June 24, 2016 14:30 CDT
Thanks to modern technology, I have had the pleasure of spending nearly all of the last 18 hours with the United Kingdom's cable news network, Sky News, watching the election returns and aftermath [of the successful British European Union referendum (Brexit). Four weeks, the "Remain" campaign has been explaining that leaving the EU would result in huge economic and market disruption.
When, contrary to expectation, it became clear fairly early in the evening that Brexit would pass, there were frequent reminders of these predictions. The value of the pound sterling dropped from $1.50 to $1.32 as the votes continue to be counted and there was never the slightest indication of a turnaround.
When the markets opened, there were indeed losses. And, a number of the financial experts, political consultants and members of Parliament interviewed were quick to point out that the predictions were correct. For most of the day following the election, watching Sky News gave the impression that there had been a disastrous financial meltdown. However, now, more than 12 hours after the final declaration at Manchester City Hall, Sky News is beginning to suggest that the financial losses may have been modest.
The leading stock market index in London, the FTSE 100 experienced an 8.7 percent drop in early trading. However by the close of trading, the decline had fallen to only 3.15 percent, the largest drop in five months. Five months? Perhaps most amazingly, today's close was higher by two percent than Monday's opening. The day's loss would have needed to be 75 percent higher to have been among the 10 worst in history. Yes, this was a big loss, but must have surely been disappointing to the analysts who were basking in their own exaggerations earlier in the day. By the end of the day, the pound had recovered to $1.37.
Nor did the London stocks do worse than those on the continent. French and German stock prices were down more than twice as much as the FTSE 100, as well as in Tokyo. Stocks in Spain and Italy were down four times as much.
Of course it is far too early to predict the economic impact of Brexit. But it was humorous watching the "spin doctors" whose narrative seemed to be "we told you so." I think there is much more to this than that SW1 is out of touch with the people, "SW1" is the postal code prefix for Parliament in Westminster and has the same connotation of separation from the people as "inside the beltway," as applied to Washington.
It may be that the insiders have lost credibility with too many voters. One former Labor consultant, who was as effective in missing the point as any other, poignantly suggested that perhaps too many of the voters had not participated in the post-recession recovery. Hear! Hear!
For years, some provincial governments in Canada have been either forcing municipal amalgamations or offering incentives for municipalities to merge. This has included municipalities from the largest (Toronto), which was forced into a merger over voter disapproval in 1998 in an advisory election to rural municipalities with fewer than 1,000 in Manitoba, forced to merge by the recently defeated provincial government.
A heated debate has ensued for decades over the issue. Those who believe amalgamations are beneficial claim that costs will drop along with taxes. They claim amalgamations reduce duplication of services. Those who believe that amalgamations tend to be harmful (in most situations, this writer), note that merging the cost structures and political cultures of even adjacent municipalities is likely to raise costs and taxes and note that the duplication of services claim ignores the fact that municipalities have exclusive service areas that preclude such a result.
Besides the disagreements over the quantitative evidence, the local opponents invariably rely on their own interest in keeping government close to home, not believing that bigger government routinely produces greater efficiencies.
The pressure to amalgamate continues in Canada. Recently, six Pictou County, Nova Scotia municipalities began to consider amalgamating. Two dropped out, but the remaining four took advantage of a provincial government program to study amalgamation and then place the question before voters.
The province offered $27 million for infrastructure costs, operating costs and transitional costs, in the event that the amalgamation took place. On May 28, the voters soundly rejected the amalgamation, by a nearly two to one margin. Residents in New Glasgow supported the amalgamation strongly, residents in Pictou narrowly defeated it, while residents of Stellarton and the municipality of Pictou County opposed the measure by three to one margins. According to The News, only four wards or districts approved the plan out of the 21 in the four municipalities. The Newsarticle includes a detailed chronology of the events leading up to the rejection.
According to CTV News, The Nova Scotia Utility and Review Board had projected the merger would produce annual savings of $500,000 annually, which pales by comparison to more than 50 times higher provincial offer of $27 million as an incentive to amalgamate. Further, as has been shown in Toronto and elsewhere, higher costs can result, even where substantial savings have been projected.
