Newshoggers.com

The tax revolt of 2010 (cont...)

By Fester:

People are in pain right now. Twenty million homeowners are underwater, a systemic debt reduction effort is underway, the employment picture now just sucks instead of horrendously sucking, any productivity and compensation gains are getting eated up by health care premiums and energy prices have bounced back up after an easy first half of the year.

In November 2007, I thought one of the dynamics that we would be seeing in 2009 and 2010 would be a property tax revolt. Property owners in bubblicious areas would see their homes go underwater as values and the regional economy that was built on bubble building deflated, and these property owners would be in pain and in a political position to do something about some of their pain:

People who are stuck with mortgages and houses that they can not sell, refinance or service will be looking for help. They will be looking for refinancing deals, special breaks, holds on foreclosures, delays on credit reporting, and most significantly at the local level, assistance on minimizing the quasi-fixed costs. That means support for more heating and energy assistance, lobbying for lower insurance limits for flooding and hurricanes in disaster prone areas with the hope of either dodging the bullets, or shifting those costs to someone, somewhere else, and most importantly, constant and downwardly revising re-assessments without concurrent increases in millage rates...

Homes are the primary asset for most people, and right now homes are under systemic threat as a symptom of a greater problem. People want to make that pain go away without the costs of fixing the greater problems, and engaging in a local government financial death spiral and micro-local education arbitage seems like a decent short term fix, so we'll see a full scale tax revolt in 2010 or no later than 2012 as the last round of housing bubble junk Option ARM mortgage resets will be hitting in 2010/2011 --- what we are seeing now is just the tip of the iceberg

We have seen refinancing deals, special breaks, and holds on foreclosures as federal policy. These efforts have probably brought marginal relief but they have not addressed the systemic problem of way too much debt and not enough carrying capacity. Local governments are just starting to get slammed as the combination of a decent first half of FY 2009 on revenue collection and short term reserves have made the FY-09 budgets austere but not dramatically shrunked. Those reserves are no longer in place for most states as they face massive budget deficits. Balancing those state budgets will often mean school and local jurisdictions that rely on state funds will see a significant hole in their budget that can either be filled by new taxes or spending cuts.

Local taxing authorities will want to maintain assessed values from the bubble peak years and fight like hell against appeals for lower, closer to market values. Politically it is easier to have a low millage rate on an artificially high base than to have a high millage rate on an accurate base. The New York Times reports on this fight:

Homeowners across the country are challenging their property tax bills in droves as the value of their homes drop, threatening local governments with another big drain on their budgets....

The pain at the state level is trickling down to county and local governments. To compensate, about 10 percent of large counties are raising the tax rates associated with home values to minimize the revenue loss, the county association said....

The revenue losses are coming as homeowners prod towns for new assessments, and as municipalities conduct regular revaluations of their real estate. While declining residential values weigh heaviest on many governments, the value of commercial real estate is also sliding as businesses shut down and move out of storefronts or shopping malls....

Mr. Kramer, the assessor in Contra Costa County, said homeowners started swamping his office with requests for new assessments in December. As many as 500 people would call in one day. His voice mail message now begins: “If you’re calling to request an informal review of your property value due to the declining real estate market.”

Contra Costa has now reduced the recorded value of more than a third of the 350,000 privately owned properties in the county....

I still think that there is a significant political opening for demagogues who call for tax cuts uber alles as that will seem to alleviate some of the pain for a little while and when people are getting beaten down, a breather and a break is a very attractive promise.

G-20 Economic Displacement

By Fester
At the end of May, I was skeptical that the G-20 would provide a significant net boost of regional economic activity in Pittsburgh because the combination of a massive security bubble, low local value-add to the goods and services that will be consumed by the summit goers and significant displacement would occur:

So the combination of typical activity displacement, opportunity cost and massive security disruptions will make most probable estimates of economic impact be far less than the hopes of local officials...

Hotel reservations will be gobbled up by summit attendees but they will be displacing normal business travellers as well as any other potential conventions that could have been occurring at the same time. ...

