Only the Names have been changed

Out here in the foreclosure belt, many blame the securitization of real estate for the boom-bust cycle we are now enduring. Securitization of loans allowed for a huge influx of cash into mortgages and huge group of middle men who profited from the sale of loans--and laughed all the way to the bank even if the loan later went into default.

While securitization was touted as something new and different, a recent article in the New York Times (click here) points out that securitization was first created in the 1920s--and may have played a major role in the financial collapse of 1929 that led to the Great Depression.

Here are some gems from the article:

“Easily obtainable financing via public capital markets corresponded with an urban construction boom,” reported William N. Goetzmann and Frank Newman in a paper just released by the National Bureau of Economic Research, titled “Securitization in the 1920s.”

“Regulation and centralization were glaringly absent,” they add. “Ultimately the size, scope and complexity of the 1920s real estate market undermined its merits, causing a crash not unlike the one underpinning our current financial crisis.”

Yet the lessons of that boom and bust have largely been ignored. Everyone remembers the 1920s and the stock market crash of 1929, but there has been little data collected on what happened to real estate securities or even on how large a market it was. It turns out that real estate securities constituted a major market, and began to falter before stocks did.

“The breakdown in their valuation, through the mechanism of the collateral cycle, may have led to the subsequent stock market crash of 1929-30,” they wrote.

The writer goes on to conclude:

That fact should raise questions about whether the securitization machine should be patched up and back in business to operate without government guarantees.

Perhaps, instead, we should find a way to get banks and other long-term investors, like insurance companies, to make — and keep — most of the real estate loans that are needed in society...

It was, instead, the same old speculative enthusiasm, even if it was wearing fancy new clothes. Investors who had seen real estate prices rise thought that trend could not end. Wall Street sharpies thought they had found a way to make lots of money while not bearing the ultimate risk if the game suddenly ended.

As it turned out, the sharpies were wrong. They too got swept up in the carnage — just as their predecessors had in the 1930s.

Great words to ponder as we look to our leaders to regulate future financial programs.

Positive View on the Future

Joel Kotkin is one of the more objective commentators in the country when it comes to the economy. He was way ahead of his time in predicting the tech bubble bursting and is quite disappointed that we've continue to neglect our manufacturing sector--which is still the key to a healthy economy in the long term.

Thus, I was really surprised when he wrote a hopeful piece for Forbes.com the other day about the strength of our economy in the long run. Entitled "Don't Give Up on the U.S." (click here for story), he outlined our competitive advantages as follows:

1. The U.S. is the only advanced country in the world with viable demographics. By 2030, all our major rivals, save India, will be declining, with ever-larger numbers of retirees and a shrinking labor force. By 2050 Germany, Japan and South Korea could approach having twice as many people over 65 per capita as the U.S. By then, the U.S. will have 400 million people, which may be more than the entire EU and three times the population of our former archrival Russia.

2. In terms of energy resources, the U.S., combined with Canada, is the second richest region in the world after the Middle East. The country possesses vast resources of natural gas, about 90 years' worth, as well as strong areas for wind power. Given America's past profligacy, the country could derive considerable savings with even modest conservation efforts.

3. America remains the world's agricultural superpower, with the most arable land on the planet. With another 3 billion people expected on the planet by 2050, the U.S. should enjoy a continuing boom in food exports.

4. Military power matters now and in the future. We are not living in a Star Trek future of earthly harmony. The U.S. leads in military technology and, yes, our martial spirit remains a positive factor, despite the portrayals from Hollywood. For all its missteps, the U.S. military has achieved its strictly war-fighting missions--in Iraq and Afghanistan, as well as a host of smaller conflicts--over the past 20 years. Meanwhile, Europe and Japan have taken themselves out of the military game, and it will be decades before China will be ready for a head-to-head challenge.

5. There is no large country that comes close to the U.S. as an entrepreneurial hotbed (Taiwan, Israel and Hong Kong come close but are far smaller). The recent Legatum Prosperity Index showed the U.S. remains by far the largest generator of new ideas and companies on the planet.

He goes on to note that China and India's future are more cloudy than many realize and discusses the key things we need to do right to make sure that we remain an economic superpower. The bottom line is that he makes me feel a lot better about our future and the world that our children will run in the distant future. It is well worth reading the entire article.

Happy New Year - Let's start with Positive News

Here's a "positive" report from the LA Times to start out the new year:

More bad news is on the way for commercial real estate, but it won't be bad enough to bring down the economy, a leading property analyst said today.

Bob Bach, the chief economist at brokerage Grubb & Ellis, refuted an assertion made often last year by other analysts that pending commercial-property bankruptcies could throttle recovery and push the country back into recession.

"Many have called commercial real estate ‘the next shoe to drop,’ but that’s really an exaggeration,” Bach said. “It implies that commercial real estate could wreak damage on the financial system equivalent to the subprime residential mortgage losses, which is highly unlikely because the value of outstanding commercial mortgages is a fraction of the value of outstanding residential mortgages."

Nevertheless, Bach said, losses will mount over the next several years for commercial-property owners and their lenders.

"If banks aren’t lending because they’re coping with losses in their real estate portfolios," Bach said, "this could impede the economic recovery.”

He predicted commercial real estate's decline in value will slow this year and begin to turn around in early 2011.

-- Roger Vincent

Data of the Decade

Here's a great blog post I found for those of us who love data. I think candidate number four is the one that we all need to consider when projecting how our economy and therefore our city budget will be doing over the next decade. Given the fact we now have a negative savings rate, it may take a while for consumer spending to recover to 2006 levels. In any case, here's the post:

Economic Statistic of the Decade Award:Finalists

Posted in Statistics by Mike Mandel on December 31, 2009

Economic statistics don’t get enough recognition for all of their hard work. So, I’ve decided to offer an “Economic Statistic of the Decade” Award. The three criteria are simple. First, we want to reward the economic statistic that best reflects the decade (both the good and the bad).

