Brookings: Topics - California

What the Stockton Municipal Bankruptcy Means, And Doesn't

Tracy Gordon — Tue, 02 Apr 2013 11:20:00 -0400

A few years ago, it was fashionable to compare California, Illinois, or whatever U.S. state was struggling financially to the troubled island nation of Greece. Now, with Stockton, California the largest U.S. municipality to enter bankruptcy, it may be tempting to make another Mediterranean comparison - this time to the troubled island nation of Cyprus.

In Cyprus as well as Stockton (plus San Bernardino, California and Jefferson County, Alabama), the question is: Who will be left holding the bag? A common theme is "haircuts," or possible losses for investors (bank depositors in Cyprus; bondholders in California) to spare wider pain to taxpayers, pensioners, public employees, and other local stakeholders.

One problem with haircuts is that they can impair future market access: the government in question may have to pay higher borrowing costs to regain investor confidence. A wider concern is contagion: If investors fear they won't get their money back, they might demand higher interest rates from the sector as a whole. Moody's Investors Service publicly worried about such contagion last summer, in a report critical of U.S. municipalities and what the organization viewed as changing norms toward bankruptcy.

But there are a few reasons to be skeptical about the contagion scenario applied to munis. First, although broad (worth about $3.7 trillion in 2012), the municipal bond market is not very deep. On the supply side, a few large issuers like California, New York, and Texas dominate. On the demand side, most investors are households or institutions representing households such as money market mutual funds.

Because of its traditional mom-and-pop structure, muni bonds don't transact very often. When they do, different buyers may pay different prices for the same bond, and prices can rise faster than they fall (the "rockets and feathers" phenomenon). Economists have rightly criticized these features as inefficient. However, some market participants counter that proposed cures might be worse than the disease.

A silver lining of less-than-perfect information and higher transaction costs in muni markets may be that shocks are transmitted slowly through the system. More educated institutional investors are probably able to sort good apples from bad; other investors simply "buy and hold." A recent IMF working paper confirms these predictions: after a bad credit event, investors apparently shift their money from places like California and the City of New York to safer issuers.

Rather than suffering from Stockton's misfortune, other states and municipalities will probably benefit, much like U.S. Treasuries after the 2008 financial crisis. Interestingly, the IMF authors did detect some evidence of contagion, or bad news spreading, but in an unexpected direction from munis to U.S. Treasuries. One explanation is that investors looked at a Illinois or California and worried about prospects for a federal bailout, analogous to Cyprus and the rest of the Eurozone.

Still, measured effects were small and took time to surface. The U.S. also has a long history of steadfastly refusing requests for local aid.

In any event, it will take some time to parse through yesterday's Stockton ruling. Its most significant effects may be felt within California—where many municipalities pay into the state's CalPERS pension fund. The judge ruled that CalPERS was just another creditor, but we still don't know who will be left holding the bag.

Authors

Tracy Gordon

Publication: Real Clear Markets

Image Source: © Lucy Nicholson / Reuters

The Future of Redevelopment Financing in the United States

Bruce Katz and Robert Puentes — Wed, 18 Jul 2012 00:00:00 -0400

Once again, local leaders are out forging pragmatic solutions to issues that are ideologically stuck at national level.

If there is a silver lining from our economic roller coaster, it's that crisis often begets innovation, even in areas like real estate financing.

News reports from Beijing indicate that the China Development Bank is negotiating to finance a massive urban redevelopment project in San Francisco. This deal appears to be the first significant funding of a private U.S. investment by the CDB. We think it’s a promising sign of things to come.

The Bayview Hunters Point/Candlestick Point project is innovative on a number of fronts: social policy, technology, urban design, real estate and finance. By turning an old military base into an urban research-and-development campus that anchors an entirely new community, the project promises to create a virtuous cycle of innovation that can form the basis for lasting prosperity.

Yet equally transformative is the proposed funding and finance package for the nearly $3 billion project.

The CDB is interested in contributing $1.7 billion for Hunters Point and the separate-but-related Treasure Island redevelopment. It was only after exhausting its attempts to get funding from domestic sources that the developer, Lennar Corporation and partners, undertook negotiations with the CDB.

For the Chinese, an investment like this is attractive, in part, to diversify their holdings. While there is no precedent for this kind of Chinese investment in the United States, there are plenty of examples in other countries.

Barriers to Chinese investment in American infrastructure, however, are not inconsequential. Mutual concerns generally center on firms, workers, quality, and standards. For example, Chinese workers (not domestic workers) are often employed on their infrastructure projects in Africa and the Middle East, and contractors understandably come with a different culture around labor and production standards. From the Chinese perspective, there are concerns about America‘s lack of public-sector expertise in partnerships of this nature and trepidation over American national security policies that they consider protectionist.

Yet, the Hunters Point project shows there is significant potential for reciprocated benefit if reservations can be overcome and deals structured in ways that address the genuine needs of both sides.

Read the full article at theatlanticcities.com »

Authors

Publication: The Atlantic Cities

Image Source: Robert Galbraith / Reuters

California’s Budget Crisis: Part XII

Tracy Gordon — Thu, 17 May 2012 12:40:00 -0400

Summer is here and that can mean only one thing – the start of movie season. Well, that and California’s annual budget mess. Like a tired franchise that keeps coming back, it’s the same story year after year, sometimes gussied up with computer generated effects or a surprise cameo appearance.

On Saturday, Governor Jerry Brown kicked things off by announcing that tax collections were coming in below projections, and so the state would face a $4 billion deficit by the end of the current fiscal year (June 30^th) if lawmakers failed to take corrective action. Left unchecked, by the end of next fiscal year, the deficit would grow to $16 billion.