Downtown will be massively disrupted.... It is likely that many downtown businesses will not be open during the summit. Normal spending will not occur, and it may be replaced to some degree by summit spending

The Post-Gazette is reporting that these disruptions are already occurring as they tell the story of a disrupted wedding and throw in a couple of other useful hooks as well:

plans for a Sept. 25 wedding at the Sheraton Station Square wilted faster than a fragile boutonniere.

While the hotel staff at first told the Bethel Park couple that the gathering here of 20 world leaders on Thursday and Friday, Sept. 24 and 25,would not affect their Big Day, the two learned the following week that their guests would be subject to background checks and security checkpoints....

Andrew Sliben, director of sales and marketing at the Sheraton Station Square, said his staff explained to the couple that the G-20 summit might interfere with their wedding, adding that it could take an hour to get up and down in an elevator because of security....

So the wedding was moved to another Friday at the hotel, Aug. 21...

While the same florist and photographer were still available on the new date, about 30 of their 150 intended guests were not -- including key relatives...

The G-20 summit in this case has cost the Pittsburgh regional economy between twenty and thirty out of town visitors with attendant hotel fees, car rentals, meals out, as well as some number of airline seats that will no longer be bought, as well degrading some utility from the prospective bride and groom. And this is not just the story of a single wedding getting displaced. The PG article notes that a medium size meeting for American Eagle, a locally headquartered company, will most likely take place in another city due to the G-20 instead of Pittsburgh.

Furthermore if Station Square is within the security perimeter, the disruption to Downtown will be far more significant than I had previously projected as I had projected a small perimeter of only a few hundred yards/a few blocks around the Convention Center would be heavily secured while it looks like a much larger region will be in the security zone.

Bus Route Ineffeciencies

By Fester:

Mass transit for it to be truly cross-class mass transit instead of the option that is only taken when there are no other affordable options needs to be clean, reliable, predictable and not onerously slow.  The Port Authority, Pittsburgh's local transit authority, does a good job on the clean, reliable and not onerously slow part for most of the city and inner ring suburb routes, but the predictable portion needs to be worked upon. 

As I was waiting for a bus to take me home last night on Forbes Avenue, I saw a steady stream of buses go by.  However the stream had a few inefficiencies in it.  I saw a full 71-A go by with people stacked on top of each other at 6:12.  At 6:14 I saw another 71-A with three passengers go by.  The same applies for the 71-C as one went by standing room only and another passed me four minutes later with 90% spare capacity.  Finally the convoy of 61's came through, the C, D, A, C, and finally my B to take me home.  The lead few buses were packed as the most heavily used stretch is from Downtown to Forbes and Murray in Squirrel Hill, but the trail buses in this four or five minute span were at a third capacity at most. 

This bunching of bus capacity makes the system far less reliable if a rider is either not intimately familiar with their needed route or if their destination is past a major trunk line where some buses are randomly packed to the gills and will go by certain stops.  I would have had to wait another half an hour if the 61-B was the lead bus instead of the trail bus in this pelaton.  That is not predictable.

One of the potential and low cost solutions is to reschedule the complementary and duplicated routes so instead of having five buses make the Downtown to Squirrel Hill run go by a time point within a span of three minutes and then not see another bus on that run for another twenty minutes, spreading those five buses across time so that a bus passes that same time point every three to five minutes.  That should reduce unpredictability as well as increase passenger comfort. 

Delivering convenient, efficient and predictable services should be the epitome of effective and responsive government and governmental authorities.  Getting these basics right should be a small-brainer. 

Regulation Equalization

By Fester:

If a society wants more of something, that something is made comparatively cheaper than the undesired or less desired items.  And over the course of time, the background structure of that society will reflect the comparative pricing of the different options.  In certain cases, the less desired option is a vastly superior option so it will still exist but the default implementation will be the cheaper and more heavily subsidized option.  Changing the pattern of subsidy is a major change of societal assumptions. 

The Angry Drunk Bureaucrat has two relevant rules that I want to discuss today:

Rule #4: "It's about the money; follow the money."