Second, we want to recognize the economic statistic that turned in a surprising performance–that is, back in 2000, if someone had shown you a graph of the statistic over the next ten years, you would have said “no way”. Third, we want to reward economic statistics that are reliable and accurate representations of the actual economy.

In the 1990s, for example, the Economic Statistic of the Decade Award would have gone to U.S. productivity growth. The runner-ups would have been Chinese economic growth, followed by global tech spending.

What about this decade? Here are the four finalists (chosen by me):
1) Housing prices
2) Global trade
3) Chinese growth
4) U.S. household borrowing

Here’s a bit about each of the finalists:

1) The boom and bust in housing prices clearly epitomizes the decade. What’s more, in 2000 nobody in their right mind would have predicted that the boom lasted as long as it did. Downside: The gyrations in the housing market may be a symptom of deeper problems, much like a fever is a symptom rather than a disease in its own right .

2) Globalization has been one of the main themes of this decade–and nothing illustrates globalization more than the rise in exports as a share of global GDP. In 1999, global exports were about 22.7% of global GDP, as measured by the International Monetary Fund. By 2008, that number was 32. 3% before plummeting in 2009. Downside: There may be systematic double-counting, as companies break up production into smaller and smaller pieces.

3) Chinese economic growth would have been one of the runner-ups for the Economic Statistics of the Decade for the 1990s. Chinese economy growth averaged an astounding 10% peryear in that decade, and looks like it’s going to get to the same level again in this decade. Downside: No one is really sure whether to trust the Chinese economic statistics or not.

4) Finally, we come to U.S. household borrowing, which probably is the clearest reflection of the financial crisis. In this decade the U.S. household sector amped up its borrowing from $500 billion in 1999 to $1.2 trillion in 2006, before dramatically cutting debt in 2009. Downside: This number from the Federal Reserve includes domestic hedge funds and nonprofit organizations, making it a bit tough to interpret.

Click here for the graph, it is pretty stunning.

TARP hangover...

Sunday's Washington Post (click here) has an interesting story about Neel Kashkari, the 35-year-old Treasury staffer who came up with TARP. How did he do it? Here's an excerpt:

In Washington, he used his BlackBerry to determine the bailout sum presented to Congress. His arithmetic: "We have $11 trillion residential mortgages, $3 trillion commercial mortgages. Total $14 trillion. Five percent of that is $700 billion. A nice round number."

Looking back, he says, he is more confident about the two-by-sixes (he's purchasing at Home Depot)

"Seven hundred billion was a number out of the air," Kashkari recalls, wheeling toward the hex nuts and the bolts. "It was a political calculus. I said, 'We don't know how much is enough. We need as much as we can get [from Congress]. What about a trillion?' 'No way,' Hank shook his head. I said, 'Okay, what about 700 billion?' We didn't know if it would work. We had to project confidence, hold up the world. We couldn't admit how scared we were, or how uncertain."

The story goes on to talk about the trials and tribulations he went through as he attempted to implement the TARP program via congress. The end result of all of his hard work over the past year--he has now retreated to a remote cabin in the Sierra Nevadas.

The story is a cautionary tale for those of us who believe we can go to Washington and actually change things.

I think it also gives those of us a fresh perspective on local government--while our work can seems overwhelming at times--we really do have the ability to effectuate positive change at the local level. This ability diminishes as you attempt to accomplish tasks at the upper branches of government.

When will we start buying things again?

One of the biggest unknowns for our city budget is where we think revenues are heading--particularly sales tax revenues. I've been spending lots of time researching this question--and I'm really struggling to find evidence that consumption is going to increase any time soon.

Here's a great posting from "Richard's Real Estate Blog" -- compliments of a professor at my alma mater (USC):

Why it is hard to imagine consumption reigniting.

Mark Thoma wonders about whether consumption will come back any time soon.A graph making the rounds uses the Federal Flow of Funds data to look at the ratio of Household Debt to GDP--the ratio rose from around 60 percent as recently as 15 years ago to more than 100 percent now. If households begin reducing their leverage back toward the long-term average, it will depress consumption for three reasons:

Debt service payments will rise when interest rates rise, and so discretionary income will be lower than it was when households had less leverage ( we are getting some relief right now because of very low interest rates on debt tied to LIBOR or the prime rate).

Households will not take on new borrowing to support spending.Households will in fact be amortizing their current debt (meaning they won't spend).

The counter-argument is that average household net worth relative to GDP remains quite normal by historical standards. But here is where the skewed distribution of wealth is a problem. I am reasonably sure that when the next Survey of Consumer Finances is released for 2010, median household net worth will be down. Corelogic says that one in four households with mortgages has negative home equity--this would be about 18 percent of owner households (about 30 percent of owners have no mortgage). If we combine this with the fact that 1/3 of the country rents, this means that the median households has little or no home equity. The median household is not loaded with financial assets, either. According to the 2007 Survey of Consumer Finances, only half of families have a retirement account, and only 21 percent owned stocks. Put this all together, the median household is not in great shape financially, and the median household consumes a higher share of its income than higher income households.

One more back of the envelope calculation on getting us back to a steady state: suppose the steady state household debt to GDP ratio is 70 percent. If the national economy uses 5 percent of its income to pay down that debt (which is about 7.5 percent of current consumption), at an interest rate of 8 percent, it would take 9.2 years to de-lever down to the steady state ratio.

[Update: the above back of the envelope assumes six percent nominal growth. If nominal growth is less, it will take longer].

Layoffs back in the News

I'm sure that most of you are aware that the State of California is beginning to come clean with their budget situation (click here for story). I don't think there was a state budget watcher anywhere who believed that the budget they passed was even close to balanced. As Dan Walters noted:

Anyone with half a brain and a hand calculator could figure out that many assumptions on which the budget was based, both spending and revenues, were unrealistic, some of them conjured out of thin air to "balance" an inherently unbalanced budget for political reasons.

