a slowly changing and increasing base while the more variable income and sales tax revenues are counted on to provide the marginal cash flow that determine whether a taxing body is seeing income gains or declines. 

With the real estate bubble bursting, property tax collections are stagnant or declining in most locales.  The decline in jobs, and stagnation in wages combined with higher fixed cost expenditures on fuel, energy, medical care and education, all of which have some tax advantages in most locales means that sales tax revenues are not growing.  Gambling revenues were expected to provide another source of stable to growing revenue but as the industry has matured, it is responding to the business cycle as most mature industries will.  It is declining when everything else is declining, and it is stagnant when everything else is stagnant. 

 

Pittsburgh Financial Implosion??

By Fester

Chris Briem at NullSpace is getting into the weeds of the new Hockey Arena's financing and notes that there could be a couple of very large problems on the horizon.  The arena has the potential of straitjacketing the City of Pittsburgh AND Allegheny County due to the bond statement's seniority arrangements AND the weak condition of the Don Barden and PITG finances.

The Pittsburgh Post Gazette has been reporting that the final financing for the casino is still not coming together:

"A combination of anxiety and curiosity has built in recent weeks surrounding Don Barden's efforts to secure $780 million in financing for the Majestic Star casino, and it could come to a head at the construction site Monday. The team of more than 20 companies erecting the North Shore casino has not been paid on time for work done in either April or May, according to the primary contractor. They agreed on one extension already at a June 16 meeting with Mr. Barden. They meet with him again on Monday, and will decide collectively what action to take if he cannot provide payment of about $10 million that is owed, said Dan Keating III, chairman of Philadelphia-based Keating Building Corp., the primary contractor."

Barden and PITG have had trouble getting financing as they have swapped principal backers and have found raising capital in the crunched credit markets much tougher than they anticipatead a few years ago.  This could have some massive regional financial impacts if the casino is either not built at all, OR if it is significantly delayed or downsized. So let's get into the weeds with Chris by reading the bond statement and working through some of the implications. The bond statement is here SEA_arenabond_2007.pdf and we'll start with Chris's analysis:

The core financing in the form of $7.5 annually is indeed slated to come from him, but he isn't really involved in building it. So who does bear the risk of the arena project.

One answer is the Sports and Exhibition Authority (SEA) because THEY ALREADY BORROWED THE MONEY. That raises lots of questions. If the Barden money stream does not start flowing in as expected, what happens? ....

the revenue backing the project are not limited to the revenues specifically tied to the arena, to include the Barden payments, rent or other sources.. but all the SEA revenue. At least that is my reading. So before these bonds could default to bond insurers it seems the holders have claims against most SEA revenue.

WARNING --- SOME SERIOUSLY NERDY FINANCIAL WONKERY AND SPECULATION AHEAD --- Read at your own risk to your mental health.... 

The Sports and Exhibition Authority currently is paying off the bonds for most of the major destination projects in the city center right now.  These include the two new stadiums, Heinz Field and PNC Park, and the Convention Center.  The Convention Center is a money losing proposition at this time that is consistently blowing a hole in the current Sports and Exhibition Authority budget.  It already drew upon the Regional Asset District's general fund of the 1% county sales tax to cover its 2007 operating deficit.  The SEA is drawing upon a wide variety of general revenues to pay its pre-existing bond obligations. 

So you can see there are significant revenue streams for the SEA from the county sales tax, hotel tax and dedicated parking taxes.  Those revenues are already assigned to pre-existing debt obligations, but I am a bit worried when I read the bond security summary from page 6 of the statement:

The Bonds are payable from, and are secured solely by, certain payments and other revenues to be received by the Authority including: (a) Special Revenues; (b) Swap Receipts; (c) Commonwealth Lease Payments under the Commonwealth Lease (each as hereinafter defined); and (d) other moneys pledged to or held by the Trustee under the Indenture for such purposes.

