Economic Development

This Is What Happens When a City Goes Bankrupt

By Froma Harrop

CENTRAL FALLS, R.I. — The stock market plunged over 500 points last Thursday, but no one seemed very perturbed about it in this tiny factory town. Three days before, Central Falls had filed for a Chapter 9 bankruptcy. These working-class folk see bottoms fall out on a regular basis.

For people used to living one paycheck or unemployment check to another, the number that mattered this day was not the Dow Jones Industrial Average but the temperature, which that summer evening registered a balmy 75.

Thus, young people were joyfully playing soccer in a park near the picturesque Blackstone River waterfall that gave this city its name. Older residents gathered on the spacious porches of their ancient Victorians or wooden triple-deckers, drinking beer and conversing in Spanish, Portuguese and sometimes English.

If any U.S. city was destined to go bankrupt, it was this one — though Vallejo, Calif., beat it by three years. Like Vallejo, ruinous public-employee contracts sent Central Falls over the edge. Unlike the San Francisco suburb, Central Falls has a smaller, less economically diverse tax base. (The median household income is under $33,520 a year.) Its local government at the time of the bankruptcy filing was far more corrupt than Vallejo’s.

On this thin tax base, Central Falls faced an annual deficit of $5 million and unfunded pension obligations of $80 million. For a long time, its police and firefighters could retire on full pensions after only 20 years of service. So even though their monthly payouts were not princely, workers could start collecting them — and free health coverage for life — while in their 40s. Bankruptcy lets a city tear up union contracts and start over.

Like troubled industrial cities in the Midwest and elsewhere, Central Falls has a proud past evident in grand public buildings and fine old housing stock. Its nickname was Chocolateville, due to being home to one of America’s first chocolate factories. A century ago, the mill workers were largely French-Canadian. Nuns taught French as a first language in the parochial schools. Today, artists and such are setting up lofts in some of the old factories.

For decades, Central Falls was the most densely packed city in the United States, cramming over 24,000 people on 1.3 square miles. It lost that distinction in the ’70s.

Today, the grand 1910 Adams Memorial Library is open only a few hours a week, thanks to volunteers. The community center has closed. The fire chief, who died in December, has not been replaced. The factory owners say their workers are tops but that if they were starting out today, Central Falls would not be the place.

Being able to erase foolish spending decisions made in more prosperous times is a tempting proposition. Very few cities have tried bankruptcy so far, but many are considering it.

The experience of Vallejo offers some warnings on the dangers of going the bankruptcy route, however. Harrisburg, Pa., and others on the brink, take note.

Vallejo’s bankruptcy resulted in a $9.5 million legal bill and a black eye to its reputation. Bankruptcy is a booming announcement that the local government is dysfunctional. For some businesses, having the city’s name on the letterhead becomes an embarrassment. A lawyer and real estate broker recently moved out of Central Falls, not because he didn’t like the city, but because its name has become a stigma associated with failure.

But like other depressed factory towns, Central Falls retains its reputation as a nice place filled with nice working people. Less than an hour from Boston and loaded with some lovely housing now selling super-cheap, the city will rise. Its next generation, meanwhile, is playing soccer while the sun shines.

fharrop@projo.com

Copyright 2011, Creators Syndicate Inc.

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America’s 10 Sickest Housing Markets

by 24/7 Wall St. Staff
Wednesday, August 3, 2011

By Charles B. Stockdale, Douglas A. McIntyre and Michael B. Sauter

For three years, the real estate market has been going in one direction — primarily down. Some areas, however, have begun to recover. Recent S&P/Case-Shiller data show that among the top 20 housing markets in the U.S., 18 had very modest improvements in sales prices during May. Others, like Washington and Boston, have began to at least stabilize from a year ago.

Few markets, however, can match Washington and Boston. Robert Shiller has been stating that home prices could fall another 10% in the next year. Inventories in some major metropolitan areas would take years of sales to get back to 2005 levels. Then, the normal inventory of homes for sale was replaced on average every six months and it was unusual for a house to be on the market for a year. Foreclosure rates remain high and only the robo-signing scandal has slowed the process. Once this is resolved, economists fear the market will be flooded with even more vacant, unsold homes.

24/7 Wall St. has taken a new look at the housing market to find the very weakest cities by identifying those with the highest homeowner vacancy rates and rental vacancy rates. These are markets where demand has clearly collapsed. These are cities where the requirement for living space has dropped well below the national average. Further, vacancy rates of many cities were stable during the recession, but accelerated sharply higher in the last year. Similarly, housing prices in several of these markets have decreased at a faster rate in the last three quarters than during the recession. These cities, like Detroit, St. Louis, Dayton, and Atlanta, also tend to be larger and older among the top 75 metropolitan areas. Their economies were damaged long before the recession.