Rule #18: "Money is not created equal."

Our society has decided to value automobile centric organization and habituation over most other forms of urban development.  This decision started in the 1920s and became most apparant in the 1950s.  And so we have undertaken a massive subsidy program for the automobile and shockingly we have created a built environment that is optimized for the automobile.

Reuters has a good piece on how we have done this in the Houston region:

 for now, the U.S. government will pay as much as 80 percent of the multibillion dollar cost of a proposed 180-mile ring road around Houston...even though it serves a thinly populated rural area.

In contrast, an expansion of the city's light-rail system is only eligible for getting 50 percent of the cost paid by the federal government, she said.

Yet more than 147,000 people live within a half-mile of the ten stations on the light rail system, Holzer said....

Houston's light-rail system was subject to voter approval as well as strict cost-benefit analysis and environmental provisions. Highways do not require voter approval, are not subject to such cost-benefit provisions and qualify for much more federal cash

Local stakeholders have to front less cash and have far fewer levels of hassles to get highways approved.  Shockingly, highways are approved and built quite frequently while non-automobile dedicated infrastructure is seldom built. 

Equalizing the regulatory hurdles would be a dramatic shift towards a denser and more urban future.  The equalization could be done either by increasing the share of rail, subway and bus-way projects that is paid for be the federal government, decreasing the share of the highway projects costs borne by the feds or a bit of both.  More importantly, the hurdles such as a full-scale CBA that is reluctant to address induced demand would make highways far less attractive compared to mass transit. 

This is a fairly small technical change that could have massive political and real-world impacts for decades to come as it would be a potential game changer on urban and inner-ring suburban infrastructure debates. 

Assessment food fight

By Fester:

The very big news for the very small community of Western Pennsylvania financial wonk bloggers (we meet monthly in the phone booth at the Monroeville Mall by the Dairy Queen --- plenty of space for new faces) this week is the Pennsylvania Supreme Court affirmed Judge Wettick's order that Allegheny County can not use the 2002 base year system for property taxes as that system is fraught with errors and violates the uniform taxation clause of the Pennsylvania Constitution. 

"[T]he Allegheny County scheme, which permits a single base year assessment to be used indefinitely, has resulted in significant disparities in the ratio of assessed value to current actual value in Allegheny County. The disparity is most often to the disadvantage of owners of properties in lower-value neighborhoods where property values often appreciate at a lower rate than in higher-value neighborhoods, if they appreciate at all."

The base year property assessment system was not declared unconstitutional as the Courts are kicking it to the Legislature to figure out how to fix things.  My bet is two fold:  First Harrisburg will attempt to duck the issue for as long as they can and then some more, secondly, whatever mangled compromise that no one claims credit for passes, it will be declared unconstitutional. 

So what does this mean.  On the very practical level, it means that Judge Wettick will be ordering a re-assessment of all property in the county.  New values will be calculated and new tax bills will be prepared.  And then the fights begin.

This is political dynamite as property owners (who are high propensity voters) do not like to see their assessed values increase as that means their taxes will increase without any other actions taken.  Pissed off voters make for very scared elected officials.  County Executive Dan Onorato is one of those very scared elected officials, especially as he is strongly rumored to be ready to run for the Democratic nomination for governor.  His angle would be the only candidate from Western Pennsylvania and as a pragmatic executive who did not raise taxes on old people during his time in office.  He has vowed to fight the re-assessment and delay it for as long as possible.

On the more pragmatic level, a reassessment within the next eighteen months blows a massive hole in the county budget.  The best guesstimates say a complete re-assessment will cost the county more than $30 million dollars in general revenue funds.  The county is effectively broke right now and it can not afford that type of payment without dramatic cuts in general revenue expenditures such as the police and courts.  The drink tax is a potential source of revenue if the County can get the Legislature to give it permission to raise the drink tax back to 10% from the current 7% and devote the increment to re-assessment.  If that proposal was approved,two years of incremental drink tax revenue would be sufficient to pay for the reassessment.  I would wager that the courts would allow for tri-annual or quadrennial re-assessments as constitutionally valid, so a smaller tax increment may be possible. 