THE BONDS ARE LIMITED OBLIGATIONS OF THE AUTHORITY PAYABLE SOLELY FROM THE TRUST ESTATE PLEDGED UNDER THE INDENTURE. THE BONDS ARE NOT OBLIGATIONS OF THE COMMONWEALTH OF PENNSYLVANIA OTHER THAN THE COMMONWEALTH’S OBLIGATION TO MAKE ANY ANNUAL LEASE PAYMENTS TO THE AUTHORITY UNDER THE COMMONWEALTH LEASE.... THE FULL FAITH AND CREDIT OF THE COMMONWEALTH IS NOT PLEDGED FOR THE PAYMENT OF THE BONDS. NEITHER THE CREDIT NOR THE TAXING POWER OF THE CITY OF PITTSBURGH, THE COUNTY OF ALLEGHENY, OR ANY POLITICAL SUBDIVISION THEREOF IS PLEDGED FOR THE PAYMENT OF THE BONDS......

What are the special revenues?  From page 27 of the entire statement and page 17 of the counted pages:

“Special Revenues” include certain rental payments expected to be received by the Authority
pursuant to the Arena Lease (its sublease of the Arena to the Arena Operator), payments it expects to receive from the entity which receives a license to operate a slot machine casino in the City (the "Casino Operator"), and payments it expects to receive from the Economic Development and Tourism Fund (“Economic Development & Tourism Fund”), a fund established pursuant to Act 71 of 2004 of the Commonwealth (4 Pa. C.S.A. §1407) ("Act 71").

In English, the special revenues are the arena lease payments, and two streams of casino revenue.  The arena lease payments are paid by the arena operator and collected from the users and tenants of the arena, including he Penguins.  The two slot streams are a $7,500,000 annual payment pledged by Don Barden and PITG, the slot license holder, and another $7,500,000 from the state of Pennsylvania.  The state money is from a bond issue backed by casino revenue.

And here is the genesis of a potential financial implosion.  The arena's financing is dependent upon the casino being built and rapidly generating revenues. The arena is already being built in anticipation of the casino running on time and on budget.  The vast majority of the SEA's ability to repay is tied to the casino.  however the casino looks like it will not be completed on time due to financing problems and more importantly, it will be completed when disposable incomes are shrinking.  Ooahhhh Shit....

Despite the bond statement limited the SEA's responsibility to only the dedicated special revenues, interest rate swaps, lease payments and insurance payments, this bond structure could turn itself into an implicit moral bond structure. 

The county and the city have authorized the SEA to perform some local government functions, including agreements to place golden handcuffs on the city amusement tax, and have allowed the SEA to borrow off the books.  If this debt is placed on the books, neither entity can handle the additional debt load strain.  Furthermore, the SEA has current claims on varying amounts of local revenue, including payments from RAD that are dedicated to rehabbing the current Mellon Arena and are due to terminate in the near future.  Local entities are counting on additional RAD funding becoming available.  IF the SEA or the city/county decide that the implied cost to their credit ratings are too high to use insurance, that RAD revenue will be eaten up and could also displace other currently funded projects.

This right now is a low probability event but as the troubles with PITG continue, combined with a slowing economy, the probability of an implosion increases.

Nowhere to go, Nothing to do

By Fester:

I have been amazed at the Gloucester, Massachusetts high school pregnancy cluster story arc:  first reported as a pact, converted into a right wing two minute hate against Juno and Knocked Up as a sign of a society that devalues the hard work of parenthood despite the fact that these movies were held up as pro-life conservative message movies last year as abortions were not chosen, and now the school saying that there was no evidence of a pact.  I just have two things to say here, one is wonky and one is intuitive. 

The wonky thing is that in any population as large as the entire universe of American high schools, a few random clusters that are three, four or five standard deviation events will occur every year.  We should expect a few high schools every year to see a bizarrely anomalous number of student pregnancies.  And we can say it is odd, unusual, and different, but we don't have enough information to attribute causation.

Secondly, on an intuitive level, Gloucester sucks for a kid.  It lost the fishing industry from the 60s to the 90s and the high tech boom has passed it by with the exception of the rising real estate prices and increasing number of commuters to Boston and the 128 Belt.  It is a lot like my hometown. 

