NewGeography.com blogs

A recent report from the National League of Cities projects a grim financial situation for many municipal governments during the next three years. According to the report the municipal sector "likely faces a combined, estimated shortfall of anywhere from $56 billion to $83 billion from 2010-2012." Such shortfalls will be "driven by declining tax revenues, ongoing service demands and cuts in state revenues". Facing large deficits, cities around the nation may be forced to "cure revenue declines and spending pressures with higher service fees, layoffs, unpaid furloughs, and drawing on reserves or canceling infrastructure projects".

The process of belt tightening has already begun in cities across the nation. In Michigan, the city of Jackson is asking municipal workers to take pay cuts to help close a $900,000 budget deficit. Toledo, Ohio, another rust belt city hard hit by the recession, may face a deficit of up to $44 million, and is being forced to consider "mid-contract union concessions, cutting city spending, and possibly asking the voters to increase the city's 2.25 percent income tax."

In California, already challenged by record state deficits, the city of Los Angeles may have a budget shortfall of $1 billion by 2013, "driven primarily by escalating employee pension costs and stagnant tax revenues". For the current fiscal year the city faces a deficit of $98 million. Under such budget conditions, the city's administrative officer projects substantial cuts to city services will be "unavoidable".

With states already facing their own set of budget challenges, the League of Cities is calling on the federal government to intercede. According to the League, "in the absence of additional federal intervention, a deepening local fiscal crisis could hobble the nation’s incipient recovery with more layoffs, furloughs, cancelled infrastructure projects, and reduced services." However, with an exploding federal debt load and federal budget deficits running at all time highs, municipal cries for increased aid may face a lukewarm reception in Washington, DC. Support for expanded stimulus efforts might prove lacking, with signs beginning to emerge that a mild economic recovery is underway, and many of the already passed stimulus dollars yet to be spent.

For now, cities facing deficits will have to find ways to solve the shortfall on their own. If they are unable to bridge the gap, municipalities may find themselves forced, like the city of Vallejo, California,to file for Chapter 9 bankruptcy protection.

Northrop Grumman Corp started California’s New Year by announcing it is moving its headquarters to the Washington D.C. area. Unfortunately, they are neither the first nor the last major corporation to leave Southern California. It is a trend, one that may not last much longer, though since aren’t that many major corporations still headquartered in greater Los Angeles.

For decades, Southern California was the center of the aerospace world, a basic part of the Southern California’s DNA. Now, once Northrop leaves, there will be no major aerospace companies still headquartered in Southern California.

Aerospace is not the only industry abandoning Southern California. The region was once host to financial giants, like Bank of America, Security Pacific Bank, Countrywide, and First Interstate. Today, there are none. California was once a major automobile manufacturing state, with a dozen plants. Even the entertainment industry is slowly shifting away from its Hollywood roots.

When you lose corporate headquarters, you lose more than jobs. You lose the tax base, the leadership, the philanthropic giving, and the intangibles. Corporate headquarters are usually very good citizens.

Many local political leaders ignore this business’ exodus, or make excuses. The decline of the U.S. defense spending, aerospace spending in particular, is often given as a reason for the decline. But the last decade was not a bad one for defense; the industry thrived, just not in Southern California.

The reasons for this exodus are both simpler and less flattering than those usually given. One big reason is selfishness. California’s decline chose to consume, and not to produce. Wealthy, aging, Baby Boomers control the state. In the cause of “quality of life,” or “the environment,” they have succeeded in limiting opportunity for everyone else.

The other big reason for decline lies with governments, state and local, that now exist to serve themselves and not their citizens. The level of government goods and services, even infrastructure and basics, has declined, but state spending, adjusted for inflation and population, has continued to soar. The difference has been going into public employee’s pockets, through higher salaries, benefits, and generous retirement programs.

Remarkably, no Southern California economic sector is in ascendancy. Unemployment remains well above the national average, particularly in the middle class Inland Empire. The growth in bankruptcies has been about twice that of the United States. The state is becoming less equitable, the divide between those who have and those who do not have constantly growing, the middle class declining.

Southern California is starting to look a lot like a third-world economy, service based, inequitable, serving a wealthy, mostly aging few, with little opportunity for younger workers and a large underclass. Changing the region’s prospects will be very difficult. Nothing short of a major generational change in leadership is likely to change the current sad trajectory.

Federal Reserve Chairman Ben Bernacke called for stronger regulation to avoid future asset bubbles, such as the housing bubble that precipitated the international financial crisis (the Great Recession) in an Atlanta speech.