Methodology: 24/7 Wall St. pulled Census data on the 75 largest U.S. metropolitan areas and ranked the cities with the highest overall vacancy rates for both homeowner vacancy and rental vacancy for the second quarter of 2011. We picked the cities with the worst rates in each of the two categories to create meta-data ranks. We then removed the cities that had either improved homeowner vacancy rate in either the last twelve months or the last quarter. We believed that any sign of improvement in homeowner vacancies, the more telling of the vacancy rates, should disqualify a city. To improve our analysis, we also looked at unemployment rates for these cities provided by the Bureau of Labor Statistics. We also used historical median home prices, as provided by the National Association of Realtors.

The analysis shows that some cities have home vacancy rates over 5% and rental vacancy rates over 10%. Obviously, these levels of unused inventory have the effect of driving down both home and rental prices month after month. It also means that there is comparatively little demand for the purchase of new or existing homes. These ten markets are essentially dead as far as real estate prices and sales activity are concerned.

These are America’s ten sickest housing markets.

1. Tucson, AZ
Homeowner vacancy rates: 6.8% (1st)
Rental vacancy rates: 15.9% (6th)
Total housing units: 440,909
Unemployment: 7.8%

Tucson’s homeowner vacancy rate was 3.2% one year ago. It is now over double that. The city had a booming residential housing market before the crash. Since then, demand is so low that median home prices have dropped 18% in the past year and 33% since 2008. In addition, the city has among the highest rate of foreclosures in the country.

2. Indianapolis, IN
Homeowner vacancy rates: 5.2% (5th)
Rental vacancy rates: 13.5% (10th)
Total housing units: 757,441
Unemployment: 7.8%

The average home price has dropped by $20,000, or 15.3%, between the second quarter of 2010 and the first quarter of this year. Indianapolis’s home vacancy rate of 5.2% is the fifth-highest in the country. Its rental vacancy of 13.5% of units is the tenth highest in the country. In 2009, while vacancy had not even reached its worst point, the mayor’s office of Indianapolis recognized the serious problem the city faced. The city’s plan to help solve the abandoned home issue states: “Indianapolis, like many communities, faces a significant challenge in dealing with vacant and abandoned properties. This challenge is exacerbated both by weaknesses in the local and regional housing markets — including an oversupply of housing relative to demand — and by the high and growing rate of foreclosures.”

3. Memphis, TN
Homeowner vacancy rates: 4% (9th)
Rental vacancy rates: 13.5% (11th)
Total housing units: 550,896
Unemployment: 10.1%

Memphis’s slow economic recovery has kept vacancy rates high. The metropolitan area’s homeowner vacancy rate has increased from 2.5% in 2010 to 4% in the second quarter of 2011. In the city’s defense, its rental vacancy rate has decreased from a staggering 21.2% in 2010 to 13.5%. This is still among the highest in the country, but it is an improvement. The unemployment rate remains at 10.1%, which is significantly higher than the national average of 9.2%.

4. Atlanta, GA
Homeowner vacancy rates: 5.4% (4th)
Rental vacancy rates: 11.8% (17th)
Total housing units: 2,165,495
Unemployment: 9.7%

Atlanta’s homeowner vacancy rate of 5.4% is the fourth highest among major U.S. cities. The city, which had a significant influx of new residents, particularly from the northeast, has been hit hard. Atlanta’s unemployment rate of 9.7% is well above the national average of 9.2%. According to the Atlanta Journal-Constitution, the city had lost nearly 25,000 jobs between June of 2010 and June of this year. Between 2008 and the first quarter of this year, homes have lost more than a third of their value, dropping in price by nearly $50,000.

5. Baton Rouge, LA
Homeowner vacancy rates: 3.9% (11th)
Rental vacancy rates: 13% (12th)
Total housing units: 329,729
Unemployment: 8.4%

Baton Rouge did not emerge from the recession unscathed, but it did perform better than many other cities in the U.S., in part because it is the state’s capital city and in part because of the money brought in through Hurricane Katrina recovery work. However, according to one local news station, the area has built more housing structures than it could fill following Katrina. The city has not been able to break free of this situation, as both homeowner vacancy rates and rental vacancy rates have increased not only since last year, but since the last quarter as well.

6. Dayton, OH
Homeowner vacancy rates: 4.7% (7th)
Rental vacancy rates: 10.7% (23rd)
Total housing units: 385,160
Unemployment: 9.3%

Dayton’s home vacancy rate of 4.7% is the seventh-highest in the country among major cities. At one time, Dayton was a much larger city and an economic powerhouse. The Ohio city, which was a major manufacturing center, was at one point awarded more patents each year than any other place in the U.S. The city has a particularly bad unemployment rate of 9.3%. Median housing price, which stood at $109,000 in 2008, has fallen by 29%, or $27,000, between 2008 and the first quarter of this year.