If this all sounds familiar, it’s because in every budget cycle since the last recession, the state has started with a projected gap between inflows and outflows. The problem has certainly grown worse lately, as California and nearly all states have struggled mightily with falling revenues and rising service demands in the Great Recession. But it’s inescapable that lawmakers could have fixed the roof when it wasn’t raining. They didn’t.

This is what’s known in the business as a “structural deficit.” It means that there is an ongoing mismatch between revenues and public spending, regardless of how the economy is performing. Some would attribute this mismatch to a disconnect between what voters want from government and what they are willing to pay for it. Others would call it a failure in government’s ability to provide services efficiently and live within its means.

The problem is that the debate about right sizing government – in California and Washington, DC – typically happens in a fact free zone. No one is talking about the business of government, what it provides, to whom, and at what cost. The truth is we have very little data to underlie this kind of conversation. Budgets are rife with information, and California’s non-partisan Legislative Analyst’s Office does a Herculean job putting out its own materials. What’s missing is someone to put it all together. Some nonprofits and advocacy groups are providing a good start.

Also, voters and politicians alike could be more engaged. Instead, California’s budget season usually follows the same plot line: January budget release, May revision, and then a summer of gridlock punctuated by a few high profile protests and maybe a cash crisis necessitating state IOUs. All is resolved in late summer or early fall (well beyond the state’s June 15^th constitutional deadline and into the July 1^st fiscal year). Or is it? The villain always comes back, and the process begins again.

Maybe this year will be different. The governor is proposing some harsh cuts to health and social services on top of those that have already happened since 2009 as well as converting state employees to a four-day work week (at 5 percent less pay). If voters do not approve his November ballot initiative for a temporary income tax surcharge on high-income residents and a quarter cent sales tax boost, public schools, colleges, and universities are next on the chopping block. Those kinds of cuts, as well as closing 70 state parks, may get people’s attention.

Or, as one LA observer noted, “…we are about to head into the summer, when people are not spending a lot of time paying attention to what is happening in government.” Alas.

Authors

Tracy Gordon

Image Source: David McNew / Reuters

How Metropolitan Areas Can Recharge Manufacturing

Bruce Katz and Richard M. Daley — Wed, 09 May 2012 00:00:00 -0400

Perhaps the only silver lining to the Great Recession is that it triggered a new focus on manufacturing in the United States. After 25 years of being sold a shiny vision of a service-dominated post-industrial economy, the U.S. is rediscovering how important it is to actually make things in order to spur innovation, raise wages, drive exports and lower the trade deficit.

Corporate cost calculations undergird the newfound appreciation of U.S. manufacturing. The offshoring of manufacturing was rooted in harsh economic realities: rock-bottom wages in nations such as China and the aggressive attraction and infrastructure strategies of foreign governments. Yet labor costs are rising in China, and concerns persist about the protection of American intellectual property there. Energy can be cheaper here, and more reliable. The tsunami in Japan, supplier of many high-tech components, revealed the fragility of far-flung supply chains for many U.S. companies.

As corporations reevaluate their bottom lines, national leaders must reassess the critical role of manufacturing. Its jobs pay 20% more on average than non-manufacturing work and are more likely to provide benefits. It employs a disproportionately high number of less-educated workers and tends to spark job growth in service-based industries. And, in the words of Andrew Liveris, chairman and CEO ofDow Chemical Co.: "Where manufacturing goes, innovation inevitably follows."

That reality has cost the U.S. dearly. In the electronics sector alone, 90% of R&D now occurs in Asia, in large part because of the steady offshoring of manufacturing by U.S. companies since the 1980s. That must not happen in other advanced industries.

And it doesn't have to. The key to reviving manufacturing and exports in the U.S. can already be found in metropolitan areas like Los Angeles and Chicago.

The phrase "urban manufacturing" evokes images of a sooty skyline, cramped sweatshops or the massive automotive assembly lines of mid-20th century Detroit. But urban manufacturing today involves small, specialized firms that rely on advanced technology and workers with different skill sets than in the past.

In Torrance, for example, Pelican Products produces high-performance protective cases and portable lighting equipment used by law enforcement and the defense, aerospace and entertainment industries. In 2010, Pelican employed 600 people at its home-base Torrance facility. (It has four other plants — two more in the U.S. and two in Europe.) Pelican sells products to more than 100 countries. In the last two years, its export sales have grown 25%, driven by demand in Europe and Asia.

As other companies chased low-wage labor by offshoring manufacturing capacity, Pelican chose to remain primarily in the U.S. In Torrance, it could readily benefit from a skilled workforce and a strong and flexible supply chain. Pelican's 12-year relationship with neighboring Victory Foam highlights the benefits of proximity to suppliers. Victory provides Pelican with next-day order fulfillment, which greatly reduces the time required for production. Daily interactions between the two companies allow for rapid adjustments to meet market demands while providing opportunities for collaboration on new products. Together, these firms are key components of a thriving regional innovation and manufacturing ecosystem.

These are the sorts of ripple effects and mutual benefits that only cities, with their density and diversity, can supply. As one industry feeds another, productivity improves, entrepreneurship is encouraged and employment and wages increase in the region.

What do firms like Pelican need to thrive? It's not rocket science.

A functioning federal government matters. It can deliver the big stuff: enhancing access to foreign markets, enforcing trade agreements and protecting intellectual property. It can also provide expertise on emerging markets through U.S. consulates, help match firms with potential customers, provide export promotion support and commit resources to modernizing key logistics hubs like the ports of Los Angeles and Long Beach.

Local governments and institutions also have a role to play in recharging American manufacturing and creating a more prosperous economy.

Small and medium-sized manufacturing firms need a steady supply of skilled workers that can be supplied by local community colleges and even specialty high schools that reinvent vocational education for a new century.