The question now is whether or not the state's labor unions will attempt to come up with a revenue enhancement that continues to put off the inevitable--massive layoffs at the state level. It isn't unrealistic to think that the state will have a repeat performance of last May, when they attempted to extract more dollars out of the voters--who will likely overwhelmingly turn it down.

In the past few days, two of our neighboring cities (Lathrop and Tracy) floated the idea of tax measure for public safety. Both proposals were shot down. Here in Manteca, our Budget Advisory Committee emphatically shut down the idea of revenue enhancements eight months ago.

For some reason, our state government always seems to be the last to get the message.

We've also got a number of cities still coming to grips with our woeful revenue situation. The City of Vallejo, as part of their mid-year budget is looking at laying off seven more police officers (click here for story).

In Fresno, it looks like over 100 layoffs and furloughs are in the works.

Addressing the City Council and a packed council chamber, Swearengin said she understands the pain of those who would lose jobs and the frustration of Fresnans who could see reduced services.

But, she added, "before anything else, our No. 1 responsibility is to be good fiscal stewards."

Swearengin and City Manager Andy Souza outlined a plan to fix a $27.8 million general fund deficit expected to unfold over the next 18 months. The problem is a sharp and unexpected drop in various tax revenues and a jump nearly as sharp in expenditures, particularly retirement costs.

Swearengin's plan comes only about six months after city officials made cuts and layoffs to close a $27 million budget shortfall.
Looking ahead, city officials said an additional $4 million to $9 million in cuts may be necessary to balance the 2012 budget.

"We are an organization that must contract," Swearengin said Thursday afternoon during a meeting with The Bee's editorial board.

Among other things, Swearengin is calling for 125 layoffs, a mandatory 40-hour furlough for many employees, plus the closing of four of the Parks Department's neighborhood centers and two fire stations. The fire stations are Station 10 in east-central Fresno and Station 18 west of Highway 99.

Click here for full story

I don't expect the revenue picture to get any better anytime soon. The real estate market problems are not just a subprime issue anymore as noted in this story:

A rising proportion of fixed-rate home loans made to people with good credit are sinking into foreclosure, adding to concerns about the strength of the economic recovery.

Driven by rising unemployment, such loans accounted for nearly 33 percent of new foreclosures last quarter. That compares with just 21 percent a year ago, when high-risk subprime loans made during the housing boom were the main reason for default.

At the same time, the proportion of homeowners with a mortgage who were either behind on their payments or in foreclosure hit a record high for the ninth straight quarter.

The Mortgage Bankers Association's report Thursday suggests the housing market and broader recovery could be thwarted by the continuing surge in home loan defaults, especially as the unemployment rate keeps rising. Lost jobs, rather than the shady loans made during the housing boom, are now the main reason homeowners fall behind on their mortgages.

After three years of plunging prices, the housing market started to rebound this summer. While optimists hope the worst is over, pessimists say there are simply too many foreclosed properties that have yet to be dumped on the market and expect further price declines.

Click here for full story

Underemployment versus Unemployment

The chart above is in an article in today's San Francisco Chronicle (click here).

The article talks about the rise in the "underemployment rate." This measurement reflects the fact that the unemployment rate doesn't take into account the many workers whose hours and benefits are reduced during a recession. It gives all of us a better picture of how severe the current recession has become. This staggering number demonstrates the huge percentage of our population suffering right now. It also explains why retail sales have dropped so sharply, as underemployed workers are less likely to spend.

On the other hand, this data also can come in handy in the future at refuting the concerns that we may end up having a jobless recovery. As the economy recovers, the underemployment often drops far more quickly than the unemployment. This is due to the fact that employers often increase hours and benefits for their underemployed workers before they add positions. Thus, while it may seem like no jobs are being created, in fact, millions of underemployed workers are going back to full time status.

Let's hope that the underemployment number has peaked!

Jobless Recovery?

Apparently, all economic indicators point upward and the "great recession" may be abating. Unfortunately, it doesn't look like the unemployment rate is going to go down anytime soon. An article in today's USA Today eloquently describes this predicament.

The article (click here) notes that:

Even with an economic revival, many U.S. jobs lost during the recession may be gone forever and a weak employment market could linger for years.

That could add up to a "new normal" of higher joblessness and lower standards of living for many Americans, some economists are suggesting.

The words "it's different this time" are always suspect. But economists and policymakers say the job-creating dynamics of previous recoveries can't be counted on now.

Here's why:
• The auto and construction industries helped lead the nation out of past recessions. But the carnage among Detroit's automakers and the surplus of new and foreclosed homes and empty commercial properties make it unlikely these two industries will be engines of growth anytime soon.
• The job market is caught in a vicious circle: Without more jobs, U.S. consumers will have a hard time increasing their spending; but without that spending, businesses might see little reason to start hiring.
• Many small and midsize businesses are still struggling to obtain bank loans, impeding their expansion plans and constraining overall economic growth.
• Higher-income households are spending less because of big losses on their homes, retirement plans and other investments. Lower-income households are cutting back because they can't borrow like they once did.

In any case, this "new" normal could have a devastating impact on our city budget. Fewer jobs means fewer retail sales. Fewer jobs means fewer new homes and lower priced homes. These factors translate into less funds to operate our city services at a time when our services are in higher demand than ever.

I'm going to assume that even if this isn't the new normal, we are still looking at less funds in the future to run our community. I'll be blogging soon about how we plan to address the budget challenges we'll be facing in the future. Our staff is developing a new model that will address the need to focus our services where they are needed the most.