7. Detroit, MI (Tied for 8th)
Homeowner vacancy rates: 2.4% (32nd)
Rental vacancy rates: 17.2% (3rd)
Total housing units: 1,886,537
Unemployment: 11.6%

The recession hasn’t been kind to Detroit. Part of the Detroit-Warren-Livonia metropolitan area, it has been among the hardest hit cities in the country. Since 2005, the metropolitan area has lost approximately 323,400 jobs. Unemployment in the Motor City almost reached 30% in 2009. According to one estimate, the city had 90,000 abandoned or vacant lots or residential homes in 2010. One of the reasons the city is not at the top of this list is that the city had so many vacant properties that a huge portion of them were demolished. Regardless, at 17.2%, the rate of rental vacancy is still the third highest rate in the nation.

8. Kansas City, MO (Tied for 8th)
Homeowner vacancy rates: 3.7% (13th)
Rental vacancy rates: 11% (22nd)
Total housing units: 883,099
Unemployment: 8.4%

Kansas City’s rental vacancy rate of 11% is the 22nd highest of any major city in the country, while its homeowner vacancy rate of 3.7% is the 13th highest. The city has a relatively high rate of unemployment, at 8.4%. While it’s below the national average of 9.2%, it is well above the state average of 6.6%. The median home price in the city is down by $19,000, or more than 13%, since 2008. Most of that decline came in the last year. Between the second quarter of 2010 and the first quarter of this year, prices dropped by more than $25,000.

9. St. Louis, MO
Homeowner vacancy rates: 3.3% (19th)
Rental vacancy rates: 11.4% (18th)
Total housing units: 1,236,222
Unemployment: 8.6%

In 2008 and 2009, the St. Louis area has shed more than 82,000 jobs. This loss had a negative impact on the city’s real estate market. Vacancy rates have continued to rise, increasing from under 2% one year ago to 3.3% in the recent quarter. The rise in vacancy rates has occurred while the median sales price for single family homes has fallen more than 19% since 2008. While rental vacancy rate, which is currently at 11.4%, has decreased slightly since the last quarter, it is still 1.6 percentage points higher than it was last year. St. Louis office vacancy rate is at 12.6%, according to real estate information company CoStar Group.

10. Oklahoma City, OK
Homeowner vacancy rates: 5.2% (6th)
Rental vacancy rates: 9.6% (34th)
Total housing units: 539,077
Unemployment: 4.9%

Oklahoma City had the sixth highest homeowner vacancy rate in the country as of the second quarter of this year. The city’s unemployment rate is just 5.3%, but this low rate has not helped improve high home and rental vacancy. From last year, home sales in Oklahoma state dropped by 7.7%, according to the state’s newspaper NewsOK. In the city, sales were flat from last year. Between the first quarter of 2010 and the first quarter of 2011, the median home price in the city dropped by more than 8%.

Patrick McNamara from Inside Tucson Business covers our newest economic success story – another call center.

……Even with the industry improvements, questions lingers about whether call centers represent the type of economic development nest for Tucson’s future?

“It’s not one our targeted industries,” said Guymon, who said TREO more actively pursues high-tech, aerospace and biotechnology firms, which are the sorts of industries that provide high-wage careers and support numerous ancillary industries.

But with the economy still hobbled and the illusive recovery not yet realized, Guymon said the region can use any new industry that comes along.

“If companies like C3 and others come knocking, we’re going to open that door,” he said.

The region’s economy continues to limp along, with foreclosure rates still high, a myriad of homes on the market and unemployment at nearly 10 percent.

“The economy has not been generating jobs, so there’s quite a demand for even low-paying call center jobs,” said economist Marshall Vest, director of the Economic and Business Research Center at the University of Arizona.

The most recent jobs forecast for Pima County shows about 45,000 people are out of work, an estimate Vest believes is low because it only includes people actively searching for work and not the thousands of job seekers who have become discouraged and stopped looking.

Put into perspective, Vest said, in 2007 there were about 15,000 to 20,000 people out of work in Pima County.

“The turnout for this is a clear signal that we have lots of people with those skills,” he said. “You welcome jobs where ever you can find them.”

Guymon said he doesn’t think Tucson would become a call center capital anytime soon.

“We don’t want to be that, we want to build high-tech and aerospace, we want to build the bioscience industry,” Guymon said. “We want to be mentioned in the same sentence as Austin or Portland.”

Contact reporter Patrick McNamara at pmcnamara@azbiz.com or (520) 295-4259.

Posted: Friday, July 29, 2011 8:00 am | Updated: 10:34 am, Thu Jul 28, 2011.

An open letter to the board members of the MTCVB By Joe Higgins and Chris DeSimone, Inside Tucson Business Inside Tucson Business | 2 comments

Dear Metropolitan Tucson Convention and Visitors Bureau board member,

By now you’ve had a chance to see and read Pima County’s performance audit of the Metropolitan Tucson Convention and Visitors Bureau (MTCVB). As you know the county’s audit commission included actual stakeholders, including general managers of major resorts, members of the Pima County Sports And Tourism Commission and officials with our region’s renowned attractions. Among them are some of your former colleagues on the MTCVB board.