Firms also need a safe, stable place to do business. Chicago met this demand by creating industrial districts. Supported by financing based on the tax increases that redevelopment would bring, the city secured industrial land from rezoning and invested in infrastructure to improve freight transport.

Finally, firms need business advice close to home and more connections abroad. In Los Angeles, the USC and UCLA business schools have given Pelican access to MBA students, who are designing a distribution system for the company's booming trade with China and other Asian nations. This is a model partnership that needs to be replicated.

U.S. cities and metropolitan areas still possess significant manufacturing capability and, by extension, innovation capacity. A rich industrial heritage has endowed American cities and metros with the companies, skilled workers, educational and advanced research institutions, and production strength essential for moving toward a new economic vision.

The Great Recession was a wake-up call to the nation. Let's heed it.

Authors

Bruce Katz
Richard M. Daley

Publication: Los Angeles Times

Image Source: © CHRIS KEANE / Reuters

Going Global: Boosting the Economic Future of Greater Los Angeles

Wed, 21 Mar 2012 08:30:00 -0400

Event Information

March 21, 2012
8:30 AM - 2:00 PM EDT

Davidson Conference Center
University of Southern California

Los Angeles, CA

As we emerge from the Great Recession, it is clear that our economy must be purposefully restructured from one focused inward and characterized by excessive consumption and debt to one that is globally engaged and driven by production and innovation.

A growing chorus of leaders is calling for a new growth model, one that creates more and better jobs by engaging rising global demand and attracting global talent and capital. These leaders recognize that only by harnessing the power of cities and metropolitan areas can we hope to foster job growth in the near term and restructure our economy for the long haul.

This new imperative forms the basis for the Global Cities Initiative.

On March 21, the Global Cities Initiative hosted a forum in Los Angeles focused on global competitiveness. Speakers and panelists provided context on the position of Greater Los Angeles in the global marketplace and offered insight into how state and metropolitan leaders can work together with international partners to expand global trade and enhance the economic prosperity of the region.

IN THE NEWS
Nationwide Push to Boost Exports is Launching in Los Angeles
Los Angeles Times, March 21, 2012

San Diego's Economic Lifeline: Exports
San Diego Union-Tribune, March 22, 2012

U.S. Global Economic Push Enlists San Diego
NBC San Diego, March 22, 2012

Chase Looks to Help Cities Boost Job Creation
Fox Business, March 26, 2012

EVENT IMAGES — Click on thumbnail photograph for full view

The Port of Los Angeles.

Michael "Mickey" Kantor, former Secretary of Commerce and U.S. Trade Representative, and Richard Daley, former Chicago mayor and Midwest Chairman of JP Morgan Chase, at the Global Cities Initiative event in Los Angeles.

Peter Baker, California Chairman of JP Morgan Chase, speaks at the Global Cities Initiative event in Los Angeles.

Event Materials

Participants

Panelists

C.L. Max Nikias

President, University of Southern California

Honorable Richard M. Daley

Former Mayor, City of Chicago
Senior Advisor, JPMorgan Chase

Peter L. Scher

Executive Vice President, Head of Corporate Responsibility, JPMorgan Chase

Moderator: Dr. Ernest Wilson III

Dean, USC Annenberg School of Journalism

Richard Drobnick

Director, Center for International Business Education and Research, USC Marshall School of Business

Scott Ermeti

Vice President of International Business, Pelican Products, Inc.

Robert M. Hertzberg

Chairman of the Board, Los Angeles County Economic Development Corporation

Nancy McFadden

Executive Secretary for Legislation, Appointments and Policy, Office of California Governor Jerry Brown

Matthew K. Rose

Chairman & Chief Executive Officer, BNSF Railway

Moderator: Honorable Michael "Mickey" Kantor

Former Secretary of Commerce and U.S. Trade Representative

Honorable David Carden

Ambassador, U.S. Mission to ASEAN

Honorable Chan Heng Chee

Ambassador of Singapore to the United States

Honorable Zhang Shaogang

Minister Counselor, Embassy of the People's Republic of China

Peter Barker

California Chairman, JPMorgan Chase

Honorable Antonio Villaraigosa

Mayor, City of Los Angeles

Negative Equity Concentrated in a Few States

Ted Gayer — Fri, 02 Mar 2012 00:00:00 -0500

Yesterday’s release of CoreLogic’s negative equity report showed that in the fourth quarter of last year there were 11.1 million residential properties with a mortgage in negative equity, which is 22.8 percent of mortgage holders. This is slightly higher than the 10.7 million (22.1 percent) from the third quarter. The CoreLogic data show wide variation across states in the percentage of mortgage holders that are underwater. Nevada leads the list with 61 percent of all of its mortgage properties underwater (an increase from 58 percent in the third quarter), followed by Arizona (48 percent), Florida (44 percent), Michigan (35 percent) and Georgia (33 percent).

The average underwater borrower has about $65,000 of negative equity, which yields an aggregate debt overhang of approximately $717 billion nationwide. This aggregate burden varies widely across states. The table below shows state-level data of the number of mortgage properties that are underwater, the average amount of negative equity for these properties, the aggregate negative equity, and the state’s share of the national mortgage debt overhang. While Nevada has the highest proportion of mortgage holders that are underwater, it is the sixth highest state in terms of aggregate negative equity. California has about 2 million mortgaged properties underwater, with an average amount of negative equity across these properties of approximately $92,000. This translates into mortgage debt overhang of about $187 billion, which is the highest among the states and about 26 percent of the total national mortgage debt overhang. Florida has the next highest share of the total national mortgage debt overhang at about 16 percent. The aggregate amount of negative equity in four states (California, Florida, Arizona, and Massachusetts) makes up over 50 percent of the approximately $700 billion of nationwide negative equity overhang.