Economic Woes are Everywhere

Here's an excerpt from a news story I was listenting to on the radio early this morning:

SOCOLOVSKY: I'm feeling pretty bad, says Aranchas Sanchez del Canya, who works as a government researcher. My life plan was clear: a government job that let me spend time with my two kids. I thought I was set for life. Now it looks as though it won't be that way.
Her boss recently told her that her contract would not be renewed. Her husband, a computer specialist, is just barely hanging on after the small IT firm he works for let go of most of its staff over the summer.

SOCOLOVSKY: You just can't plan for the future, Sanchez says. With unemployment now at 18 percent and forecast to rise even further next year, many people who still have jobs feel them slipping away. Unemployment for those under 25 is already nearly 40 percent. With her geology degree, good grades, and the ability to speak several languages, Penelope Torre Alba says her opportunities seemed limitless.

SOCOLOVSKY: It looked like the world was mine for the taking and that I could have any job I wanted, she says. But Torre Alba's employer just gave her a choice between layoff and temp status, which means she can be let go at will.

(Click here for link to full story)

Sounds like a conversation you might overhear today at any restaurant in the Central Valley--not to mention the Bay Area, the west or the balance of the United States.

Actually, the conversation isn't even in the U.S.--it is taking place in Madrid, Spain.

I realize that we can only focus on Manteca's issues, but sometimes it is important to realize that what we are experiencing is a world-wide problem. When this city and just about every other city in the country planned out its budget in 2002, 2003 or 2006, none of us anticipated an economic downturn of this magnitude. Even if we had, there is no way we could have saved enough money to offset the huge drop in revenues that we've experienced the past few years. Ask the City of Tracy, who is quickly going through a $38 million reserve.

It may feel better to claim hindsight, but you can only base your budget on your best knowledge of the current information and past history. This city budgeted according to realistic assumptions for revenues and expenditures. This city used one time revenues for one time expenditures to make sure that the budget didn't grow at an unsustainable rate. Finally, this city put together a compensation package that could withstand what every city thought would be a worse case scenario.

Unfortunately, we are now experiencing an unprecedented drop in revenues that is of a magnitude that no one could have predicted. As noted above, this economic tsunami is worldwide and public and private sector employers in every country are going through these same struggles. It is a lot easier to throw your local leaders under the bus and blame your woes on them, but it isn't realistic and it isn't going to solve our budget deficit.

More Company for our Misery

I was mentioning the other day how our budget woes are a nationwide trend. Here is just a partial listing of articles from just the last week describing California cities that are going through the same experience as us:

By the way, on some computers, it will ask you for a password to link to these stories. Cancel out the password request, go up to the web address box and you'll see the following:
http://www.ci.manteca.ca.us/exchweb/bin/redir.asp?URL=http://www.redding.com/news/2009/oct/06/redding-mayor-suggests-ballot-measure-could-cut/%2520

Just delete out everything up to and including the "=" (equals sign) and leave the rest and you should be able to get to the story. Of course, some of the stories will already be gone, but for most this should work.


Redding mayor suggests ballot measure could cut more city benefits... Posted October 6 by the Record Searchlight
State employees take pay cuts, save 1,100 jobs... Posted October 6 by CBS 13
Alameda moves to cut health benefit costs for new hires... Posted October 5 by the IslandofAlameda.com
Recession making it tough for San Joaquin agencies to maintain workplace diversity efforts... Posted October 5 by the Stockton Record
California blunts budget cuts... Posted October 5 by the Wall Street Journal
L.A. city SEIU local: "our members get loud and angry"...Posted October 4 by OurLA.org
Is Columbus Day a holiday? State workers get conflicting advice...Posted October 4 by the Sacramento Bee
Loma Linda forced to cut staff...Posted October 3 by the Press-Enterprise
Sonoma cuts “to the bone” to balance budget... Posted October 2 by the Sonoma Valley Sun Prison educators get layoff notices... October 2 by the Press-Enterprise
Tuolumne County employees benefit from PERS windfall...Posted October 2 by the Union Democrat
Brea to temporarily cut on-duty fire staffing...Posted October 2 by the OC Register
Union concessions may ease Sacramento County budget crisis... Posted October 2 by the Sacramento Bee
Riverside County declares impasse with prosecutors...Posted October 2 by the Valley News
Union workers cut in Guadalupe... Posted October 1 by the Santa Maria Times
San Jacinto approves cuts in office hours, workers' pay... Posted October 1 by the Press-Enterprise
UC Riverside employees to get "temporary layoff" notices... Posted October 1 by the Press-Enterprise
Alameda County, SEIU come to new pact...Posted October 1 by the Oakland Tribune
546 S.F. workers get layoff notices, but many will be rehired, paid less...Posted October 1 by the SF Public Press
Vallejo IBEW president: time for resolution, redirection... Posted October 1 by the Times-Herald See also Retiree group wants to see Vallejo's Chapter 9 exit strategy... Posted October 2 by the Times-Herald
UCSF offers furloughed employees little help via "hardship loans"... Posted September 30 by the SF Public Press
Opinion: Myth of the underpaid public employee...Posted September 30 by the Boston Globe
Anaheim teachers face up to 11.75% pay cut... Posted September 30 by the OC Register
Furloughs equal more work less pay in S.F.... Posted September 30 by MissionLocal.org

NEGOTIATIONS/LABOR RELATIONS
Deputies' union says non-sworn jail guards compromise safety... Posted October 5 by the OC Register
Vallejo Con Dios: New report on unions' impact... Posted October 5 by the Times-Herald
And... Posted September 28 by the CATO Institute
Don Perata still making bank from prison guards' union... Posted September 30 by the Contra Costa Times
Glendale USD, teachers union start far apart... Posted October 4 by the Glendale News-Press
PERB ruling favors Modesto CEA leader... Posted October 2 by the Modesto Bee
Palo Alto to resume negotiations with IBEW... Posted October 2 by PaloAltoOnline.com
See also Palo Alto police managers forming own group... Posted October 1 by PaloAltonline.com See also Palo Alto managers talk of joining Teamsters... Posted September 30 by PaloAltoOnline.com
Anger is mutual for SEIU, SF mayor... Posted September 30 by the San Francisco Chronicle
Santa Maria’s City Attorney rejects ballot measure on police pay... Posted September 30 by the Santa Maria Times