Earlier this month (May 9, 2016) the Orange County (California) Grand Jury issued a report entitled: “Light Rail: Is Orange County on the Right Track,” which is on the Grand Jury website here. The report largely concludes that it is not and that there is a need for a light rail system in Orange County. On page 7, the 2016 Grand Jury report says: “No Grand Jury has reported on development of light rail systems in Orange County.”
In fact, there was a previous report, at: http://www.ocgrandjury.org/pdfs/GJLtRail.pdf, which is a 1999 report of the Orange County Grand Jury entitled: “Orange County Transportation Authority and Light Rail Planning.” Both the 1999 and 2016 reports are on the Orange County Grand Jury website as of May 25, 2016. The 1999 report reached fundamentally different conclusions than the 2016 report. Obviously, the 2016 report makes no attempt to reconcile its findings or analysis with the 1999 report.
Inappropriate Density Comparison
There are additional problems with the 2016 Grand Jury Report. In making the case for light rail in Orange County, the 2016 Grand Jury put considerable emphasis on the fact that Orange County’s population density is higher than that of Los Angeles County. The reason for Orange County’s population density advantage is the fact that much of Los Angeles County is in the largely undevelopable Transverse Ranges (including the San Gabriel Mountains), with a considerable amount of rural (not urban) desert. The difference is that Orange County’s land area is approximately two-thirds urban, while Los Angeles County’s land area is about one-third urban. This renders the overall density comparison for urban transportation planning meaningless.
Indeed, the urban density of Los Angeles County is substantially higher than that of Orange County. According to the United States Census Bureau, the population density of the urban areas in Los Angeles County was 6,859 per square mile in 2010, well above Orange County’s 5,738. Los Angeles County’s densest census tract is nearly 2.5 times the density of any census tract in Orange County.
Transit is About Downtown
Even so, urban rail ridership bears little relationship to overall urban population density (otherwise the San Jose urban area would be a better environment for rail than the New York urban area). In 2010, San Jose’s density was about 5,820, while New York’s was 5,319 (Los Angeles was 6,999, including the most dense parts of Los Angeles and Orange County and part of San Bernardino County).
One of the most important keys to transit ridership is the concentration of work destinations in a dense central business district (CBD), to which nearly all high capacity and frequent transit services converge. In the United States, 55 percent of all transit commuting destinations are in the six largest municipalities (such as the city of New York or the city of San Francisco, as opposed to metropolitan areas) with the largest central business districts. This is dominated by New York with about 2,000,000 employees in its CBD. On the other hand, San Jose has one of the smallest central business districts of any major metropolitan area and a correspondingly smaller transit market share than the national average. Orange County, with an urban form far more like San Jose than New York or San Francisco, has little potential to materially increase transit ridership with light rail.
The record of new urban rail in the United States is less than stellar, evaluated on the most important metric. Generally, new urban rail has resulted in only minor increases in transit’s miniscule market share and in some cases there have been declines.
In the case of Los Angeles, on which the Grand Jury relies for its conclusion favoring light rail development, three one-half cent sales taxes and spending that has amounted to more than $16 billion on development of new rail lines. Yet, transit ridership has fallen, as reported in the Los Angeles Times (see: “Just How Much has Los Angeles Transit Ridership Fallen”). Former SCRTD (predecessor to the MTA) Chief Financial Officer Thomas A. Rubin has also suggested that the MTA ridership decline may be greater if adjusted for the increased number of transfers that have occurred in the bus-rail system compared to the previous bus system (For example, a person traveling from home to work who starts on a bus, transfers to rail and finished the trip on a bus, counts as three, not one).
The Grand Jury report notes:
“The California Penal Code Section 933 requires the governing body of any public agency which the Grand Jury has reviewed, and about which it has issued a final report, to comment to the Presiding Judge of the Superior Court on the findings and recommendations pertaining to matters under the control of the governing body. Such comment shall be made no later than 90 days after the Grand Jury publishes its report (filed with the Clerk of the Court).”
This would apparently require a response by August 9, 2016
Permission Granted to Cite or Quote this Article or the Linked Documents
Any respondent is hereby granted permission to cite or quote from this article or the linked documents.