I grew up in Lowell, a city about 30 miles away that lost its economic reason for existence in the 1960s as the cotton mills moved south.  As a teen in the 90s, the inklings of economic viability it now has and life were barely visible from my point of view as all of the action was in Boston.  There was not a whole lot to do when I could not hop the commuter rail into Boston for the day. 

Lowell, from my teenage perspective  was a beer-sex-weed town.  As I noted elsewhere on this blog, weed was never that interesting to me, and despite spending massive amounts of time and cognitive surplus on looking for sex, I could not pass my ennui that way.  So my boys and I drank and brawled as there was nothing else to do. The five of us all left Lowell as soon as we could. I lucked out, my parents had the motivation and (somehow) the resources to make sure my horizons and my sense of potential were vast, but that is not always the case.  I can understand teenagers making decisions on the beer-sex-weed triangle as there is nowhere to go and nothing to do. Occasionally sex will dominate that triage of boredom.

I now live at the edge of the Mon Valley, which used to be the Steel Valley.  The mills closed in the mid-80s and with those closures went the economic justification for places like East Pittsburgh, Duquesne, Monessan and dozens of other little riverside towns.  Now those communities are a black hole of high needs that can not be met with local resources as anyone with easy mobility has already left the region in the past generation. 

There is not a whole lot of hope of being able to do well while staying put, and there is not a whole lot of anything going on.  Beer-sex-weed dominate the entertainment choices of the youth, and since there is little prospect of easily getting out, tough decisions and life choices become a whole lot cheaper to make as the opportunity cost of having kids early in life is a whole lot lower as there aren't the opportunities to lose.

This logic applies in Gloucester, it applied to too many of my acquaintances and buddies in Lowell, and it applies in economically disconnected and disorientated towns of the Mon Valley.  It applies anywhere the prospects aren't good for teens.  It should be a clarion call for intensive education and horizon expansion interventions, but it is not. Those services and interventions are expensive and require regional/state supports and transfers and given the fragmentation and the beggar thy neighbor public choice incentives of local government, these areas are likely to be forgotten or at least the people will. 

Booming into the Bust

By Fester:

Local and state governments are pro-cyclical agents.  When times and tax revenues are good, local governments increase spending and employment levels which can contribute to the boom as high return on investment public goods can be provided.  However when times are tight and tax revenues are stagnant or falling, the balanced budget requirements of almost all state and local governments means they must cut back.  This worsens the bust as employment decreases and the spin-off jobs also disappear. 

Until the end of this fiscal year, which is next week for most local governments, tax revenues have held close enough to projections that one off fixes and minor cuts could cushion the employment blow.  However as the next fiscal year is starting next week and local and state budgets are assuming significantly lower property, and sales tax streams, government spending and government employment looks to decrease, as CNN is reporting a wave of new layoffs:

With falling revenue from sales and income taxes, and property-tax declines looming, states, cities and towns have already laid off tens of thousands of government employees. Many expect more job cuts ahead as public officials struggle to balance their budgets.

The American Federation of State, County and Municipal Employees, a public employees union, says about 45,000 government layoffs have been announced this year.

This is probably a low estimate of local government layoffs and definately a low estimate of local government job losses as it is almost certain that governing bodies will engage in attrition and hiring freeze strategies to reduce costs.  Furthermore, local governmental bodies and public service providers are not particularly well hedged or protected from rising costs.  For instance the Pittsburgh Port Authority, which runs the regional mass transit system, is in trouble as its hedge against fuel prices will soon expire:

The authority has budgeted $4.15 a gallon for diesel fuel, or $34 million total, almost twice as much as the current year, when it locked in a price of $2.28 a gallon in a long-term contract.

These are needed services that provide high value to individuals and the community as a whole.  However the pro-cyclical nature of local government financing means the money won't be there to fund net positive expenditures.  This is one of the reasons why a reasonable and economically defensible stimulas package should have contained some form of state and local government aid.  The federal government can borrow and it can save/reduce its debt so it can smooth out service flows when state and local governments can not.  But given the Congress and the President we have, we can only anticipate a pro-cyclical slowdown of state and local spending. 