PENSIONS/RETIREE HEALTH
Pensions’ post-crash reforms: Slipping away?... Posted October 5 by Calpensions.com
Pensions for new hires targeted as Marin County, area cities seek changes... Posted October 4 by the Marin Independent Journal
Daniel Borenstein: Taxpayers are stuck with public pension increases... Posted October 4 by the Contra Costa Times
San Diego County retirement board rejects CEO's advice on counsel... Posted October 2 by the San Diego Union-Tribune
LA coalition of unions: Vote yes on early retirement deal... Posted October 2 by OurLA.org
LAPD officers continue to bargain... Posted October 2 by the Los Angeles Wave
Publicizing $100,000 pensions is a way to reform the pension system — or kill it... Posted October 2009 by Governing.com
Initiative to shrink California’s employee pensions gains steam from public outrage... Posted September 30 by the OC Register
See also Legal trouble may loom if MWD board rejects new contracts... Posted September 29 by the OC Register
See also MWD retiree health plan: Too big to last?... Posted September 30 by Calpensions.com
See also MWD pension idea in line with other agencies... Posted October 5 by the San Diego Union-Tribune
California public employees have better pensions than feds... Posted September 28 by the OC Register

CALPELRA thanks Mark Flannery for his assistance in offering this service to its members.

The Truth About Jobs No One Wants To Tell You

The phrase above is the title to Robert Reich's latest column (click here). Reich, a former Secretary of Labor has been quite accurate lately at predicting the latest twists and turns in the economy. He notes that while the unemployment is just approaching 10 percent nationwide, it is likely closer to 20 percent. He notes:

Unemployment will almost certainly hit double-digits next year -- and may remain there for some time. And for every person who shows up as unemployed in the Bureau of Labor Statistics' household survey, you can bet there's another either too discouraged to look for work, or working part-time who'd rather have a full-time job or else taking home less pay than before (I'm in the last category, now that the University of California has instituted pay cuts). And there's yet another person who's more fearful that he or she will be next to lose a job.

In other words, ten percent unemployment really means twenty percent underemployment or anxious employment.

He goes on to talk about the only way to bring down our unemployment rate:

So why is unemployment and underemployment so high, and why is it likely to remain high for some time? Because, as noted, people who are worried about their jobs or have no jobs, and who are also trying to get out from under a pile of debt, are not going do a lot of shopping. And businesses that don't have customers aren't going do a lot of new investing. And foreign nations also suffering high unemployment aren't going to buy a lot of our goods and services.
And without customers, companies won't hire. They'll cut payrolls instead.

Which brings us to the obvious question: Who's going to buy the stuff we make or the services we provide, and therefore bring jobs back? There's only one buyer left: The government.
Let me say this as clearly and forcefully as I can: The federal government should be spending even more than it already is on roads and bridges and schools and parks and everything else we need. It should make up for cutbacks at the state level, and then some. This is the only way to put Americans back to work. We did it during the Depression. It was called the WPA.
Yes, I know. Our government is already deep in debt. But let me tell you something: When one out of six Americans is unemployed or underemployed, this is no time to worry about the debt.
When I was a small boy my father told me that I and my kids and my grand-kids would be paying down the debt created by Franklin D. Roosevelt during the Depression and World War II. I didn't even know what a debt was, but it kept me up at night.

My father was right about a lot of things, but he was wrong about this. America paid down FDR's debt in the 1950s, when Americans went back to work, when the economy was growing again, and when our incomes grew, too. We paid taxes, and in a few years that FDR debt had shrunk to almost nothing.

You see? The most important thing right now is getting the jobs back, and getting the economy growing again.

I think it is also imperative that we attempt to keep as many people employed as possible. That is what we are attempting to do by reducing pay and avoiding layoffs. But it is important to note that our private sector brethrens are really suffering and will continue to suffer for an extended period of time. We need to do everything we can in government to keep services levels up and keep costs low.

Items in the News

I realize that these are trying times for all of city staff. No one likes to lose income, but I guess I feel like I need to keep harping on what we have, and not what we don't have. A number of folks have asked me to try and put more positive news in the blog. I think the positive story is that even with the proposed reductions in salary, we are still in far better shape than the typical San Joaquin County resident.

For example, here is a link to a story in today's Stockton Record (click here) about the county's poverty rate, which has gone up markedly in the past year. Nearly one in four children in our county lives in a household with an income below the poverty line (22,000 per year). In another article (click here), UOP's Business Forecasting Center notes that domestic output in San Joaquin actually dropped last year. The article notes:

The Stockton metro area, essentially San Joaquin County, saw its constant dollar GDP fall 0.3 percent in 2008 to just under $16 billion, ranking it 264th in total economic growth.

And the area's long economic slide deepened this year, said Jeff Michael, director of the Business Forecasting Center at University of the Pacific.

"When you look at this number next year, in '08 to '09, Stockton ... will be more negative," he said Monday.

"What makes it a little bit painful for this area is we're coming off a couple of years of subpar growth in '06 and '07."

The article further reinforces why we shouldn't even considering borrowing funds to plug our budget deficit for this year. We are in the middle of a very deep recession further exacerbated by the fact that we are in the center of the mortgage meltdown. We rode the top of the crest during the housing bubble and we are now drowning in debt with the rest of the Central Valley.

The economic trends are certainly not pointing upward, and our hope that property tax and sales tax remain flat is best case and not near the worse case scenario. An article from yesterday discusses the current state of property tax collections in Calaveras County (click here). It describes the world of "negative supplementals" that we've been warning our employees about.