As a board member, you may not be happy the current MTCVB board got attention in the audit, as “not fully engaged, energized or pro-active in representing the stakeholder community.” Those of you who are vendors also must know, as the audit found, that serving on the MTCVB is not in the best interest of the bureau.

You realize, of course, the MTCVB board isn’t alone in having to take a hard look at the performance of the organization it’s responsible for. The Tucson Metropolitan Chamber of Commerce, the United Way of Tucson and Southern Arizona and the Fiesta Bowl have all had to make sweeping changes.

In addition to implementing the recommendations in the audit, you’ll also have to ascertain the true performance of senior leadership of the MTCVB.

In fact, we suggest you might consider it an annual performance review and don’t be surprised if it goes something like this scenario:

You: “Thanks for coming in today. What are we looking like for this year? We’ve been paying you guys for over a decade and I’d like to hear from you about what you feel your impact is on our resort. What’s going on at the MTCVB?”

They: “Well, two of our biggest funders, Pima County and the City of Tucson, did independent audits of our performance. This has never occurred before. Actually, it’s pretty rare.” (A fact noted in the Pima County audit.)

You: “What did they find?”

They: “There’s a perception in local government and among other principal stakeholders that we view ourselves with a sense of entitlement. Also, while we produce strong results at times, we do not consistently provide transparency, accountability and a focus in communicating out to stakeholders.”

You: “That’s not very comforting. You’ve been telling us all is well for years.”

They: “We have some problems telling the story of our results. They say ‘major deficiencies are found with the annual report, the marketing plan, and brand development program, as well as the current leisure development marketing program.’”

You: “That’s pretty serious, you’ve been paid millions each year in bed tax collections to tell the world how great our region is. Is there anything else?”

They: “Even though our senior vice-president was certified as a Destination Marketing Executive by DMAI (Destination Marketing Association International), the audit said our ‘current process for branding bears little resemblance to the industry’s preferred models.’ They also said our branding ‘was produced by staff and not by principal stakeholders. Instead of input, a very few were relegated to providing feedback, which provides no true inclusion into this process’.”

You: “(Sigh) Any good news?”

They: “Our employees working day-to-day in the trenches are working very hard: ‘staff is generally dedicated and skilled, they display high morale, are long tenured and professionally accredited in their scopes of work’.”

You: “Is their any independent verification of your true performance?”

They: “Well, the county’s audit included a 10-year analysis of our market share performance. Our competition statewide brought in 41.4 percent more tourism spending in their areas. We were up 21.8 percent. We actually dragged down the state average.”

Interview over.

So now, as an owner or general manager of a tourism asset in Pima County, you have to ask yourself what you would do with such a vendor? You might be tempted to go find another company. In the case of the MTCVB, the county’s audit found the staff is diligent and capable. That leads to the question: Is it time to make a change in senior management?

The Tucson region’s No. 1 industry cannot afford to be the weak link in Arizona’s tourism chain any longer.

Contact Joe Higgins and Chris DeSimone at wakeuptucson@gmail.com. They host “Wake Up Tucson,” 6-8 a.m. weekdays on The Voice KVOI 1030-AM. Their blog is at www.TucsonChoices.com.

(Reuters) – Central Falls, Rhode Island, one of a handful of U.S. cities and counties facing fiscal collapse in the wake of the economic recession, filed for a rare Chapter 9 bankruptcy on Monday.

The bankruptcy filing, a risky and potentially expensive move that could freeze the city out of the U.S. municipal bond market, marks a symbolic blow as state and local governments struggle to pull themselves out of the recession.

The smallest city in the smallest U.S. state made the filing as it grappled with an $80 million unfunded pension and retiree health benefit liability that is nearly quadruple its annual budget of $17 million.

“This is a wake-up call for other struggling towns,” said Eileen Norcross, a senior research fellow at the Mercatus Center at George Mason University. “States should be looking at Rhode Island and saying, ‘How can we avoid this?”

Still, dire predictions of mass municipal defaults made late last year by Wall Street analyst Meredith Whitney have not come to pass. A string of failures could rattle the $2.9 trillion U.S. municipal debt market.

The Central Falls filing was not the start of a “huge nation-wide trend”, said Adam Stern, a vice president at Boston-based Breckinridge Capital Advisors, a municipal bond investment firm.

“A bankruptcy filing is sort of an endgame over years and years of economic distress, so it’s not something your typical U.S. town or city is likely to experience anytime soon,” he said.

There have been only 624 municipal bankruptcies under Chapter 9 of the U.S. Bankruptcy Code since 1937, with five occurring last year, according to James Spiotto, a municipal bankruptcy expert at the law firm Chapman and Cutler. For graphic see: r.reuters.com/kyb92s

Alabama’s Jefferson County is currently working to ward off the largest municipal bankruptcy in U.S. history stemming from its $3.2 billion sewer bond crisis. The Pennsylvania state capital of Harrisburg, which has about $300 million incinerator debt, is also considering bankruptcy.