There seems to be no end to the difficulties facing Honolulu’s urban rail project. In an editorial, Honolulu’s Civil Beat noted that federal officials fear the project cost may reach $8.1 billion, which is more than 50 percent above the “original estimate” of $5.2 billion. The cost blowout of nearly $3 billion would be far more than state consultants suggested in a 2010 report. That report, by the Infrastructure Management Group (IMG) in conjunction with the Land Use and Economic Management Group of CB Richard Ellis and Thomas A. Rubin estimated a “most likely scenario” in which the rail cost overrun would have been $909 million (Note).
This is, however, a particular concern to local citizens, since it has been suggested that no rail project has cost more in relation to its population base in US history. If the the project costs $8.1 billion, the IMG et al report estimate will have turned out to be far too conservative, less than one-third the overrun. At $2.9 billion this extra cost is nearly $3,000 for every man, woman and child in Honolulu. It is more than $8,500 per household.
The Civil Beat editorial is here.
Note: Thomas A. Rubin’s more recent analysis of rail and transit ridership in Los Angeles is here.
The Washington Metro passenger safety fiasco (see: America’s Subway: America’s Embarrassment?) has only gotten worse. On May 10 the Washington Post reported the federal government has twice threatened to close the system if the Washington Area Metropolitan Transportation Authority (WMATA) failed to “take actions to keep passengers safe.” U.S. Secretary Anthony Foxx.
According to the Post, “The most recent incident to illicit that threat came last Thursday after an arcing insulator exploded near a platform at Federal Center SW. The explosion, a fireball followed by a shower of sparks, was captured by Metro’s security cameras. On Tuesday, at a sit down with reporters, Transportation Secretary Anthony Foxx described his reaction to the video. ‘It was scary.’”
But Foxx went on to say that “even more worrisome was Metro’s conduct following the incident.” Foxx indicated that Metro’s response had not been sufficient in view of the seriousness of the incident.”
On the next day (May 11), Federal Transit Administration Acting Administrator Carolyn Flowers took the unusual action of a letter to WMATA General Manager Paul Wiedefeld, itemizing and prioritizing the necessary repairs: “I am therefore directing WMATA to take immediate action to give first priority to these repairs.” The letter is reproduced below.
On the same day, the Post editorialized (“Metro’s Dangerous Complicity”): “An overhaul in Metro’s culture is what is needed; that begins with accountability.
Not only is this an embarrassment for America’s Subway (as a previous Washington Post article suggested, see “Metro sank into crisis despite decades of warnings”), but the necessity for the nation’s second most patronized subway, in perhaps the nation’s most sophisticated metropolitan area, having to be directed (appropriately) by a federal agency is even more astounding.
At the same time, it is important to note the extraordinary nature of this case. There are many Metro (heavy rail) systems in the nation, as well as many light rail and commuter rail systems. Nor should it be assumed that Metro’s burden is anything more than a result of its own failures. Somehow, for example, New York’s subway manages to safety carry more than 10 times as many riders. None of the many systems has ever required such intervention by the federal government on passenger safety, which is perhaps the most basic requirement of transportation systems. This is not “business as usual.”
“California Commuters Continue to Choose Single Occupant Vehicles,” according to a report by the California Center for Jobs and the Economy. The Center indicated:
“The recent release of the 2014 American Community Survey data provides an opportunity to gauge how California commuters have responded to this shifting policy. The data clearly reflects that even with the well-documented and rapidly rising costs of the state’s traffic congestion and costs associated with the deteriorating condition of the state’s roads, California workers continue to rely on single occupant vehicles for the primary mode of commuting. Moreover, their reliance on this mode of travel continues to grow both in absolute and relative terms (emphasis in original).
California has experienced substantial growth since 1980. There are approximately 7,000,000 more workers today than 35 years ago. The Census Bureau data shows that 83 percent of the new commuting has been by single-occupant automobile. Working at home accounted for 11 percent of the new commuting, while transit accounted for less than one half that figure, at 4.5 percent (Figure). In 1980, transit accounted for more than three times the volume as working at home. By 2014, the number of people working at home exceeded that of transit commuters.
The Center noted that state policies to discourage single-occupant commuting had been of little effect:
“The substantial investments in public transit, bike lanes, and other alternative modes have not produced major gains in commuter use. Instead, these investments appear to have simply shifted the choices made by commuters who already are committed to getting to work through modes other than single occupant vehicles. From 1980 to 2000, public transit use grew by 116,000 while “other” modes dropped by the same amount. From 1980 to 2005, public transit use grew by 121,000 while “other” modes dropped by 113,000. In the following years, 1/3 of the growth in public transit and “other” modes was offset by reductions in carpool use.”