...Calaveras County since August has been sending out more in refunds than it is receiving in additional taxes for properties that get supplemental assessments midyear due to sales or new construction.

Supplemental assessments are in addition to regular property tax bills and are a way to either bill for the additional taxes or send a refund for the part of a year that a property is under new ownership or has newly completed construction. The supplemental is no longer necessary in subsequent years once a new base value is set for a property.

Acting Calaveras County Assessor Leslie Davis says that the negative revenue from supplemental assessments is an ominous sign that a significant drop in the county's property assessment roll and property tax revenue may be ahead.

While we've got a decent amount of new construction occurring in Manteca, we also have a lot of homes selling at less than their assessed value. This is why we've projected no increase in net property tax collections during the 2009-2010 budget year.

The Bulletin has a good article today (click here) as well about the need to be prudent. How can we possibly expect to borrow to plug our structural budget deficit. There is no way we can take on additional debt when all the economic forecasts clearly demonstrate that we won't have the money to pay back the funds in the future. I have no interest in behaving like the State of California and putting off the inevitable--and then paying a greater price for delaying the pain.

More on the California Economy

Wednesday's news was filled with lots of stories on the latest California Economic Forecast. The SacBee (click here for link) notes that the recession will end this year, but according to the two major economic forecasts:

"...the cutbacks in state and local government, along with the continuing fallout from the mortgage meltdown, will make 2010 feel like another year of recession..."

The story goes on to note that at least 24,000 government jobs have been eliminated with many more to come.

The article in the San Francisco Chronicle (click here for link) focuses on the longer view, and notes that this recession could mark a fundamental change in consumer behavior. It points out:

"...Both forecasts characterized California as the epicenter of back-to-back consumption binges fueled by the dot-com boom and the housing bubble, and argued that now the state faces big adjustments as it recovers from ills that have long plagued the U.S. economy.

"Consumers have been on a spending binge ever since 1995," said Jon Haveman with Beacon Economics, as soaring 401(k)s and, later, inflated home prices made Americans feel so wealthy they stopped saving money.

"California is different from the rest of the United States in the magnitude of all this," said Jerry Nickelsburg with UCLA Anderson, as people here exemplified the bad American habit of borrowing to spend.

"Now the easy-money days are over, the inflated asset values are gone, the home equity boom is over and people are going to have to save more, which means less consumption and slower growth," Nickelsburg said..."

The article goes on to point out:
"...Ed Leamer, director of the UCLA Anderson Forecast, said consumers usually roar back from recessions with spending that lifts production and fuels hiring, but he thinks that is unlikely during this recovery because Americans have been living beyond their means for too long - borrowing too much and importing more than the country sells abroad.

"We need to turn our shopping malls into factories," Leamer said "Our economy over the next decade is going to have to build more of the stuff we buy."

Haveman said the painful adjustments now under way should eventually benefit California and the Bay Area, which lead in technology, biotechnology, clean energy and other cutting-edge industries..."

While this may be good news for our economy in the long run, it could create additional challenges for local governments (such as Manteca) that are heavily dependent on consumer spending to fuel our local budgets via sales tax.

Economic Outlook

Due to budget constraints, I was not able to attend the Annual International City Managers Conference this week. Luckily, the Ventura City Manager is there and was gracious enough to share one of the keynote addresses from one of the titans in the economic world, Dr. Alice Rivlin. I believe the theme of her speech is one to consider as we project our city budget fortunes into the future. Here's Rick Cole's post on her presentation:

"Positive, but disappointing growth for years to come"

Dr. Alice Rivlin was the last Director of Management and Budget to have balanced the Federal Budget, so her opinions come highly regarded. The former Vice Chair of the Federal Reserve spoke at this morning's general session of the ICMA conference here in Montreal.

She traced, with the benefits of hindsight, the now familiar sources of the global economic reckoning from outright greed and corruption to the larger problem of "overborrowing and overspending." On that foundation, she discounted the chances of a second dip ("possible, but not very likely") and inflation ("inflation happens when demand is high and the labor market is tight -- we should be so lucky.") But she ruefully acknowledged that "if I'm right, you are going to have continuing tough times" because the prospects are for "positive, but disappointing growth for several years to come."

"It's not going to be good for shopping centers, commercial property and new housing," she predicted, especially in regions (and at the edge of regions) where too much suburban sprawl occurred in the last boom. Consumers are simply tapped out and will need to pay down debt before they can resume spending.

To Rivlin, the greatest threats ahead are "looming Federal budget deficits" that are "the product of making too generous promises combined with uncontrolled per capita costs on medical care." This mismatch between our appetite and our ability to pay for it forces us to continue to borrow from other countries, particularly China and Japan. "We can't go on doing that," she noted dryly. "We're going to have to cut entitlement spending and raise taxes." Both are politically difficult, but necessary for the two parties to compromise on.

Turning attention to local government, she joked, "If you wanted an easy job, you wouldn't have gone into this line of work." Because local government revenues will recover even more slowly than the sluggish economy, there will continue to be a clash between citizen expectations and willingness to pay. The only bright side of this squeeze will be that it will be easier to win political backing for difficult, but overdue, efficiencies. There will simply be "no choice" about making even painful changes.

That certainly resonated with our challenges in Ventura. Having cut $11 million from this year's budget, we will either have to live with reduced services or pay more for years to come. The "recovery" predicted for the end of the year simply won't come strongly or quickly enough. "Living within your means" is not easy. But the alternative of "overborrowing" to finance "overspending" has been spectacularly discredited at both the Federal and State levels. We must and will take a different, more sustainable, route.

Locally, the University of Pacific released their latest economic forecast for the central valley. They forecast an end to the recession late this year, and believe unemployment rates will begin to drop off by the end of next year. Read more about the forecast here.