Those cases lead some to take a pessimistic view on the future of municipal bankruptcies in the United States.

“Chapter 9 has been a fairly unusual event but we and many others think that’s not necessarily going to be the case going forward,” said Sean Scott, a municipal bankruptcy expert at law firm Mayer Brown.

“THE BIG ASK”

In Central Falls, a city of just 19,000 located six miles from the state capital of Providence, residents reacted to the news with disappointment and resignation.

The big question on their minds was if another nearby town, like neighboring Pawtucket, or the state itself would take over their city.

“I’d be curious as to who’s going to take it over. Someone has to, but no one wants to,” said Dan Mercure, 48, on a break from his job at an auto parts store. “It’s going to hurt business, it’s all mom and pop stores here.”

Ulysses Ortiz, a 50-year-old retiree, said whatever budget cuts will be imposed would hurt residents, who have already borne the brunt of heavy budget cutting.

“It’s too bad, because Central Falls has always been a progressive city,” said Ortiz. He added that he hoped the city would not be absorbed by one of its neighbors. “We’ve been here for more than a century,” he said.

Central Falls, which has been under state control since July 2010, has $21 million of outstanding debt, Moody’s said.

State officials worked to avoid a municipal bankruptcy filing, saying it could upset Rhode Island’s other fragile localities.

Earlier this year, the state passed a law that guarantees bondholders will be paid before a distressed city like Central Falls deals with its other obligations. It was not immediately clear whether the law would hold up in bankruptcy court.

Rhode Island Governor Lincoln Chafee said the situation is “dire” and requires “decisive” action.

“Everything was done to avoid this day,” said Central Falls’ state-appointed receiver, retired judge Robert Flanders, Jr. “Taxes have been raised to the maximum level allowable. We negotiated with…the police and fire unions, without success, attempting to reach voluntary concessions, and we tried in vain to persuade our retirees to accept voluntary reductions in their benefits,” he said.

(Additional reporting by Karen Pierog in Chicago, Joan Gralla in New York and Matthew Bigg in Atlanta; Writing by Edith Honan; Editing by Andrew Hay)

We’ve been here before, and we’ll be here again.

South Tucson needs Pima County to bail it out. This time it’s for $1.4 million in delinquent jail costs that the little city simply can’t afford. Portions of the bills date back a decade, the Star’s Kellie Mejdrich recently reported.
And, of course, Pima County is more than willing to lend South Tucson a hand in this newest time of fiscal trouble. County Administrator Chuck Huckelberry said the unpaid bill could be put off for a while and Pima County could give the little city “latitude” with $314,000 in interest.
But why stop there? Supervisor Ramón Valadez, who has South Tucson Mayor Jennifer Eckstrom on staff, has said the county should just waive the whole principal.
“It’s really a regional responsibility,” he said.
From his lips to Dan Eckstrom’s ears. With South Tucson, it’s always a regional responsibility.
South Tucson officials say the city shouldn’t be held responsible for the entirety of its jail costs because nearly 85 percent of those arrested in the city don’t have South Tucson mailing addresses. Pat Benchik, the county’s behavioral health administrator, said many of those arrested are homeless who are drawn to South Tucson for services. When Benchik was head of COPE Community Services, he pursued several problematic housing projects in South Tucson. There’s always a connection between the county and South Tucson.
“We need to pay our share. But quite frankly, our share is nowhere even near what we’re being charged,” South Tucson City Manager Enrique Serna told Mejdrich. “We can’t afford to let this fiscal obligation continue because it threatens our viability as a city.”
Serna used to work for Pima County.
This isn’t exactly a new issue. Back in 2009, the Star reported that South Tucson owed $500,000 for its delinquent jail bills. Officials then were unwilling to come up with a payment plan. South Tucson accumulated the debt even though the county twice bought property from the city and wrote down the debt – by $555,000 in 2000 and again by another $220,000 in 2008, Star archives show.

With its strong ties to the county, South Tucson always knows it has a backstop for bills it can’t afford. That’s what happened back in 2007 when South Tucson suddenly needed $500,000 to pay for two pocket parks the city built even though it couldn’t afford them.
Back in 2003, the county gave South Tucson $150,000 in bond funds to build a small park and a community garden. But over the next four years it spent closer to $650,000 on two small parks. When the parks were 95 percent complete, South Tucson came to the county with hat in hand. The county agreed to pay for those parks.
That’s just the South Tucson way.
Serna said if the jail bill goes unpaid, the viability of the city is threatened. Would that really be such a bad thing? Should a city really exist if it consistently can’t afford to pay its bills?
This would be an opportune time for county officials to show South Tucson that it shouldn’t enter into agreements it can’t afford. At the very least, spare us the pretense that South Tucson ever had any intention of paying its jail bill. But we imagine the region’s taxpayers will just pick up the tab, and leaders will keep pretending that South Tucson can stand on its own. It’s politics as usual at Rigo’s.
Arizona Daily Star
Read more: http://azstarnet.com/news/opinion/article_ec642119-b155-509b-90fe-56d110d901e4.html#ixzz1Ts3IYjWf

From Wall Street 24/7, via MSNBC – There are several signs that a recession is firmly in place again and that the downturn could last for several quarters. Most are already easy for the average American to see.