The administration has recently increased taxpayer-financed incentives to banks to engage in more principal reductions for underwater borrowers, and it has pressured Edward DeMarco, acting director of the Federal Housing Finance Agency, to allow principal reductions for Fannie Mae and Freddie Mac loans. The distribution of negative equity across states suggests that any serious attempt at wide scale principal reductions would reap benefits to borrowers concentrated in only a few states.

State	Negative Equity Mortgages	Average Negative Equity Amount	Aggregate Negative Equity	Percentage Share of Nationwide Aggregate Negative Equity
Alabama	43,431	$44,526	$1,933,808,856	0.27%
Alaska	6,273	$48,473	$304,071,971	0.04%
Arizona	631,126	$58,704	$37,049,636,573	5.18%
Arkansas	25,676	$71,662	$1,839,983,520	0.26%
California	2,041,276	$91,621	$187,024,071,967	26.14%
Colorado	241,682	$43,488	$10,510,260,953	1.47%
Connecticut	111,140	$112,147	$12,463,982,075	1.74%
Delaware	28,919	$77,112	$2,229,996,542	0.31%
Florida	1,916,082	$57,905	$110,950,170,016	15.51%
Georgia	541,178	$41,147	$22,267,822,137	3.11%
Hawaii	24,118	$97,578	$2,353,394,765	0.33%
Idaho	64,135	$45,393	$2,911,301,900	0.41%
Illinois	489,535	$59,412	$29,084,236,461	4.07%
Indiana	69,123	$36,369	$2,513,963,937	0.35%
Iowa	38,125	$55,444	$2,113,790,975	0.30%
Kansas	32,552	$44,288	$1,441,668,766	0.20%
Kentucky	26,704	$69,100	$1,845,246,383	0.26%
Louisiana	36,546	$144,987	$5,298,693,940	0.74%
Maine	7,662	$58,723	$449,935,894	0.06%
Maryland	331,159	$63,243	$20,943,444,374	2.93%
Massachusetts	240,887	$127,772	$30,778,641,582	4.30%
Michigan	480,075	$40,143	$19,271,670,396	2.69%
Minnesota	109,407	$38,566	$4,219,372,191	0.59%
Mississippi	11,209	$42,347	$474,669,190	0.07%
Missouri	137,177	$41,959	$5,755,815,289	0.80%
Montana	10,754	$66,122	$711,071,659	0.10%
Nebraska	26,140	$57,584	$1,505,239,249	0.21%
Nevada	343,256	$82,435	$28,296,313,698	3.96%
New Hampshire	47,206	$53,056	$2,504,538,822	0.35%
New Jersey	329,780	$78,782	$25,980,883,310	3.63%
New Mexico	36,898	$82,371	$3,039,337,194	0.42%
New York	122,125	$130,341	$15,917,855,328	2.23%
North Carolina	205,764	$54,865	$11,289,339,673	1.58%
North Dakota	3,763	$58,326	$219,478,984	0.03%
Ohio	526,802	$30,878	$16,266,566,980	2.27%
Oklahoma	33,205	$60,754	$2,017,331,352	0.28%
Oregon	131,126	$40,102	$5,258,416,029	0.74%
Pennsylvania	156,376	$71,702	$11,212,482,487	1.57%
Rhode Island	52,286	$78,393	$4,098,877,472	0.57%
South Carolina	99,936	$52,123	$5,208,989,529	0.73%
South Dakota	NA	NA	NA	NA
Tennessee	162,058	$39,203	$6,353,082,233	0.89%
Texas	347,021	$43,374	$15,051,777,345	2.10%
Utah	100,687	$43,879	$4,418,092,031	0.62%
Vermont	NA	NA	NA	NA
Virginia	303,800	$63,596	$19,320,458,450	2.70%
Washington	271,505	$50,279	$13,651,107,650	1.91%
Washington, DC	12,446	$83,987	$1,045,297,365	0.15%
West Virginia	1,225	$76,345	$93,522,139	0.01%
Wisconsin	104,548	$54,206	$5,667,083,140	0.79%
Wyoming	5,056	$44,377	$224,371,648	0.03%

Source: CoreLogic

Authors

Ted Gayer

Image Source: © Mike Segar / Reuters

Web Chat: States and the Economic Recovery

Jennifer Bradley — Wed, 22 Feb 2012 00:00:00 -0500

The nation’s governors are gathering for their annual winter meeting in Washington, and jobs and economy will be the top items on the agenda. Frustrated with Washington’s partisan gridlock and lack of progress on the economy, many governors are now pressing forward with innovative solutions to jumpstart their economies at the state level and lay the foundation for long-term growth.

On February 22, Jennifer Bradley answered your questions on the economic health of the states during a live web chat with POLITICO.

12:30 Vivyan Tran: Welcome everyone, let's get started!

12:30 Jennifer Bradley: State innovation is part of the genius of our federalist system. Health care reform was law in Massachusetts years before the recent passage of federal legislation. During the 1980s, governors from both parties experimented with welfare and healthcare reforms, paving the way for federal advances in the next decade. Throughout the 1950s, public university systems, established by states like California and North Carolina, set the stage for the federal technology investments of the 1960s and 1970s. And before he was president, New York Gov. Franklin D. Roosevelt experimented with interventions that foreshadowed the New Deal.

With Washington mired in gridlock, states have no choice but to innovate. Smart governors are working with partners in metropolitan areas, which concentrate people, jobs, GDP, and innovation potential and are critical for job creation, revenue generation, and economic growth.

12:30 Comment From Tim: What are a few examples of innovation at the state level that have helped local economies get back on their feet again?

12:32 Jennifer Bradley: States like Nevada, Tennessee, and New York are organizing their economic development strategies around the needs of local and metro economies. They are focusing on aligning resources metros need, rather than sticking with the same old state agency stovepipes.