House Sizes Shrinking

I found this post on a USC professor's real estate blog interesting. It talks about the disconnect between median income and housing size. As I look at the homes we are building out here in the central valley, I'm very concerned that we are over consuming housing--which in the long run diverts dollars from other parts of our economy. I'm worried that our retail sales will suffer in the long run as many of our homeowners will be forced to put a disproportionate amount of their income into maintaining homes they can't really afford in the long run--particularly after the kids leave home.

In addition, large homes on large lots typically means more miles of roads, water lines, sewer lines and storm drains to maintain. At an time when we seem to be getting less income per household instead of more, this is a disturbing trend. We need to look at what size home and housing subdivision is sustainable for both the city and the residents. In any case, here is the post:


One thing that has led me to believe that the housing market in Southern California is largely at bottom is the fact that many houses are selling at less than replacement cost. While such a discrepancy can exist for a long time in places with declining population, replacement cost is a pretty sound fundamental for determining the minimum sustainable house price in areas with growth.

The report on median incomes released yesterday, though, suggests to me a flaw with my line of reasoning. While the average new house has grown about 20 percent in size over the past ten years, median household incomes have actually fallen a bit. If house size is a proxy for house quality (and we have good statistical evidence to think that it is), then house quality has outstripped the ability of people to pay for it.

When comparing market prices to replacement cost, we really need to think about depreciated replacement cost. Depreciation comes in three flavors: physical, functional and economic. Physical depreciation happens because things wear out as they age--it is what Congress is thinking of when it allows depreciation deductions for investment property and plant and equipment.

Functional depreciation happens when a component of a capital asset does not perform its function well by current standards. Think of a furnace that uses lots of energy, and could be replaced by something more efficient. It is possible that it could work as a furnace for years, but it still would be best replaced by something more efficient.

Finally, there is economic depreciation, which happens when the demand for something (like Detroit real estate) disappears. It is possible that large houses have incurred economic depreciation because people lack sufficient income to afford them. If this is true, values can fall below original construction cost and stay there for some time.

Such considerations do not, of course, apply to reasonably well located, modest homes--I continue to believe that 1500 square foot houses in the San Fernando Valley and the central part of the San Gabriel Valley are reasonably priced now. But the market for larger houses may be troubled for some time yet to come.One other implication: builders should construct smaller houses in the years to come. This vindicates a prediction I once made. Unfortunately, I made it in 1990.

NUMMI Closing

I originally blogged this AM about the pending decision on the fate of the NUMMI plant in Fremont. Here's an update.

Breaking News from the San Francisco Chronicle:

(08-27) 13:01 PDT FREMONT -- Workers at New United Motor Manufacturing in Fremont assembled in a giant meeting hall this morning to hear plant manager Kunihiko Ogura deliver the news that Toyota has decided to halt production at the factory in March, a move that dooms about 4,700 jobs inside the plant with huge ripple effects throughout California. Read more: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/08/27/BU6919EL3P.DTL#ixzz0PQBy7eAu

The 4,700 jobs in Fremont are just a small percentage of the total job loss that this plant closure will create in the Bay Area and the Central Valley. Local economists conservatively estimate that nearly 10,000 manufacturing jobs in San Joaquin County are dependent on the NUMMI plant. A good chunk of the domestically produced parts for the vehicles came out of plants in San Joaquin County. The NUMMI plant closure could increase our local unemployment rate by as much as 5 percent!

As is typically the case, the state of California was very slow at reacting to the pending plant closure. There were a number of bills plodding through the legislature to provide incentives for NUMMI to stick around. Even though Toyota had made it clear that a decision was coming in late August, the earliest any legislation could have passed would have been mid-September. (click here for an article that discusses the state's glacial progress in providing incentives)

While it still may not have staved off the closure, it is symbolic of the absolute inability of our legislature to do anything right--and further reinforces our state's anti-business stance. While I hope this will serve as a wake up call that California can't continue to run businesses out of our state, only time will tell.

In the meantime, the business leadership in San Joaquin County needs to help its existing industrial base survive this serious blow.

Real Estate Prices Fall Statewide

Here's one of the latest posts from California City News:
(P.S. That isn't a typo, that really says "1933"!)

State Property Values Fall for First Time Since 1933
As if you needed any more data to confirm the dire straights of the state economy, the Board of Equalization reported this week that total state and county property assessments dropped 2.4 percent from last year. We've all been hearing about property values in a tailspin for months, but this number is actually pretty significant -- it's the first time values have declined since the Great Depression.
Of course this means big trouble for state and local revenues, but that's no surprise. Here's the lowlights:
Assessed values dropped 9.9 percent in the northern San Joaquin Valley,
4.8 percent in the greater Sacramento area
4.2 percent in the southern San Joaquin Valley.
San Francisco and Trinity Counties both saw values increase by 5% or more.
Read more in the SacBee and LA Times. And a glimmer of hope: Realtors said home sales were up 12 percent last month.

Two Track Economy

In Thursday's New York Times (link here), M.I.T. economist Simon Johnson adds credence to what many of us are thinking about today's economy:

The United States has, over the past two decades, started to take on characteristics more traditionally associated with Latin America: extreme income inequality, rising poverty levels and worsening health conditions for many. The elite live well and seem not to mind repeated cycles of economic-financial crisis.

He discusses the many competing economic forces we are now facing and how they will impact the average family. His bottom line concern is that the rich will survive and the rest of us will continue to lose ground -- possible indefinitely.

He doesn't provide any solutions, just food for thought--and the importance of finding a way to keep the middle class alive. He like most economists, believes that you can't have a healthy economy without a healthy middle class.

Retailer Blues

Today's links to the Sac Bee focus on retail sales--which as most of you know are not only the lifeblood of our economy, but really important to us in local government. Sales tax is responsible for 25 percent of our general fund revenue.