The report credited impressive public transit gains in the San Francisco Bay Area, but went on to say that:
“even in the Bay Area, growth of public transit and the “other modes” has come largely from the shrinking relative use of carpooling.”
While improving transit ridership is a good thing, to the extent that it removes passengers from car pools, there is no gain in traffic, because the car and driver are still on the road.
The report laid considerable blame on the cost of houses in California:
“California, the growing body of land use, energy, CEQA, and other regulations affecting housing cost and supply has put both the cost of housing ownership and rents within traditional employment centers out of the reach of many households.”
California’s housing affordability is legendarily desperate. Since the imposition of strong land use regulations began in the early 1970s, the median house price has risen from three times (or less) times median household incomes in of the state’s metropolitan areas to over nine times today in the San Jose and San Francisco metropolitan areas, over eight times in the Los Angeles and San Diego areas and over five times in the Riverside-San Bernardino area (Inland Empire).
Perhaps the most important “take-away” from the report was that: “The current de facto policy of trying to reduce commuting by increasing congestion and its associated costs to commuters has to date not shown itself to be successful.” Simply stated, the vast majority of jobs and destinations in all of California’s urban areas are not accessible by transit in a reasonable time. The question for most California commuters is, for example, not whether to drive or take transit to work, but whether to go to work at all, since most jobs are not readily accessible except by car.
A study in the Canadian Medical Association Journal (CMAJ) indicates that the survival rates of cardiac arrest (heart attack) is considerably worse at higher floors. Survival rates were compared by residential floor in Toronto. The article implied that the longer time necessary to reach patients after having arrived on the scene was likely a factor. Further, it was suggested that the longer time required to reach the hospital from the higher floors could be a factor, since cardiopulmonary resuscitation (CPR) is suboptimal until the patient is in the hospital.
The study examined “911” response calls to high rise residential buildings in Toronto and found that the best survival rates were on the first and second floors (4.2 percent). Above the second floor, the survival rate was 40 percent less, at 2.6 percent. Above the 16th floor, the survival rate dropped 80 percent from the first and second floor (0.9 percent). There were no survivors above the 25th floor (Figure).
The study concluded: “With continuing construction of high-rise buildings, it is important to understand the potential effect of vertical height on patient outcomes after out-of-hospital cardiac arrest.”
New research by London school of economics Professor Christian Hilber and Wouter Vermeulen of the Netherlands Bureau for Economic Policy Analysis provides strength and evidence of the connection between high housing prices and strong regulatory constraints. The paper advances the science by estimating the share of house price increases attributable to regulatory constraints. Hilbur and Vermeulen show that supply constraints are considerably more important in driving up house prices than the physical constraints (such as lack of land or topography) and lending conditions or interest rates:
"In a nutshell, in our paper we use this unique data to test our prediction that house prices respond more strongly to changes in local demand in places with tight supply constraints. In doing so, we carefully disentangle the causal effect of regulatory constraints from the effects of physical constraints (degree of development and topography) on local house prices, holding other local factors constant and accounting for macroeconomic fluctuations induced, for example, by changing lending conditions or interest rates."
Their conclusions are based on analysis of housing markets in the United Kingdom since 1979. Unlike the United States, Canada, Australia or New Zealand, the United Kingdom was fully engulfed by urban containment regulatory policy by that time.
Perhaps the most important advance of the research was the author’s quantification of developable land. This is a relatively new direction in research, with perhaps the most important early contribution from Alberto Saiz of Harvard University, whose estimates relied on the assumption of a 50 mile radius of land from the cores of US metropolitan areas. My response doubted the usefulness of measuring housing markets with a fixed radius, not least because since some metropolitan areas (and even built-up urban areas) extend beyond that distance. Hilbur and Vermuelen avoid this problem by estimating developed land by local authority area, which allows for analysis at the housing market level (which is usually larger than the local authority area).
The authors also note recent research on the consequences of land use regulation to economic growth and stability. These include Hseih and Moretti, who found that without tight housing regulation, the gross product in the median city might be nearly 10 percent higher, and Glaeser et al research showing the greater volatility of prices in a tightly regulated environment.