Urban Power Resiliency

By Fester

Resiliency is basically the ability of a system to withstand shocks and still perform its intended functions within reasonable parameters of costs, safety, reliability and predictability.  The more resilient a system is, the more damage it can take before catastrophic failure occurs.

The dominant global power infrastructure of centralized generation plants connected to distant consumers by loosely coupled networks of transmission wires and distribution centers is not particularly resilient.  For instance thirty transmission towers knocked down near Baghdad took out that city's power supply for four years straight.  A single point of failure near Cleveland knocked out most of the Northeast's power grid in 2003. Demand overload and blown transformers blacked out large sections of Queens for a week in 2006.   Tightly coupled systems with brittle and numerous failure points are not resilient to deliberate attacks or unusual circumstances. 

Local production as either part of the base load or as an emergency/supplemental system can contribute to local and system wide resiliency.  My post on diesel generation raised the question of rural/off the grid resiliency, but within a wide network of diverse power supplies, diesel is a resiliency adder for short to intermediate time frames. 

Treehugger is pointing out another source of localized power production that can maximize sustainable and resilient power generation; building mounted micro-wind turbines.  They take advantage of urban wind shear and elevation offered by buildings to produce local power.   This idea has been tried several times in the past but it looks like some of the noise and cost issues have been resolved so that this implementation is a more plausible path. 

Local, urban wind power will not supplant centralized production and its economies of scale.  However micro-turbines and other distributed power generation and localized distribution systems can be a critical resiliency add-on so that in most situations buildings and neighborhoods could generate a 20% base load.  This would allow for orderly shut-downs of non-essential equipment in general outages while also decreasing peak loads on the regional distribution system.  Decreasing peak loads also significantly decreases the probabilities of large failures.

This is an interesting development and it is a part of trend of improving local power production past the diesel generator in the hospital's basement that has twenty four hours worth of fuel.  It should be encouraged.   

2nd Round of the Housing Bust

By Fester:

The first round of the housing bust has produced numerous losers.  Home owners who are facing foreclosures, homeowners who are facing decreased or negative equity, investment banks that believed their own sales jobs, and then the second order impacts of banks contracting, construction contracting and aggregate demand for everything but gasoline contracting.  Most of these impacts are immediate impacts.  There are minimal lags.

However we may be entering the second round of lagged impacts as property values decrease, local government tax bases decrease.  Kat notes that Tampa Bay is seeing an epidemic of overdue taxes:

More Tampa Bay property owners than ever before failed to pay their real estate taxes this year.

The surge is unprecedented, officials say, and the reasons are clear: a slumping real estate market, stagnant wages, growing unemployment and the rising cost of energy, goods and services....

In Pinellas, those numbers rose nearly 23 percent this year, coming on top of a 37 percent increase last year. Other counties saw even bigger increases this year: 27 percent in Hernando, 30 percent in Hillsborough and 33 percent in Pasco. 

Statewide figures are not available, but counties around Florida have seen, on average, about a 20 percent hike this year in the number of unpaid property tax accounts...

Unpaid taxes are a small but growing problem.  Most taxes are still being paid on time and the expected value of collection efforts are still high so most municipalities are not threatened by a rash of unpaid taxes.  However the big problem is a reduction in the tax base as property values first stagnated and then declined for several years in a row.  Most local governments' assessments services lag the market for a few years.  In normal times, homeowners like this as normal appreciation is not taxed for a couple of years, they get a freebie.  However in times of a declining market, homeowners want to have the government reassess every year if not every week as they want their tax bill to follow the market downwards. The  Cleveland Plains Dealer is seeing this happen:

The overall value of Summit County homes dropped 1 percent in this year's reappraisal - making it the first county- wide decrease in recent Ohio history.

That means a small part of most homeowners' tax bills will decrease. But there are bigger implications for some school districts: They will collect less money from recently passed general levies, or they will never see the increased revenue they expected.

"It's just never happened," said Scott Ebright, spokesman for the Ohio School Boards Association. "Property taxes have always increased."....

Cuyahoga Treasurer Jim Rokakis estimates a 10 percent reduction in assessed property values would cost Cleveland $10 million in revenue and its school district $3 million.