The Chairman appears to miss the fact that regulation itself was a principal cause of the Great Recession. The culprit, however, was not financial regulation, but rather land use regulation, which drove house prices so high in highly regulated markets. When households that could not afford their mortgages defaulted, the losses were far too intense for the mortgage industry to sustain, and thus the Great Recession.

This is not to ignore the role of Congress and others, which fueled more liberal mortgage credit, and created the excess and credit-unworthy
additional demand for home ownership.

This higher demand, however, was only a necessary, but not a sufficient condition for creating the bubble, which when burst, precipitated the worst economic crisis since the Great Depression. In many markets, there was relatively little increase in house prices relative to incomes, as prices remained at or below the historic Median Multiple (median house price divided by median household income) standard of 3.0. In other markets, however, prices reached from 5 to 11 times incomes.

Already, a new bubble may be on the way to developing. Even after the huge losses, house prices in California were only beginning to return to sustainable historic levels (3.0 Median Multiple). Since bottoming out, however, prices in California have risen 20%, at an annualized rate greater than that of any bubble year.

Perhaps the first principle of regulation is understanding what to regulate. In the case of the housing bubble, it was land use regulations themselves that needed to be regulated.
To avoid future housing bubbles, no more effective action could be taken than to repeal the restrictive land use regulations, without which the last bubble would have been, at most, only slight compared to the destructive reality that ensued.

The day before leaving town to vacation in an opulent $9 million, 5-bedroom home in Hawaii, the Obama administration pledged unlimited financial support for Fannie Mae and Freddie Mac. The mortgage giants are already beneficiaries of $200 billion in taxpayer aid. On Christmas Eve, regulatory filings reported that the CEOs of the two firms are in line for $6 million in compensation. Merry Christmas!

Executive compensation is the subject of many academic studies, but one focused on Fannie Mae from two Harvard Law School professors is especially well-named: “Perverse Incentives, Nonperformance Pay and Camouflage”. Executives are able to take unlimited risks and reap unlimited upside rewards knowing that US taxpayers will foot the bill on the downside. The mortgage-backed securities issued by the two firms remain at the center of the causes-and-effects of the financial meltdown.

The compensation for Fannie Mae’s senior managers is recommended by the Compensation Committee “in consultation and with the approval of the Conservator”, which is the U.S. Federal Housing Finance Agency (FHFA). The FHFA was created in July 2008 when Bush signed the Housing and Economic Recovery Act. At the time, the Congressional Budget Office estimated that the $200 billion Act would save 400,000 homeowners – in the first six months, exactly one homeowner was able to refinance under the program. The Act also was supposed to clean up the subprime mortgage crisis – which it did not do as evidenced by the collapse of the global financial markets a few months later.

Back to the current problem of paying $6 million to run a bankrupt company whose every financial obligation is guaranteed by taxpayer money. Who is on the compensation committee that recommended this pay day? Dennis Beresford from Ernst & Young (E&Y); Brenda Gaines, recently from Citigroup; Jonathan Plutzik, from Credit Suisse First Boston; and David Sidwell, from Morgan Stanley.

Back in 2004, Ernst & Young was engaged as a consultant to Fannie Mae – right after the Securities and Exchange Commission banned E&Y from taking on new clients. Citigroup took $25 billion in TARP bailout money and Morgan Stanley took $10 billion. Credit Suisse benefited by a mere $400 million as their share of the AIG Financial Products group bailout. Needless to say, this Compensation Committee knows a thing or two about controversies and federal aid!

Enjoy your luxury Christmas vacation, Mr. President, while 45 out of 50 U.S. states are enjoying statistically significant decreases in employment in the face of rising prices. Please take some time to contemplate the words GE Chairman and CEO Jeff Immelt used in describing the leadership traits that need to change in America: “The richest people made the worst mistakes with the least accountability.”

And to the rest of you out there reading this, take some time to contemplate the words of Bill Moyers as he concluded a rather shocking essay of the role of lobbyists in the recent “healthcare reform” legislation: “Outrageous? You bet. But don't just get mad. Get busy.”

The European Commission has just made a Google Earth overlay available showing annual greenhouse gas (GHG) emissions by 10 square kilometer quadrants. The overlay can be manipulated to show estimates from every year beginning in 1970. One of the most fascinating features is the GHG emissions on the oceans, from shipping lanes. All are green (fewer GHG tons), but one route stands out as by far the busiest, from Hong Kong and Japan through the Straits of Malacca and the Suez Canal to northern Europe.

The application is useful for broad reviews of GHG emissions by same-sized areas, though the zoom feature does not provide high resolution enough photography to discern differences at the smallest area level.