12:32 Comment From Katie: I see that you're with Brookings's Great Lakes Initiative. It seems as though Detroit and the whole region is experiencing a resurgence at the moment. What do you attribute this success to?

12:35 Jennifer Bradley: Manufacturing turns out to be a source of strength in the recovery (and will likely continue to be a source of economic strength, since it's so closely tied to innovation, which is the engine of economic growth). Places that have hung on to their manufacturing, particularly in sectors in which the U.S. as a whole is strong—like autos and transportation, and chemicals—have gained as those sectors have rebounded.

12:35 Comment From Sam: How successful have states in the "rust belt" been in revitalizing their economies following the recession?

12:38 Jennifer Bradley: This is a nice follow up to the previous question. States in the Midwest/Northeast that have done well have done so by really focusing on innovation and linking that to their manufacturing sector. Ohio has done this through its Third Frontier innovation program; Michigan has done this through its 21st Century Jobs fund to some extent. Focusing on exports also has been critical, because the recovery is also export-driven—all those manufactured goods are finding eager purchasers abroad.

12:38 Comment From Tony: Which states are close to fully recovered and which are still lagging behind?

12:40 Jennifer Bradley: The states with the strongest recovery, as of the end of last year, are North Dakota, Michigan, Louisiana, Wyoming, West Virginia, Utah, Indiana, Massachusetts, Alaska, and Oregon.

You see there a mix of natural resources economies, and manufacturing and exports economies (Intel, for example, is a big exporter in the Portland, OR, metro).

12:40 Comment From Beth T: Many politicos see manufacturing as a way for states to emerge from the recession and begin to provide high-paying jobs for their citizens. Given the cheap cost of manufacturing in places like China, is this realistic?

12:43 Jennifer Bradley: My colleagues at Brookings just devoted several hours to this very question at an event this morning! Chinese labor costs are rising, and there are a lot of other factors that make U.S. manufacturing competitive. Job loss in manufacturing is not inevitable. Smart governors understand that manufacturing may not employ as many people as it used it, but it is an important driver of innovation in their states, so they are working to link up university research and manufacturing needs.

12:43 Comment From Abigail: Are there any state programs right now that could and should be scaled up to the federal level?

12:48 Jennifer Bradley: Michigan's governor has proposed a new approach to transportation investments, driven by data—which projects are going to deliver the most bang for the buck, and how do transportation investments support goals beyond just getting from point A to point B (goals like more exports, or supporting logistics hubs)? The federal government could certainly benefit from a more strategic approach to transportation as well.

The larger point though is not necessarily that the Feds should scale-up state interventions willy-nilly, but that they should be taking the same approach, asking "Where are the market failures, and how can we deploy our resources to solve those failures? What needs to be done, and how can we bring a unique solution?"

12:48 Comment From Donna: For a while in the 90s, every state was hoping to have the "next Silicon Valley." What types of industries/sectors are states trying to cultivate today?

12:51 Jennifer Bradley: One promising thing that my colleagues and I see is that states are no longer trying to be "the next" anything—they are trying to be the best versions of themselves and build on strengths that they have. Jed Kolko has done research indicating that 95% of new jobs come from existing firms—that's where smart states are starting, with what they already do well. For some states that's advanced energy, for some it's helping auto supply companies pivot to supplying parts for wind turbines.

12:52 Comment From Fran I: I've heard a lot recently about regional economic development as a tool states are using to support growth. Could you explain a bit more about what these are?

12:55 Jennifer Bradley: It varies from state to state. In New York, for example, Governor Cuomo established 10 regional development councils and asked them to develop strategic plans for their regions. These plans were evaluated by a panel of experts and the top four regions got $100 million in state funding. Colorado's Governor Hickenlooper used a different model. He told each county to create an economic development plan, constructed regional plans from those, and then used that as the state's economic development plan. Tennessee used something called "jobs base camps" to identify key clusters to support.

12:56 Comment From Karen K: How can the federal government encourage states to experiment in these sort of ways?

12:58 Jennifer Bradley: The federal government can listen to the states when they ask for flexibility. For example, governors like Michigan's Gov. Snyder has asked for a different, more flexible approach to spending federal workforce dollars.

Ironically, the federal government is spurring a lot of state innovation right now because it's paralyzed and gridlocked. The states (and metro areas, too) have no choice but to innovate, whether the federal policy environment is conducive to it or not. I certainly don't advocate continued paralysis at the federal level, but it shows that states simply have to get stuff done—they have to balance the budget, they have to respond to unemployment numbers, they have to bridge the gaps.

12:59 Vivyan Tran: Thanks for the questions everyone, see you next week!

Authors

Jennifer Bradley

Image Source: © Max Whittaker / Reuters

How to Keep U.S. Exports (and Jobs) Growing

Amy Liu — Fri, 17 Feb 2012 11:14:00 -0500

U.S. exports, a bright spot in the lethargic economic recovery, have now expanded for 10 straight quarters—two-and-a-half years. Alongside an improving jobs picture, the trend offers further evidence of an economy on the mend.

Yet, as the economy improves and the dollar strengthens, how to keep export momentum going, and the good paying jobs exports create at home, needs to be a long-term focus of American growth and competitiveness goals.

To get there, national efforts to reduce trade barriers or reorganize trade programs, while helpful, are not enough. The United States needs to empower metropolitan areas, the front lines of American business activity, to help more firms become new exporters and lay the foundation for greater global engagement.

Post-recession, the steady surge in U.S. exports can be credited, in part, to the low value of the dollar and the efforts of sophisticated multinational companies specializing in such products as motor vehicles, aircraft, and petroleum. The benefits of these big exporters to their domestic suppliers and local-serving industries cannot be overstated.

Yet, the share of U.S. firms that sell a product or good outside our borders has not budged past 1 percent, despite decades of domestic and overseas services and programs dedicated to helping companies export.