As I receive information on our revenues, I always pass them on to the readers. Today, I don't have any Manteca-specific information, but I do have some interesting news to demonstrate the horrific condition of our state economy.

There will be 15 smaller cities in the state (including nearby Ripon) who won't be receiving their next sales tax payment! These cities allocation was too high last quarter, and the adjustment to this quarter's payment completely wipes out their allocation. In fact over half of the cities in the state will be getting a readjustment due to last quarter's lackluster sales. Luckily, here in Manteca we are not one of them. To read more about this situation, click here.

In a related note, click here for a story that basically tells some personal stories of why sales taxes are dropping so quickly.

No Money Down the Culprit

Living and working in the center of the national foreclosure crisis keeps one's interest piqued in the many theories that abound as to what happened...and what will happen next. While much of the media has focused on subprime loans, there is hard data that shows that subprime loans were just part of the sideshow.

Since I'm a numbers guy at heart, I put the most stock in the analyses that take an objective look at the numbers. In last week's Wall Street Journal, a University of Texas professor presented findings that were based on the analysis of over 30 million mortgages. While subprime loans were one of the culprits that led to this mess, negative equity was the biggest contributor to homes going into foreclosure. Here is an excerpt from the article:

Many policy makers and ordinary people blame the rise of foreclosures squarely on subprime mortgage lenders who presumably misled borrowers into taking out complex loans at low initial interest rates. Those hapless individuals were then supposedly unable to make the higher monthly payments when their mortgage rates reset upwards.

But the focus on subprimes ignores the widely available industry facts (reported by the Mortgage Bankers Association) that 51% of all foreclosed homes had prime loans, not subprime, and that the foreclosure rate for prime loans grew by 488% compared to a growth rate of 200% for subprime foreclosures. (These percentages are based on the period since the steep ascent in foreclosures began -- the third quarter of 2006 -- during which more than 4.3 million homes went into foreclosure.)

Sharing the blame in the popular imagination are other loans where lenders were largely at fault -- such as "liar loans," where lenders never attempted to validate a borrower's income or assets.

He goes on to note that mortgage resets (common in subprime loans) were a minor factor and that while only 12% percent of homes had negative equity, they were 47% of all foreclosures.

The conclusion of this article should be disconcerting for our federal and state policymakers, who seem to focused on bailing out owners with bad loans. The author notes:

The difference in policy implications is enormous: A significant reduction in foreclosures will happen when and only when housing prices stop falling and unemployment stops rising.

Although the government is throwing money -- almost $2 trillion and counting -- at the mortgage markets with the intent of stabilizing house prices, its methods are poorly targeted. While Federal Reserve actions have succeeded in reducing mortgage interest rates, low interest rates induce refinancings more than they do home purchases.

His solution is much more simple, we go back to the way residential real estate used to function:

Rather, stronger underwriting standards are needed -- especially a requirement for relatively high down payments. If substantial down payments had been required, the housing price bubble would certainly have been smaller, if it occurred at all, and the incidence of negative equity would have been much smaller even as home prices fell. A further beneficial regulation would be a strengthening, or at least clarifying at a national level, of the recourse that mortgage lenders have if a borrower defaults. Many defaults could be mitigated if homeowners with financial resources know they can't just walk away.

To read the article in its entirety, click here.

Valley Cities hardest hit by Recession

The Brookings Institute released a study last week on the economic condition of the 100 largest metropolitan areas in the country. San Joaquin County and its 700,000 residents did not fare well in the study.

We were ranked dead last in price appreciation, 99th in Foreclosures, 98th in employment (just ahead of Fresno and Modesto), and 96th in economic growth. One bright spot was our 14th place rating in wage growth.

In any case, our congressional delegation is attempting to bring attention to the current and historic economic plight of the central valley. The House Financial Services Committee held a hearing on the Valley's dire economic circumstances. Lawmakers considered, though did not vote on proposals including one by Reps. Dennis Cardoza, D-Merced, and Jim Costa, D-Fresno, that would establish the Valley as an "economic disaster" area eligible for special federal aid.
"We are one step closer to seeing the relief we deserve in the Valley," Cardoza declared in announcing the upcoming hearing.
In a slightly different rhetorical vein, Rep. Devin Nunes, R-Visalia, says he will be bringing more congressional attention to the irrigation water shortages that have aggravated the Valley's farm economy. Starting this week, Nunes plans to offer water-related amendments on House spending bills; he conceded the amendments will lose, but he believes they will still serve a purpose.
"We need to draw a clear congressional record of those people who want to cut off water to the Valley," Nunes said, adding his belief that congressional Democratic leaders "want the Valley killed."
While not addressing the Valley's specific water woes, nor the proposals for an "economic disaster" designation, Berube stressed that the region-to-region disparity will complicate the job of "policymakers seeking to ensure a truly national rising economic tide."

We'll let you know if any thing positive emanates from the hearing.

To read the Brookings Institute study, click here.

Not all the economic news is bad...

We're deluged daily with depressing economic news. Every week we hear about the unemployment rate heading north as mass layoffs impact every business sector. However, the New York Times had an excellent article today about job growth. It points out that despite being in the worst economic downturn since the Great Depression, millions are still being hired. In fact, while 4.8 million workers were fired or left their jobs in February, 4.3 million workers were hired in that same month.

If you are interested in reading a little good news, click here.

Another story in the New York Times focuses on Sacramento real estate. The story is entitled "Where Home Prices Crashed Early, Signs of an Early Rebound". The story basically concludes that we've found the bottom of the market. While not great news, let's hope they're right and we don't have another year of free falling prices. You can access the story here.

The Los Angeles Times also weighs in on today's residential real estate market. While higher end homes and homes in outlying areas are suffering, moderately priced homes are being snapped up quickly in today's low interest rate environment. While LA prices are now yet down to 2005 Manteca prices, there are a lot of homes now selling for less than $500K as noted in the story you can access here.