1. Inflation
There is almost nothing that damages consumer confidence as badly as a rapid rise in prices. Starbucks recently increased the price of a bag of coffee by 17 percent because wholesale prices have risen by almost twice that rate in the last year. Cotton prices nearly doubled in 2010 but have fallen this year. But, apparel is made months in advance of when they reach store shelves. Summer clothing prices are up as much as 20 percent. That may change in the fall, but for the time being, the consumer’s ability to buy even the most basic clothing has been undermined. Consumers today pay more for sugar, meat, and corn-based products as well.

2. Investments have begun to yield less
Part of the recovery was driven by the stock market surge which began when the DJIA bottomed below 7,000 in March 2009. The index has risen above 12,000 and the prices of many stocks have doubled from their lows. As result, American household nest eggs that were decimated by the collapse of the market have rebounded and enabled people to splurge on themselves. However, the market has stumbled in the last quarter. The DJIA is up only 1 percent during the last three months and the S&P 500 is down slightly.

Americans, though, have few other places to put their money. Ten-year Treasuries yield about 3 percent. Gold was a good investment over the last year, but it has begun to falter as well. The market may not be a friend to investors for quite some time.

3. The auto industry
The auto industry has staged an impressive comeback, although its profitability is based as much on the layoffs it has made over the last five years as generating new sales. GM and Chrysler have emerged from bankruptcy. Year-over-year monthly sales improved late last year and through April. May sales stalled. GM’s revenue dropped by 1 percent compared to May of 2010. Ford’s sales were down about as much. There are many reasons for this trend including high gas prices and the constrained manufacturing capacity of the Japanese automakers because of the earthquake. Consumers also may be deferring big purchases because they are worried about their economic prospects. Slow car sales are not just a sign of lagging consumer confidence. They also may be a harbinger of tougher times ahead. These companies shed several hundreds thousand jobs before and during the last recession. Car firms have only just begun to hire again, but that trend will die with a plateau in sales.

4. Oil prices
Oil prices are supposed to drop as the economy slows as they did in 2008 and early 2009 when crude fell from over $140 to under $50. That drop at least allowed consumers and businesses like airlines to more easily afford fuel. Recently, crude has moved back above $100 and appears to be stuck there regardless of the economic situation. American budgets have been hurt by the rising cost of gas. Americans of more modest means have been particularly affected. A slowdown in driving usually also leads to a decline in the retail sector as consumers reduce unnecessary travel to stores. The impact on other businesses is just as great. Airlines suffer and so do firms which rely on petrochemicals. OPEC, for now, has signaled it will not increase production.

5. The federal budget
The federal budget deficit has decimated any chance for another economic stimulus package which many prominent economists like Nobel Prize-winner Paul Krugman say is essential to create a full recovery. His theory has become more of an issue as GDP growth slows to a rate of 2 percent. The first $787 billion Obama stimulus package may have saved some American jobs, but it is long over and did not work if a drop in unemployment and a sharp improvement in GDP were its primary goals. The deficit has caused a call for severe austerity measures which have already become part of the economics policies of countries from Greece to the U.K. to Japan. Job cuts in the U.S. will not be restricted to the federal level. A recent UBS Investment Research analysis predicted that state and local governments will cut 450,000 jobs this year and next. That process is already well underway. States like California and New York currently run massive deficits and the rates they must pay on bonds has risen accordingly. Newspaper headlines almost daily report on battles between state unions and governors over employment and benefits.

6. China economy slows
A slowdown in the Chinese economy is usually seen as a cause of global commodity price inflation, but the effects cut two ways. China’s appetite for energy and raw materials may fall. But, the demand for goods and services by its very large and growing middle class drops as well. Chinese purchaser manufacturing and export numbers have fallen as the central government has tightened the ability to borrow money. US exports to China are key to the health of many American businesses. John Frisbie, the president of The US-China Business Council, recently said, “Over the last decade we have seen exports to China rise from $16.2 billion to $91.9 billion — a 468 percent increase.” As that rate slows, it has a profound effect on tens of thousands of American companies and their employees. U.S. firms with large operations in China are also effected. GM is one of the two largest car firms in China along with VW. Large U.S. corporations like Wal-mart and Yum! Brands rely significantly on China to boost global sales. Without vibrant consumer spending in China, American companies will suffer.

7. Unemployment
Unemployment creates two immediate problems. People without jobs drastically curtail their spending, which will ultimately affect GDP growth. The second is the need for tens of billions of dollars every year in government aid to keep the unemployed from becoming destitute. That support has increased deficits and the domino effect is that cash-strapped governments need to make more spending cuts. It may be the biggest challenge the economy faces.