Exporting is simply not in the American DNA.

We need a massive culture shift. While President Obama’s national export challenge has garnered much support and attention, the results remain sobering on the ground. Too many company executives remain unaware of global opportunities, fear to leave the comforts of the domestic market, and do not know what services exist (and who provides them) to help them navigate the export course.

However, several innovating metropolitan areas are stepping up to more aggressively orient their economic ecosystem for global trade. Recently, the greater Portland, Oregon, area released its “ExPort Portland” plan, which leverages the region’s strengths in computer electronics and clean technology services to meet global demand. In the coming weeks, the Los Angeles, Minneapolis-Saint Paul, and the Syracuse/Central New York regions will issue and begin implementing their own plans to boost exports and trade.

These metro export strategies strengthen state and federal export activities in a number of ways.

First, the plans reflect that metro areas are the crucible of exporting. They are our nation’s centers of innovation, producers of tradable goods and services, magnets of talent, and hubs of freight and passenger movement. The 100 largest metro areas produce the majority of exports for the nation, including generating more than three-quarters of all service exports. Los Angeles, Portland, Minneapolis-Saint Paul, and Syracuse respectively rank 1st, 12th, 14th and 72nd among metro areas in export volume. These strategies will measurably increase our nation’s export capacity.

Second, many of these plans involve metro chambers of commerce, port authorities, regional civic groups, or regional economic development agencies that have strong direct relationships with firms. They are well-positioned to proactively reach out to target companies, perhaps within priority industries, and help them become export-ready, thereby building the nation’s pipeline of quality exporters.

Further, few regional economic development officials promote global trade as an expansion strategy for businesses. Engaging them as partners is essential to making exports more the norm than the exception.

Third, leaders in these metro areas are bringing together the vast network of export service providers and champions around a unified goal and strategy for boosting exports. This has the added benefit of ensuring that all players—government, business, financial, civic, university, and nonprofit leaders—are working in concert toward a shared ambition versus all-too-common fragmentation. Firms will also benefit from a coordinated system of services that will give them the confidence that exporting is the right investment.

Finally, exports in these metros represent just the beginning of a more comprehensive game plan for greater global engagement. Metro leaders are aligning strategies in foreign direct investment, manufacturing innovation, freight and transportation modernization, and immigrant outreach so they build a more globally fluent economy.

Only then can American firms truly tap the immense demand arising from emerging markets around the world and innovate and grow at home.

Authors

Amy Liu

Image Source: © Sean Gardner / Reuters

Los Angeles Doubles Down on Exports

Bruce Katz and Judith Rodin — Thu, 19 Jan 2012 00:00:00 -0500

In March 2010, President Obama established a National Export Initiative to help American companies meet the administration’s goal of doubling U.S. exports by 2015.

Why focus on boosting exports? In a word: jobs. Because every $1 billion in exported goods and services supports roughly 5,400 jobs, an increase in American exports would bring much needed job creation to communities throughout the U.S.

Even as the federal government moves to increase exports, regional leaders from the public, private and academic worlds are taking action to foster higher levels of exports in their areas. Los Angeles has pledged to do its part through the newly established Los Angeles Regional Export Council (LARExC). Housed in the Los Angeles Area Chamber of Commerce, this public-private partnership aims to double regional export levels in five years by expanding access to export training and market research, streamlining export services, and providing networking opportunities for export-ready companies in twelve key industries. [Full disclosure: The Brookings-Rockefeller Project on State and Metropolitan Innovation provided some advisory support to LARExC before it launched.]

“We in Los Angeles are not waiting for Washington to create jobs,” says Mayor Antonio Villaraigosa. “We are launching the Los Angeles Regional Export Council to help local businesses find the export assistance they need to grow their businesses and create new jobs.”

The Los Angeles region has a number of strengths when it comes to exports. With established connections to Asian and Latin American economies on the Pacific Rim and infrastructure to move freight by land, sea and air, it’s little wonder that the region is second only to the New York City metro area when it comes to total exports by dollar value. LARExC aims to build upon these assets by creating a regional export support network that connects area firms to local, state and federal services.

Export-ready companies looking to enter new markets often need some extra help at first; this is especially true of smaller firms, which often lack the resources and know-how needed to begin exporting. LARExC’s MBA Export Champions program, a joint effort of the USC Marshall School of Business and the UCLA Anderson School of Management, aims to support new-to-export and new-to-market firms through this transition by connecting companies with local MBA students, who will provide market research as well as export plan development assistance. In addition, the Export Trade Assistance Program, administered through the state community college system, offers workshops to business executives interested in learning the basics of exporting.

“When companies in L.A. tap into opportunities overseas,” says Los Angeles Chamber Senior Vice President Carlos Valderrama, “it presents an opportunity for job creation and economic growth.” By improving the quality, availability and coordination of export support services, LARExC hopes to ensure that export-ready firms in the region can get the assistance they need to compete in the global marketplace, strengthening the regional economy in the process.

Authors

Bruce Katz
Judith Rodin

Publication: The Atlantic Cities

San Diego Pushes Hard on Electric Vehicles

Bruce Katz and Judith Rodin — Wed, 18 Jan 2012 00:00:00 -0500

Very soon, Qualcomm Stadium won’t be the only place to find chargers in San Diego. Thanks to the Smart City San Diego initiative, residents will soon have more electric vehicle (EV) charging stations to choose from and 50 electric vehicles for lease to go with them.

This collaborative endeavor brings together leaders from the public sector, private industry, and academia in an effort to boost EV use, increase the city’s energy independence, and spur growth in San Diego’s clean economy sector. With one of the largest EV rollouts in the United States to date, Smart City San Diego aims to spark consumer demand while at the same time learning more about how people incorporate EVs into their everyday lives.