Most communities in this country will be facing either zero growth or significant declines in their assessable tax base over the next few years.  Projects that made sense to fund with the assumption of inflation based growth no longer will make sense; service expansions that were viable with no changes in the millage rate will no longer by viable, and the maintenance of current services may only be sustained by increasing millage rates or finding new revenue sources.

I think stories like this will open the way to the tax revolt of 2010 as the pain will be too strong.  As I wrote last December:

it is easier to assemble a narrow coalition to protect fixed slices of the pie. And as an intermediate term strategy this is a good way to reap a tax revolt within the next couple of years as the politics of pain will be too strong and the pallative of short term relief will be tempting; thus the symptoms of the underlying problems of short term pervese incentives, decreasing cutting edge productivity, loose credit and perpetual debt will be addresse without actually changing the actual structure of these trends.

I wrote in November that the local politics of housing and taxes will get increasingly nasty as there is a significant concentration of pain......

Significant local pressure will be brought to maintain services, improve the schools, at least comparatively, and cut tax rates and tax bills all at the same time.  This will not happen as services and schools require money.  But this will be the local political dynamic as governments will be forced between revenues and services or low taxes and no services.  Local politics across the country will get very nasty in the near future as the fundamental revenue planning assumption of always increasing property taxes will have been smashed during this budget cycle and one time fixes are used up. 

Gas, Distance and Equity Destruction

By Fester

Trading space for time is not just the classic Russian defensive strategy. It is our settlement pattern. 

Gas is a substitute for location.  People buy and burn gas because they are unable or unwilling to buy a location.  Suburbanization can be viewed through this lens as a means of trading expensive urban land for cheaper ring/fringe land.  This trade has made sense for many people as the travel costs were assumed to be relatively low as roads are heavily subsidized and gasoline was not a significant deterrent. 

People make their mortgage/purchase decisions based on total cost of ownership which includes the costs of living life and getting to and from work.  Individuals who live closer to their job have, all else being equal, lower commuting costs.  This allows them to shift commute expenditures to other expense categories, including housing.  Living further out and thus increasing commute costs often lead to the trade-off of lower housing prices, all else being equal. 

Trade-offs that made sense when gas was $1.80/gallon often do not make  sense when gas was $3.00/gallon and make even less sense when it has just topped $4.00/gallon.  Assuming home prices are smooth, which is a completely unreasonable assumption, significant drops in home values could be expected as the supportable house prices have to decline to meet the commute costs. 

For instance an individual who lives 50 miles away from their job and drives a vehichle of the US standard fleet fuel efficiency of 26.3 miles per gallon would see their home value drop by $3,300 just by the increase of gas prices from $3.00/gallon as the planning assumption to $4.00/gallon.  If the planning assumption was based on $1.80/gallon, the home will have lost $7,300 in value.  This assumes local driving is equal no matter where one lives and the only change in driving patterns is the commute to and from work for 240 days a year.  This is an unreasonable assumption as distant areas are less likely to have high density, multi-use zones where car trips can be combined by mulit-tasking or avoided entirely.  These estimates are low estimates.

So people are getting squeezed in multiple directions now.  Higher direct expenditures on gasoline are a squeeze on a tight budget, and the secondary impact of higher gas prices translating into lower home values squeezes any available equity cushion for people with good access to credit.     

Spreadsheet is here

Hold and Clear in D.C.

By Fester:

Large scale sweeps have always worked so damn well when they are advertised in advance and take place in areas where the local population has conflicting primary and secondary loyalties towards the sweeping force. Isolating urban communities, denying them interactions and connectivity with other districts and squeezing local economies will be the result of large sweeps and haphazard clear and hold operations.  These results are not the best way to win friends and influence people who are persuadable to move in multiple directions within the social sphere.  We'll see if lessons learned in hundreds of different places will be relearned in D.C. as the city police will be conducting large sweeps and urban isolation efforts in several neighborhoods this summer:

The program will authorize the Metropolitan Police Department to set up public safety checks to help safeguard community members and create safer neighborhoods in the District by increasing police presence aimed at deterring crime....