Unemployment has worsened because people over 65 to continue to work because the values of their homes — which they once counted on as the financial basis of their retirements — have dropped so sharply. Older Americans also fear that cuts in Medicare and perhaps Social Security are inevitable which increases the cost of their golden years. The jobs that older Americans have taken are often ones that younger Americans might have. People in their 20s must accept low wages to enter the workforce. This has delayed their prime consuming years well into their 30s which will damage GDP recovery now and for another decade.

The worst of the unemployment problem is the roughly 5 million Americans who have been unemployed for over a year. Their unemployment benefits have run out in many cases. The burden of their care falls to their families, friends, community organizations and non-profits. A family which has to support an unemployed person may be a family which cannot spend beyond its basic needs. To the extent that the federal or state governments can support the unemployed, the cost to run support programs increases.

8. Debt ceiling
The United States debt ceiling, currently at $14.294 trillion, will probably be raised before the government has to cut back essential services on Aug. 2. It might seem that the economic and employment effects of the debt cap are the same as the deficit, but they are actually more insidious and longer term. The first by-product of debt reduction, or at least a slowdown in its growth, is a combination of higher taxes and a lower level of government services. Higher taxes usually slow economic improvements, particularly when they are not coupled with stimulus measures.

A number of economists have pointed out the expense reduction alone will not sharply improve the United States balance sheet. The increase in Medicare and Social Securities costs, brought on by an aging population, are also likely to trigger a need for higher taxes. Tax increases could keep the economic growth of the US on hold for years. The taxation of companies decreases and often eliminates profits, particularly during an already troubled economic period. Profits which disappear usually cause cuts in purchasing and jobs. Taxes on wages and inheritance undermines consumer spending. And, a growth in national debt from already all-time highs will increase the borrowing costs of the U.S. That, in turn, drives up interest rates for everything from mortgages to credit cards.

9. Access To credit
The lack of access to credit has hurt the economic activity or both individuals and small businesses. Many very large companies can borrow money at rates as low as 2 percent because of their strong cash flows and balance sheets. Banks have been much less willing to loan money to companies with under 100 workers because these firms often rely on a few customers for revenue and usually have very little money on hand.

Early in June, the House Small Business Committee held hearings and among its findings were that concerns about risk and a slow economy has made financial institutions reluctant to lend to small businesses, the main driver of economic growth. Committee Chairman Sam Graves (R-Mo.) said Congress will need to “bridge the gap” between the two sides. There is no plan to accomplish that. Individual borrowers find themselves in a similar position. The cost of credit cards debt is still above 20 percent in many cases although the Federal Reserve loans money to large financial firms for interest rates close to zero.

Potential home buyers, who might help break the gridlock of slow house sales, often find that banks want down payments as high as 20 percent. The median down payment in nine major U.S. cities rose to 22 percent last year on properties purchased through conventional mortgages, according to an analysis done for The Wall Street Journal by real-estate portal Zillow.com. That percentage doubled in three years and represents the highest median down payment since the data were first tracked in 1997. Homes which are not sold often put such great burdens on owners that they are barely consumers of the goods and services that drive GDP. Home builders have continued to struggle. Construction jobs, which were a huge amount of the employment base in states like Florida, have not returned.

10. Housing
Housing is considered by many economists to be the single largest drag on the American economy, and the housing market has gotten much worse in the last two months. A report from The New York Federal Reserve published early this year said: “When home prices began to fall in 2007, owners’ equity in household real estate began to fall rapidly from almost $13.5 trillion in 1Q 2006 to a little under $5.3 trillion in 1Q 2009, a decline in total home equity of over 60 percent.”

Real estate research firm Zillow reported on more recent developments. “Negative equity in the first quarter reached new highs with 28.4 percent of all single-family homes with mortgages underwater, from 27 percent in Q4.” Many homeowners who want to sell their homes cannot do so because they cannot afford to pay their banks at closing. Whether for good or ill, the American home was the primary source for money used for retirements, college educations and the purchases of many expensive items such as cars.

Economists point out the this leverage helped contribute to the credit crisis as people could not cover the costs of home equity loans as real estate values collapsed. This may be true, but the drop in value happened so quickly that the balance sheets of millions of Americans were destroyed. Their ability to consume was severely damaged, further harming GDP. High mortgage payments bankrupted or nearly bankrupted people who have lost jobs or have found that their incomes had stagnated. The building industry became a shambles overnight. And, whatever the effects have been over the last three years, they are getting progressively worse as home values drop to decade lows. There is no relief in sight because potential buyers worry that price erosion has not ended.

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Beth Walkup named Interim Director for Imagine Greater Tucson

Imagine Greater Tucson is happy to announce that Beth Walkup has been named to the position of IGT Interim Director.  In her role, Walkup will be responsible for maximizing organizational capacity, overseeing and coordinating the daily operations of IGT, and ensuring a smooth transition into the next phase of the process.