The biggest story that has yet to be talked about is the impact that this ruling has on other counties in the region.  Most of Pennsylvania uses the base year system.  The surrounding suburban and exurban counties use the base year system.  Most of the counties have assessed no more than once in my lifetime.  This gives them a massive advantage on giving new development low assessment values instead of something approximating fair market value assessments, so it is an implicit subsidy from older. pre-assessment built-up properties to new properties.  Requiring regular re-assessment removes this implicit subsidy which should marginally help Allegheny County attract new retail and light office developments near the county lines. 

Be ready for one hell of a food fight on this issue over the next three years....

Managing Decline

By Fester:

Earlier this week, there was a small mudslide/hill collapse in Pittsburgh.  A water line broke and undermined the hillside.  Not a big deal, as no one was hurt and damage was limited, but repairs and remediation will be expensive. 

The Angry Drunk Bureaucrat has more:

So, let me get this straight (and please correct me if I'm misreading this article): this landslide was triggered by a PUBLIC INFRASTRUCTURE failure that serviced only ONE HOUSE that was probably UNOCCUPIED.

Does anyone else see a problem with this?

And no, by that I'm not suggesting that someone was accruing a private benefit for public services that was undeserved. What I am suggesting is that in an efficient system, this water line should no longer exist. Sure, in the 1940s that street probably had rows and rows of housing, but at that time, the City also had about 700,000 people. Today, the street is nearly empty and the City has closer to 311,000 people.

So the question for Greater Pittsburgh is how does one manage decline?  I know Braddock, PA which has lost 80% or more of its population in two generations is haphazardly managing decline as infrastructure crumbles, breaks or is vandalized which creates its own feedback loop.   Water mains break, are not repaired and another inhabited houses is abandoned as the owners leave the town. 

One way of managing decline is to pretend that it is not happening.  This methodology maintains a high level of services to abandoned areas such as the steep slopes and hill side communities within the region in the long run hope that the areas are just temporarily fallow and that population demands will eventually repay the investment.  Besides being a long shot as new housing stock in the burbs is both cheaper to bring up to code and nicer, this is an extremely expensive strategy. 

Another strategy is to bull-doze and redevelop areas into safe suburbanite friendly attractions.  This methodology has the problem that as soon as a city starts trying to compete with suburbs on the suburbs terms (big box, lots of free parking, not a whole lot of variety), the city gives up its comparative advantage and inflicts a lot of self-generated negative externalities upon itself.  Allegheny Center and the old East Hills shopping development are the two most notable examples of this problem.

Targeted abandonment is an option that has been floating in municipal planning circles for generations.  Selected neighborhoods that have lost massive amounts of population and civic/social infrastructure can be bought out, people resettled with subsidies if needed, and then the infrastructure for the area is either shut off, removed or allowed to gracefully fail.  The problem is people are attached to their communities and in low-income communities, most people's working capital is their social capital so relocation doubly impoverishes individuals. 

These are some of the issues that Pittsburgh and other Rust-Belt metropolitan regions have been struggling with several generations.  How does one decline gracefully while still making the region a good place to live for the remaining residents?  This question will be expanded as a lot of the boom-burbs and exurban development that went up during the bubble years will be written off as impractical over the next few years.  The advantage of the exurbs is that since they were never inhabited for long to begin with, the social costs of abandonment are much lower, but it is a different set of problems. 

Monolines and systemic collapse

By Fester:

As I have written before, municipal bond insurance used to be a sweet business:

The monoline bond insurance companies used to have a sweet business model.  They would charge a modest fee to give municipal borrowers a better credit rating and interest rate on bond offerings, and then guarantee the payment of principal and interest.  This arrangement was sweet because municipal debt was often far safer than their background rating implied so the insurers seldom had to pay out.  A decent year could see an operating profit of more than 30% of revenue. 

When I wrote that, Vallejo, California just petitioned for Chapter 9 and the first inklings of significant tax shortfalls were seen.  Now, tax revenue has fallen through the floor as discretionary spending is down, employment is down, land prices are down, building prices are down and construction is cliff-diving.  This business model is getting increasingly sour.