Potential Neighborhood Safety Zones must be approved by the Chief of Police, and will be in effect for a maximum of 10 days. Public safety checks will be established along the main thoroughfares of the established neighborhoods. Anyone driving into a designated area may be asked to show valid identification with a home address in that neighborhood, or to provide an explanation for entering the NSZ, such as attending church, a doctor’s appointment or visiting friends or relatives. Pedestrians will not be subject to the public safety checks.

I can understand wanting to do something to decrease crime, but checkpoints are not a particularly efficient way of gaining useful intelligence, creating positive personal presence or embedding oneself into the local social milleau.  Instead embedding local cops and integrating into the local social mileau and connecting opportunities and prospects to neighborhoods has a much higher probability of reducing crime.  But those strategies, especially if backed up by good training, data, and multi-system service integration take time while roving roadblocks and hassling classes of people are visible and are evidence that something is being done even if it is ineffective. 

 

Fun with Bus Funds

By Fester:

USA Today is reporting that mass transit ridership is at record levels and initial near real time reports indicate continued gains in ridership:

More people are riding the nation's buses and trains, breaking records for the first quarter of the year. Transit operators expect the increase to be greater in the second quarter as gasoline prices soar.

A report set for release today by the American Public Transportation Association (APTA) shows trips on public transit January-March rose 3% over the same period last year to 2.6 billion rides. Light rails saw the biggest jump: 10% to 110 million trips.

Early figures for April show ridership going even higher as gas hovers near $4 a gallon, says APTA president William Millar.

However there is a problem that will be emerging and that is financing increased services.  Most if not all mass transit agencies receive local, state and federal capital and operational subsidies.  This is not unusual as all transit modes receive some type of public subsidy.  However mass transit is seen as a weaker client with a strong claim than the automobile claim which is a stronger political client with a weaker claim on the merits.  Weak clients produce weak support. And given weak state and local budgets as revenues shrink and claims increase in a pro-cyclical pattern, public transit is often one of the first areas cut after social services.   

Chris Briem at NullSpace looks at how this cycle has impacted the Pittsburgh region as our local mass transit agency, PAT, has already engaged in several signifcant reductions in services to balance its books over the past few years:

This all reminds me of the Port Authority route cuts last year. Now as gas prices are hitting $4/gallon, people are actually thinking about switching their mode of commuting. How many folks that might have switched to a bus last year can't now because their route was eliminated. The cuts were concentrated in the longer and, in the past, less used routes to the suburbs. Yet, those were the routes that really served the marginal transit riders which are most likely to switch to riding the bus as gas prices go up.....

So to cure (or is that partially cure?) the Port Authority's short term budget woes, the cuts implemented were precisely the routes that could be enticing new riders out of their cars and onto public transit right now. Maybe the Port Authority should be thinking about putting back some of those routes? But no, while most parts of the country is at least thinking of how to leverage public transit to deal with current energy costs, the only debate that is going here is over the drink tax....

The routes with high ridership are on the whole already in place as they have the strongest claim to continued service on cost-efficency and effectiveness grounds.  It is the more marginal routes that can actually benefit from a change in the bus v. ride cost benefit analysis that are at the most risk of being cut-back as states seek to save an expensive dollar.  And this story is played out in advance in Pittsburgh but it will continue to play out across the country as there is a demand, service and resource mismatch.

Medium Term Adjustments

By Fester:

Gas at the station across the street from my bus stop was $3.69/gallon for 87 octane this morning.  Ouch. I turned down an opportunity to referee a good soccer game this weekend as I would have to travel 80 miles roundtrip.  The game fee was not worth the gas or travel time but I had taken similiar games two summers ago. Instead I took a couple of lower quality games five miles from my house.  I'm adjusting and substituting around high gasoline prices.  And I am not alone.  Via Kat, our amazing researcher, is this New York Times article on the substitutions people are making to avoid/cope with high prices of gasoline:

With the price of gas approaching $4 a gallon, more commuters are abandoning their cars and taking the train or bus instead.