Also, by exploring the feasibility of using solar energy to power EV charging stations, true zero tailpipe emissions may be achieved.

Each partner involved in Smart City San Diego has a particular role to play in this collaboration. San Diego Mayor Jerry Sanders got the initiative off the ground and convinced San Diegans to take part. The University of California-San Diego, led by Chancellor Marye Anne Fox, lent research capacity as well as a natural testing ground for smart grid technology and EV use. San Diego Gas & Electric, the area utility company, brought its track record in smart utility solutions. GE, creator of the WattStation EV charging station, will contribute technological expertise and CleanTECH San Diego, a nonprofit representing companies in the greater San Diego clean technology cluster, will bring its network and its experience advocating for clean technology innovation.

Because electric vehicles are still a very new industry, little is known about consumer behavior when it comes to EV use. Smart City San Diego aims to expand knowledge on this subject by studying how people use electric vehicles. A better understanding of consumer behavior will help cities and metros design EV infrastructure that meets the needs of users, ranging from locating charging stations in the right places to figuring out how to encourage EV users to charge their vehicles during off-peak times. These studies will also provide insight into what needs to be done to increase EV use.

California’s Renewables Portfolio Standard (RPS) requires that 33 percent of energy use come from renewable sources by 2020. Smart City San Diego contributes to this goal by boosting demand for renewable energy technology. “San Diego is leading the way yet again in the field of energy innovation,” says Mayor Sanders. “This is the first of many initiatives that our partners throughout the region will undertake to make San Diego the foremost resource-conscious community in the United States.”

Authors

Bruce Katz
Judith Rodin

Publication: The Atlantic Cities

Ballot Initiatives in California Aren’t as Bad as You Think

Tracy Gordon — Tue, 04 Oct 2011 00:00:00 -0400

The below was featured in a Zócalo Public Square forum on whether or not California would be better off without ballot initiatives.

Critics of California’s governance are legion. Many of them reserve special ire for the institution of direct democracy. Last April, The Economist went as far as to blame the initiative process for everything from the state’s budget woes to its failing schools and polarized public life.

But we should be skeptical of any all-purpose explanation, particularly one that rests on an institution that’s been around for 100 years and is common to many places, including about half of all U.S. states. The other half of U.S. states have no initiative process. Neither does the federal government. But they, too, are hardly immune to fiscal or political dysfunction.

My research on California cities and counties suggests that direct democracy deserves a place in state policymaking. At the local level, voters use the initiative to address practical and substantive policy concerns—such as urban growth boundaries and redistricting—that elected officials might otherwise neglect.

Local initiatives are also used sparingly. Between 1990 and 2000, the average city had just one initiative petition circulated for signatures, and the average county had three. Even among more frequent users (like San Francisco), there is no evidence of “ballot fatigue” or participation dropping with the number of measures to decide. In fact, elections with initiatives draw higher turnout.

There is also little evidence of a local “initiative industrial complex.” When I separated pro-growth from anti-growth measures (a rough proxy for funding levels), I did not detect any difference in passage rates or likelihood of becoming law. At least at the local level, shoe leather seems to beat money in politics.

All of this may reflect a more collaborative approach toward local governance generally. For example, local initiative backers often drop their petitions when legislators take up the issue. The state once had a similar indirect initiative but repealed it. As reformers contemplate improvements to California’s direct democracy, they should think locally.

Authors

Tracy Gordon

Publication: Zócalo Public Square

Image Source: Â© Phil McCarten / Reuters

Metropolitan Areas Can Fuel the Next Economy

Alan Berube — Mon, 07 Mar 2011 13:16:00 -0500

A new report analyzes U.S. metropolitan areas' contribution to state populations and economies, with an emphasis on how innovations, exports and talent from these burgeoning metropolitan areas can drive the next round of U.S. economic growth. Alan Berube says that with state budgets in crisis, we should look at how metropolitan areas can fuel the next economy.

Berube looks specifically at California, where metropolitan areas comprise 98% or more of the state's economy, and the "tug-of-war" that occurs when state legislatures sit outside the state's major metro areas.

Video

Metro Areas Can Fuel the Next Economy

How States Can Tackle Budget Deficits

Mark Muro — Thu, 03 Feb 2011 00:00:00 -0500

It's pretty common knowledge by now that many states are drowning in red ink. Most notably, the weak economy has created operating gaps ranging from the hundreds of millions of dollars in Arizona to the tens of billions in California, Illinois, and New Jersey.

Deep cuts in public spending have become the order of the day, some executed with more care than others, and although political rhetoric presents an obstacle, some leaders are contemplating whether to raise taxes, as Illinois did recently.

And yet, that's just part of the deficits problem. Bad as this situation is, this year's difficulties are arguably one of the lesser aspects of a longer-term, public finance crisis in the states that actually won't improve, like the short-term one will, as the economy recovers.

How is that? A new report recently released by my group at Brookings Mountain West, working in partnership with the University of Tennessee economist Matt Murray and Morrison Institute of Public Policy at Arizona State University, lays out the problem, focusing on California and in the Intermountain West.

On the one hand, the large "cyclical" deficits most states are grappling with represent the temporary fallout of the Great Recession These shortfalls are daunting but will pass once the picks up. In that sense, these gaps of hundreds of billions of dollars are the easier part the problem.

The hard part; because they are more entrenched, are what we call "structural" deficits -- the more or less permanent imbalances of revenues and expenditures arising from flaws in a state's fiscal structure, fundamental changes in the regional economy or the state's demographics, or, especially, imprudent or shortsighted policy choices.

In Arizona, this sort of structural shortfall now adds up to a cool $2.1 billion -- a chilling 21 percent of stable general fund expenditures. In California, the figure is about $9.2 billion -- about 9 percent of stable expenditures. And these figures leave aside such other long-term challenges like pension obligations and retiree health insurance.