Felix Salmon is worried about cascading systemic failure in the municipal bond market and thus on the remaining bond insurers that were not wipred out in the winter of 2008 as the MBS and CDOs blew-up.

This time last year, Jesse Eisinger wrote a column all about how muni bond insurance was a racket, and an amazing business to be in:

How is it that municipalities almost never default on their debt? When communities face trouble and consider filing a claim on their bond insurance, they think twice. They don't want to risk being downgraded or shut out of the capital markets for future bond sales. It's the same rationale that might keep you from filing an insurance claim if you have a fender bender. You could figure that it's better to eat the cost of the repair than risk having your premium go up.

This is true of the first municipality to default. But it's not true of the fourth. Once a few munis have started defaulting, they're all going to be "downgraded or shut out of the capital markets for future bond sales", whether they default or not. So at that point, they might as well just default. Municipal bond insurance, it turns out, might well be yet another one of those trades which makes lots of money until it blows up

Quite a few municipal bonds are specific obligation bonds backed by specific taxes such as car rental taxes or user fees or increased sales/property taxes.  These bonds are at a higher risk of default than general obligation bonds.   Right now we know that sales tax revenue is declining rapidly, property tax revenue is declining at a slower pace as communities are taking their time re-assessing values downward and other government pass-throughs and budgetary supports are under significant pressure.  Local governments will be making a decision of taking a hit on their credit by defaulting or crippling their community with an escalating cycle of tax rate increases to produce flat or declining revenues and horrendous services.  Sooner or later, pulling out of the credit market for five years will be very attractive. 

Cap & Trade as de facto Urban Policy

By Fester:

I’m an urbanist.  I love cities, I love their chaos, their complexity, the vast network of loose ties bound by stronger ties, I love the diversity, I love the density, I love the options.  And by conventional American political standards, that makes me a little bit of an outlier as the default assumption is that cities are dirty, full of ‘other’, corrupt, inefficient and that anyone who has an option to get out should be encouraged/subsidized to get out of a city. 

A very brief history of  20^th Century planning would be of efforts to either push people into suburbia through mass subsidization of new construction mortgages, cheap gasoline, cheap cars and free highways OR the creation of pockets of suburbia within a city with the City Beautiful movement, Towers in Parks and the safe city experience for suburbanites in the downtown malls best exemplified by Baltimore’s Inner Harbor, Denver’s 16^th Street mall, Boston’s Faneiul Hall & Quincy Market.

As an urbanist, national policy is fairly depressing. 

Clinton was benign with some innovative programs for certain urban areas.  Bush, Bush and Reagan were actively anti-city as their political coalition relied upon cheap gas and cheap expansion into the exurbs.  The Carter Doctrine that the United States was the only power allowed to play in the Persian Gulf was a recognition that his political fortunes would be destroyed by the suburbs if they had to buy expensive gas. 

We actually might be seeing some pro-city policies enacted that should encourage marginal growth to occur within already built high density areas.  The most likely policy change that may occur during the Obama administration will be the institution of a cap and trade program.  This will shift some of the cost comparisons between density living and suburban living in favor of higher density.

Increasing the cost of carbon dioxide emissions means the long commute is slightly less viable, it means heating and cooling a large, single family detached house is a little more difficult, it means concrete manufacturing is more expensive, it means non-walkable neighborhoods or mono-use neighborhoods are a little less practical. 

The converse is true.  Public transportation or at least the breaking of the paradigm that every fully functional adult needs a car becomes slightly easier; attached and multi-unit housing complexes are slightly more desirable.  Walkable neighborhoods or at least mixed-use developments are more desirable (which should push through local building code reform), adaptive reuse of existing structures to capture the embedded CO2 is a slightly easier task.

New York City takes these advantages to the extreme.  For 2005, it estimated that New York’s density, efficiencies and compactness allowed the typical New Yorker to use only 30% of the average American’s annual carbon dioxide budget.  Not every city will be New York, but cap and trade should help quite a few of the medium to medium-high density cities of America retain or attract population in comparison to their regional exurbs. 