The authors summarize the problem:
"Absent regulation, house prices would be lower by over a third and considerably less volatile. Young households are the obvious losers, yet macroeconomic stability is also impaired and productivity may suffer from constrained labour supply to the thriving cities where demand is highest."
This is important research in a world struggling to restart healthy economic growth and reverse the decline of the middle-income standard of living.
That's what the Honolulu Star Advertiser calls it in an April 8 editorial entitled "Rising Rail Chaos Bodes Ill for Us All." Honolulu’s urban rail project has experienced a host of problems, which were described by University of Hawaii professor Panos Prevedoros in January, who called the project “the nation’s largest infrastructure fiasco by far” on a per capita basis.
Things continue to deteriorate, as the Star-Advertiser editorial indicates. The Star Advertiser reported that city Council chairman Ernie Martin called for both Honolulu Authority for Rapid Transportation (HART) Board Chairman Don Horner and chief executive officer Dan Grabauskas.
In a letter, Martin expressed concern that: “With mounting evidence of mismanagement and out of control costs … it is clear that we need a leadership team capable of moving this multibillion (dollar) project forward.”
In its editorial, the Star Advertiser noted: “HART officials acknowledged new misgivings that the recently approved extension of the funding mechanism — Oahu’s 0.5 percent general excise tax surcharge — would cover the bills.”
Martin called it a “stunning about face” that Horner could not promise Council members that there would be enough cash to finish the project. Previously, according to Martin, Horner had said that the tax extension would be sufficient to finish the 20 mile line.
Martin went on to say that “we need to go in a different direction” to help “stop the bleeding.” He added: “We’re at the tourniquet stage right now,” “If we don’t apply more intense scrutiny, then we’re likely to lose limbs.”
Meanwhile, Honolulu is not alone. There has been plenty of bleeding with respect to expensive urban rail projects. In Los Angeles, $16 billion has been spent to build a massive new urban rail system and yet, transit ridership languishes below the levels of three decades ago, despite population growth. In Toronto, the new airport express train has been such a failure in ridership that it is routinely called a “fiasco” by the media.
Of course, all of this is predictable. Often, urban rail costs more and carries fewer riders than projected. are higher than projected ridership lower than projected, and virtually never high enough to reduce traffic congestion can be characterized as routine, as the international research led by Oxford professor Bent Flyvbjerg has indicated.
But Honolulu is a special case as well. There may have never been so intense a volunteer campaign to stop what was perceived as a boondoggle is in Honolulu. The Star-Advertiser, usually a cheerleader for the project, concluded by saying: “Reports of this dysfunction just adds to the strain taxpayers feel right now, and it’s the last thing they need. The price tag on the state’s largest public works project is past the $6 billion mark and rising, with the most complicated part of the work still looming.”
Why would companies located in one of the most beautiful states in the country – California – undertake the costly proposition of relocating to places with less scenic appeal and less-than-ideal weather?
There are three answers and they relate to California’s business environment: Regulations, taxes and anxiety.
Let’s take anxiety first. Corporate leaders and business owners fear what will happen in the future regarding proposals to raise taxes on business property, extend the Proposition 30 taxes that were supposed to be “temporary,” raise cap-and-trade fees to curb carbon emissions, and impose new workplace regulations regarding family leave and health care. We’re talking about billions of dollars in new operating and ownership costs.
Some of those proposals were defeated this year. But the energy level of the zealotry in California’s legislature means they are certain to rise again in 2016 and 2017. Projecting the resulting cost and complexity in future operations causes leaders in corporations and small businesses to worry – then they worry some more over the unpredictability of it all.
About taxes: This could be discussed for hours, but suffice to say that the Tax Foundation's 2015 State Business Tax Climate Index lists California at No. 48.
The regulatory environment can be brutal. Examples include fines for trivial errors such as a typo on a paycheck stub – not on the check, just the stub – and putting into law costly overtime provisions that in most states aren’t codified in a statute.
Last year, when Gov. Jerry Brown was asked about business challenges, he revealed his aloofness by saying, “We’ve got a few problems, we have lots of little burdens and regulations and taxes, but smart people figure out how to make it.” The Wall Street Journal responded: “California’s problem is that smart people have figured out they can make it better elsewhere.”