Mass transit systems around the country are seeing standing-room-only crowds on bus lines where seats were once easy to come by. Parking lots at many bus and light rail stations are suddenly overflowing,....

Some cities with long-established public transit systems, like New York and Boston, have seen increases in ridership of 5 percent or more so far this year. But the biggest surges — of 10 to 15 percent or more over last year — are occurring in many metropolitan areas in the South and West where the driving culture is strongest and bus and rail lines are more limited....

The increase in transit use coincides with other signs that American motorists are beginning to change their driving habits, including buying smaller vehicles. The Energy Department recently predicted that Americans would consume slightly less gasoline this year than last — for the first yearly decline since 1991.

Mass transit in high density, high networked cities such as the Bos-Wash corridor have less room to expand and increase ridership because more people who have the option of transit were already using transit.  I find it interesting that inconvienent transit systems are seeing such a large gain because it strongly indicates the degree of pain.  Dispersed and decentralized transit systems are costly in time and access, but people are still turning towards them over their cars.  Interesting. 

There is a threat to this surge in transit and it is funding.  Mass urban transit with any degree of service reach can not be a profitable enterprise at the fare box level.  It is a public good which requires some level of public subsidy.  And here is where there is a problem.  As more riders are shifting to transit due to high fuel prices, operating costs are increasing due to both fuel costs AND any additional services (more routes, more overtime etc).  At the same time, local and state governments will soon be strapped for cash.  In Allegheny County, the transit system is funded partially by a regional alcahol sales tax and then general state revenue.  If either pool of money slows it growth, transit funding may be cut.  At that point the inconvience factor tilts people back to driving and away from the buses. 

Another intermediate balancing act is occurring in the composition of the US vehicle fleet.  The fleet is getting smaller and more efficient.  Trend gasoline consumption in the United States will be decreasing its slope.  And this impact will be durable and long lasting. 

USA Today noted that the payback time for the more common hybrids is rapidly decreasing.  The payback time is the time needed to justify the higher initial expense of purchasing a hybrid by saving money on the operating/gas costs.  This means that hybrids are moving from interesting niche and lifestyle vehicles to mass market vehicles that can compete on total ownership costs with similiar style conventional cars.  Combine the trend towards more affordable hybrids with the increase in purchases of smaller cars and the attendent decline in light truck/SUV purchases and the intermediate run response to increased fuel costs is starting to become apparent. 

Micro-local mixed cluster development....

By Fester

The Angry Drunk Bureaucrat is looking at the expansion plans of Point Park University in Pittsburgh and is raising a very interesting point --- what is the role of non-research universities on regional economic development.  We know from the scores of scores of small college towns that liberal arts universities can and often do serve as local economic anchors as they generate both local and regional export work of education.  The Amherst area in Massachusetts is a super-cluster of regional liberal arts colleges which have a significant impact on the Berkshire regional economy [aided massively by UMass down the street...]

I opened my media kit from Point Park University to see what the architectural wizards over at WTW Architects came up with. Over all, it's not a bad plan for an "academic village" which includes the acquisition of the existing YMCA building, acquisition of several more properties along Forbes Avenue (across the street from the Piatt development), and a mess of public improvements to the streets, sidewalks, and trees.
The big question, of course, is what this all means to the future of Downtown....

Setting the built environment aside, however, there is the proposition that Universities can be economic development engines. This seems more true, however, for schools like Pitt and CMU that can churn out spinoffs in Biotech and IT, rather than PPU which can churn out Liberal Arts majors.

Not that there's anything wrong with Liberal Arts majors -- some of my favorite baristas have degrees in Native American Literature or Political Philosophy -- but can a horde of conservatory and media studies students be a motor for economic development downtown? Well, surely for necessities, amenities and some residential, but can the University attract industrial clusters that build on regional assets and help to generate sustainable job growth? I honestly don't know the answer to that question.

I'm a bit invested in the idea of increasing the concentration of students in a dense downtown setting for a couple of reasons, most importantly I did some research and consulting on this topic in 2002/2003. A higher density of students downtown will have significant local effects that the Angry Drunk Bureaucrat has identified including increased demand for basic amenities and significantly increased foot traffic and informal street level surveillance of a larger segment of downtown.  That section of downtown would go from being a twelve hour neighborhood (7:00 AM to 7:00 PM) to an eighteen hour neighborhood with the attendant increases of restaurants, bars, and laundrymats serving students.