Walkup has over 45 years of experience in non-profit and business management. Her experience in the region includes: Executive Director of Tucson Children’s Museum, Interim Executive Director of the Food Bank of Southern Arizona, and Interim Executive Director of the Tucson Girls Chorus. She is also a member of the Board for Commerce Bank of Arizona and the Community Foundation of Southern Arizona.

Walkup’s background in the region and expertise will be of great benefit for moving the process forward and for IGT’s own development as an organization.  Imagine Greater Tucson is both pleased and fortunate to have her as part of this effort and we look forward to the work ahead in building a stronger future for our region.

Posted: Friday, July 22, 2011 8:00 am | Updated: 9:44 am, Thu Jul 21, 2011.

By Roger Yohem, Inside Tucson Business | 0 comments

For economic conditions to improve in Tucson and Pima County, only one thing matters: jobs. But from where?

We already have too many university and government jobs. Manufacturing diversity is weak. Real estate is in tatters. It could be 2015 before the housing debacle heals.

For job growth, Tucson trails the nation and the state. For 2011, the metro area is poised to be the only Arizona region not to gain jobs. According to Moody’s, Tucson will be one of the last cities in the entire country to recover from The Great Recession.

Around here, meaningful job growth is a fantasy. Developers are vilified by enviros and NIMBYs. Copper mines and corporate profits are characterized as filthy free enterprise. To open a low-wage burger joint, the cost of permits is equivalent to funding a government worker’s pension for a year.

Sad to say, the nation’s economic recovery has bypassed Pima County. The upturn will come about the time the Wildcats play Ohio State in the Rose Bowl.

Forever lost are many jobs. Staggering uncertainty about the future has changed the economy’s fundamentals.

These uncertainties include more regulation. City and county officials continue to send anti-business signals. Plus, what will ObamaCare really cost?

Supply-demand fundamentals are out of balance. Sluggish sales create no jobs. Future demand is uncertain as costs rise for energy, materials, taxes and soon, inflation. That’s why businesses are hoarding cash and not hiring.

Tucson’s labor forecast is dismal. For the entire state, jobs are expected to grow a pathetic 0.7 percent in 2011. Tucson got a zero. The most growth will be in overburdened taxpayers and underemployed workers. That’s no way to keep well-educated young people in town.

The state’s labor analysts say Arizona’s economic downturn began in 2007. For Tucson, their most current data (through May) shows:

Construction employment peaked at 28,700 jobs in mid-2006. By the end of 2008, some 8,000 jobs had been lost. As of May, the sector employed 15,200, down 13,500 jobs due to the recession.

Since peaking in June 2001 at 33,500 jobs, manufacturing has broken down ever since. When the economy turned, the level was 28,500. As of May, the manufacturing sector had 24,800 jobs, a cut of 3,700.

In the trade, transportation and utilities sector, the May total was 58,400 jobs, some 8,000 less than the December 2007 high of 66,700. Information services peaked in mid-2006 at 6,700 jobs and is now 2,600 less at 4,100 workers.

In finance, the mid-2007 top was 18,800. It was 17,400 in May, another 1,400 jobs in the red.

In professional and business services (call centers included), jobs hit 53,900 in November 2007. Today, the level is 47,800, a 6,100 loss. In health services and private education, Tucson had 56,200 in December 2007. Currently, this category has gained 3,500 to 59,700 workers.

In the leisure and hospitality sector, jobs peaked at 41,500 in early 2007. Today, its 36,600 people, a loss of 4,900 jobs. And in the miscellaneous category, jobs are off 2,600.

Then there’s government. To be clear, the state and feds define this category as all local municipalities, universities, local school districts, and other sectors like the post office thrown in.

In December 2007, local governments employed 81,100 people. As the recession took hold, jobs jumped to 82,600 in November 2008. During 2009, jobs bounced around but settled at 82,200 in May 2010. As of May 2011, the total was 80,100, a net decrease of only 1,000 jobs.

Add it up: the damage in the private sector is 39,600 jobs lost. That’s almost 40 business jobs cut per one job cut in government.

People move to where the jobs are, but that business concept conflicts with the leanings of many political officials. Their attitudes toward economic development haven’t really changed despite the despair caused by unprecedented unemployment.

This recession is different, driven by debt. The housing collapse crushed mobility. Unemployed workers can’t afford to sell their homes to move to better labor markets.

To survive the economic uncertainty, many companies have reorganized around technology, outsourcing and the disposable worker. Workers are added as needed, then let go until needed again. Plus, they are working harder and smarter for less money.

Many pre-recession jobs are lost forever, replaced by just-in-time disposable workers. At 40 to 1, the odds are stacked against the business community.

Contact Roger Yohem at ryohem@azbiz.com or (520) 295-4254. His Business Ink appears biweekly and weighs in on local political, social and business issues.