In short, California is so difficult that companies relocate entirely or, if they keep their headquarters here, find other places to expand.
In an effort to offset Sacramento’s head-in-the-sand approach to business concerns, my firm completed a new study that provides details of business disinvestments in the state. Over the seven-year period that includes last year, the study estimates that 9,000 businesses disinvested in California in favor of other locations.
The study shows that 1,510 California disinvestment events have become public knowledge and provides details on each and every event. Site selection experts I've been in touch with conservatively estimate that a minimum of five events fail to become known for every one that does. One reason is that when companies with fewer than 100 employees relocate it almost never becomes public knowledge. Hence, it is reasonable to conclude that about 9,000 California disinvestment events have occurred in the last seven years.
Los Angeles County #1 in Losses
The study found that the Top Fifteen California counties with the highest number of disinvestment events put Los Angeles with the most losses at No. 1, followed by (2) Orange, (3) Santa Clara, (4) San Francisco, (5) San Diego, (6) Alameda, (7) San Mateo, (8) Ventura, (9) Sacramento, (10) Riverside, (11) San Bernardino, (12) Contra Costa tied with Santa Barbara, (13) San Joaquin, (14) Stanislaus and (15) Sonoma.
The report excluded instances of companies opening new out-of-state facilities to tap a growing market, acts unrelated to California’s business environment. It also points to shortcomings in Federal and state reporting systems that result in underreporting of business migrations. Those factors reduced the number of California losses.
It is easy to verify circumstances described in the report since every disinvestment event is public information, is outlined in detail and sources are identified in endnotes.
When a company launches a site search, it always wants to examine potential costs. I’ve seen many business people smile upon learning that operating cost savings are between 20 and 35 percent in other states. By the way, the appeal isn’t necessarily to the lowest-cost states, but to lower-cost states with the proper workforce.
The Top Ten States to which businesses migrated puts Texas in the No. 1 spot, followed by (2) Nevada, (3) Arizona, (4) Colorado, (5) Washington, (6) Oregon, (7) North Carolina, (8) Florida, (9) Georgia and (10) Virginia. Texas was the top destination for California companies each year during the study period.
Metropolitan Statistical Areas (MSAs) benefiting from California disinvestment events, in the order starting with those that gained the most, are: (1) Austin-Round Rock-San Marcos, (2) Dallas-Fort Worth-Arlington, (3) Phoenix-Mesa-Scottsdale, (4) Reno-Sparks, (5) Las Vegas-Paradise, (6) Portland-Vancouver (WA)-Hillsboro, (7) Denver-Aurora-Lakewood, (8) Seattle-Tacoma-Bellevue, (9) Atlanta-Sandy Springs-Marietta and (10) Salt Lake City tied with San Antonio.
Offshoring still occurs, and the Top Ten Foreign Nations that gained the most put Mexico at No. 1, followed by (2) India, (3) China, (4) Canada, (5) Malaysia, (6) Philippines, (7) Costa Rica, (8) Singapore, (9) Japan and (10) United Kingdom.
Capital diverted to out-of-state locations totaled $68 billion, a small fraction of actual experience because only 16 percent of public source materials provided capital costs for the 1,510 events. Moreover, the top industry to disinvest in California is manufacturing, a capital-intensive sector, and more detailed knowledge of this industry alone would likely increase the capital diversion.
As California companies relocated or expanded facilities elsewhere they transferred more than capital – they also shifted jobs, machinery, taxable income, intellectual capital, training facilities and philanthropic investments.
Indicators are that California’s business climate will worsen, enhancing prospects that more companies will seek places that are friendlier to business interests.
The report is based exclusively on news stories and company reports to the U.S. Department of Labor, the Securities and Exchange Commission and the California Employment Development Dept. Although all entries are based on public information, it’s rare for so much data to be gathered into one report.
Read the full study: “Businesses Continue to Leave California - A Seven-Year Review” available as a PDF here.
Joseph Vranich is the Principal of Spectrum Location Solutions, a Site Selection firm that helps companies identify optimum locations to accommodate growth or to improve competitiveness. In doing so, he conducts an in-depth analysis of business taxes, the regulatory climate, labor rates and lifestyle factors.