Now is this relevant or is this just a redistribution of students who would, no matter what, attend PPU or the Art Institute but live elsewhere, most likely on the Southside?  Here is where it gets tricky.

A significant public policy assumption has been that Pittsburgh needs a vibrant 18 to 24 hour a day downtown to be a vibrant and dynamic city for a variety of reasons. If you believe that a liveable downtown ex arguemendo is a necessity for a vital region due to density and agglomeration economic concerns then we start to get into tipping point population profiles.  For instance another local collection of neighborhoods, the Hill District, has a population of roughly 9,000 individuals and no full service grocery store.  I know that major chains don't want to go into the Hill because they either have nearby stores or the population is just not large enough to support the costs.  The same dynamic is occurring in downtown --- a small but increasing population which is not large enough to support all the amenities being demanded.  An addition of several hundred to several thousand students living downtown moves the local population much closer to another viable level of amenity provision. 

This is all well and good for local amenity and quality of life issues, but is a vibrant downtown a necessity for significant economic growth to occur?  I don't think so; I think it is a coincident or lagging indicator of successful growth and innovation.  So as a local strategy, I think this is a great plan.  I work downtown and I think my third of the day will be improved as Point Park expands, but as a regional strategy this is a wash unless Point Park becomes a world class university that imports students ( and more importantly their money) from a much wider net than the Pittsburgh MSA. 

Geography of Resiliency???

By Fester:

In the discussion of adapting to much higher energy prices, increased volatility and insecurity and a generalized minimization of effective nation state action, there is a common thread that communities will downsize and minimize their unmediated interactions with outside actors.  This is most commonly expressed in a basic form in the survivalist/off the grid communities and indepedent homesteads.  But I am expecting to read John Robb's next book on resilient communities and I am curious about how he will frame the economics of this discussion.

Cities are amazingly complex and inefficient system of systems that have one salient economic advantage over lower cost, more dispersed and easier to access locations.  That advantage is that cities when they are properly functioning they are an amazing mixing system of loose ties and large social networks that can mobilize towards common goals.  These multiple, disparate, loosely linked mobilizations of self-direct effort occur with low communication and information costs.  This is the central insight into multiple urban economic development theories including cluster analysis, creative class sociological analysis and product cycle/innovation analysis. 

Cities grow in all of these theories by being able to maximize their comparative advantage to overwhelm the high cost of locating in high density/high demand areas by creating new products and new ideas that can not be easily replicated.  Cities stagnate when their innovation cycles that fuel their growth comes to an end.  Non-innovative products are replicable products and economies.  Replicable products can be made anywhere and anywhere often includes places with much lower cost structures. 

If the resilient community is a resilient city there is a massive opportunity for increased urban import substittution as locally produced energy replaces/supplants imported energy and embedded energy products should create a massive amount of new jobs and new economic activity which will lead to increased economy wide innovation and productivity.

However if the resilient community is conceptualized as dispersed, isolated communities that are fundamentally self-sufficient or draw significantly higher proportion of economic activity from a small city region, I have doubts about the economic viability of this concept, or at least the viability of sustained economic growth and innovation.  There is a potential of recreating the feudal manor system in which the local environment is fairly self sufficient but for the import of luxuries and nice to haves.  However this system produced little trade and did not generate significant technological improvements compared to the improvements that were being generated by the nascent cities of the same period.

The low telecommunication costs of WiMax, satellite internet and Skype may mitigate against some of the city advantages but these trends are current extrapolations of current and very near future technologies.  Major cities have faced the decreased communication costs and have thrived because/despite this decrease in their comparatiev advantage.  I am curious if the resilient community concept if it is an isolation effect is a strategic hedgehog against threats --- a hardened target that is able to hold off frontal assaults at the cost of innovation immobility over the long run.  All of this is speculation before seeing the book so who knows where the argument will lead.