Rail Networks

By Fester:

James Wimberly at Same Facts has posted a very crude map of the potential rail corridors that could be eligible for the eight billion dollars in high speed rail projects.  The only truly high speed rail in the country is the Acela corridor from Boston to Washington.  Most other areas are currently served by Amtrak but at a much lower speed. 

The interesting thing about this map is that it proposes a series of disjointed networks. Small additional track segments could greatly increase the value of the network even if the joints were medium speed rail instead of high speed rail.  For instance, a Cleveland to Pittsburgh connector would allow for a high speed rail trip to start in Minneapolis and terminate in Boston, Jacksonville or New Orleans.  The same network effect could be achieved if the Buffalo/Niagra terminus joined in with Canadian VIA rail service that serves the Toronto to Windsor corridor along the north shore of Lake Erie.  At that point, it would tie back into American rail networks at the Detroit-Windsor border crossing.   Another area of gain would be to connect Jacksonville with Daytona Beach so that there would be a speed rail line along the entire I-95 corrdior from Portland to Miami.

Network effects are strong in rail and other high capital, fixed investment transportation system.  So if there is serious money to invest in high speed passenger and freight rail in the United States, it may make more sense to invest in one supra-regional grid instead of scattering projects and creating vericose veins of high speed commerce. 

Pittsburgh's Real Estate Resiliency

By Fester:

Greater Pittsburgh is odd. 

And no, I do not mean the pervasive wearing of Steelers' shirts on Fridays nor do I mean the willingness to put fries onto and into everything.  The real estate market here is wierd.  We seem to be fairly well de-coupled from national trends.  Home prices actually eked out a tiny gain last year and foreclosures decreased dramatically.

The Post Gazette reports:

Residential foreclosures in the Pittsburgh area dropped for the second year in a row in 2008, a 6.6 percent decline from 2007...

The average home price locally climbed 1.2 percent from $148,828 in 2007 to $150,588 in 2008.

I am curious as to why this is happening.

It could be that mortgage market regulation in the state kept some of the craziest products from being heavily marketed in the region.  I don't know how likely or how much explanatory power this has as the state has been reluctant to crack down on pay-day lending and other high interest high exploitation of ignorance/short discounting lending. It probably has some influence as the Pennsylvania counties in the Cleveland metro market are holding their foreclosure levels far below the Ohio counties in the Cleveland metro market. 

Another explanation could be that the Pittsburgh economy has successfully decoupled from the Great Lakes economy as Pittsburgh's employment picture has rapidly diverged from that of Buffalo, Cleveland and Detroit.  This decoupling could be due to a shift in the city towards a more diversified and uncorrelated or minimally correlated economic mix including a focus on export-able intermediate goods instead of finished goods that have been hit harder by the slow down faster.  This story would just mean that Pittsburgh is going into the recession at a six month to a year long lag as US exports and industrial capacity usage are cliff-diving.  

Now for some further out there speculation.  The bubble really never took off in Pittsburgh as a region.  There are a few significantly overpriced neighborhoods here and there, and significant overcapacity of new construction in the 'burbs, but it never got truly crazy in Pittsburgh.  I wonder how much of that is the survivor's pessimism that no way would anyone want to move here to justify expecting 50% annual profits on a cash basis from flipping rehabs.  And if the pessimism kept the bubble from inflating, it kept it from causing too much damage. 

Another line of speculation is that Pittsburgh's economic development problem is that it is too clubby and too depedent on strong ties while the dynamic cities and city regions are hothouses of weak ties. Those strong ties may lead to either more work-outs or more problem avoidance in the first place as credit was marginally tighter in the region.

Or finally, the combination of relatively low home prices and reasonably good employment news in 2007/2008 has made keeping current on payments comparatively easy for most people, and that could change.

Whatever the reason, the Pittsburgh region may be inadvertently creating an oasis of high social capital resiliency as other regions are ripped apart by foreclosure shocks.