How do these structural problems arise and what needs to be done about them? The contrasting messes in California and Arizona -- two of the Western states we studied in our report--display in extreme versions the kinds of rashness and imprudence that have gotten so many states in trouble.

California's budget problems show how overly-optimistic spending, combined with voter mandates and institutional constraints (with none of it linked together), can lead to calamity. There, a proposition directing half of all new revenue to schools has combined with multiple state and local voter-approved limits on taxing and revenue raising to produce a train-wreck.

Arizona's fiscal problems demonstrate, meanwhile, how a single-minded emphasis on tax-cutting combined with California-style voter mandates and institutional constraints can also lead to a crack up. Arizona basically gave away the store in better times by handing out an inflation-adjusted $2.9 billion in ill-advised tax cuts over some 15 years unaccompanied by spending cuts. Major new education and Medicaid expansions in the last decade added to the problem, but for the most part a fiscal disaster resulted from the combination of massive tax cuts, voter mandates and a super-majority requirement for any revenue increase.

The long-predicted result: The Arizona general fund is now short some $3.4 billion, or a full 33 percent of the needed total, for FY 2011 with fully two-thirds of that amount associated with the state's permanent structural gap.

The bottom line: Arizona and California, notwithstanding their contrasting political tilts, each ran into the ditch by combining rash, basically optimistic spending and tax decisions in good times with rigidity and narrowness all along. In each place, moreover, the basic need to constantly compare spending and revenue-raising broke down thanks to ideological fixity, a loss of consensus, and the recourse to voter mandates.

So what should these and similarly afflicted other states like Illinois and New Jersey do? States need to break with business-as-usual in three fundamental ways.

First, they will need to take unprecedented steps to close gaps--and the sooner the better. Austere states will need to add revenue increases to the mix while profligate ones will need to discipline spending.

Second, states need to broaden, balance, and diversify their revenue bases while looking to the long-haul balance of taxing and spending. Over-reliance on narrow bases won't cut it now.

And third, states need to improve the information sharing and budgeting processes.

And yet, to achieve any of this, there is one other requirement: States are going to need to reject conventional dynamics. They need to reconstruct the integrity of their budget process, make it harder for interest groups to pass budget-blowing measures that undermine sound fiscal policy, and get beyond ideological warfare to foster more collaboration.

The choice couldn't be more clear. States need to make the sound policy decisions necessary to putting their fiscal house back in order, or prolong over many years a world of hurt.

Authors

Mark Muro

Publication: Huffington Post

Addressing State Budget Deficits in the Western U.S.

Mark Muro — Fri, 28 Jan 2011 14:36:00 -0500

As California Governor Jerry Brown continues to push for a referendum on increasing tax revenues in his state, Mark Muro discusses budget deficits across various states in the western U.S. Muro explains the longstanding disconnect between revenues and expenditures and offers lessons to legislators eager to balance their budgets.

Video

State Budget Deficits in the Western U.S.

California Governor Jerry Brown Must Fix State's Structural Deficits

Mark Muro and Matthew Murray — Sun, 09 Jan 2011 00:00:00 -0500

In his typically brief inaugural address last week, Gov. Jerry Brown warned Californians to expect pain, frustration and sacrifice in the budget he will present this week. It was pretty standard rhetorical fare for a governor staring at a massive budget deficit.

But beyond that pro forma warning, Brown spoke about something else - something that suggests he sees past both the immediate budget crisis and traditional responses and into the deeper problems with California's, and other states', public financial infrastructure. He talked about accountability, about realigning governmental functions and about the need to "honestly assess our financial condition."

Too many elected officials stand in front of the cameras and look concerned and talk about "tough choices" and then either do very little or simply slash budgets without regard to consequences or strategy. They further compound their problems - and pass them onto their successors - by ignoring what we call "structural deficits." These deficits are the ones created when policy decisions and budgeting processes fail to provide an appropriate long-term balance between revenue-raising and expenditure levels.

Brown said, "A problem can be solved or forgotten, but a condition always remains." The current budget crisis is a "problem," albeit a very large one. The policies and governmental structures that helped create the problem are the "condition."

It is that "condition" that we analyze in a report published last week, "Structurally Unbalanced: Cyclical and Structural Deficits in California and the Intermountain West." We estimate that about one-third of the total deficit California faces right now is due to these structural deficits.

Simply put, there has been a lack of sound, prudent fiscal policy guiding the taxing-and-spending process, for which voters and their elected representatives share responsibility. If California and many other states who have similar problems are to put themselves in a stronger and more sustainable financial condition, deep, lasting and difficult structural changes will have to be made.

This is not just a matter of cutting spending, although spending needs to be aligned with revenue. It is more a matter of taking a balanced approach to budgeting, diversifying the tax base, giving local communities more flexibility and control, maintaining adequate rainy-day funds and adopting a fact-based, common-sense budget process that includes a clear explanation of the consequences of policy decisions.

Take Proposition 13 as an example. Enacted in 1978, the intent was to limit local property taxes, and that succeeded. But it also undermined the capacity of local governments to provide services and shifted both control and responsibility to the state government. Brown has said he wants to work to redistribute that power locally.

Ten years later, voters approved Proposition 98, requiring nearly half of all new revenue be dedicated to supporting education. While a laudable goal, that also meant lawmakers had less flexibility in budgeting. More recently, voters approved a measure allowing for a majority vote to pass a budget but a two-thirds majority for tax or fee increases.

Meanwhile, California enacted permanent spending increases when times were better and continued those even as the economy fell. On the revenue side, California is the only one of the 22 oil-producing states that does not levy an oil revenue tax, and the state has an array of tax deductions for beneficiaries like the software industry and homeowners, and exempts sales tax on food and drugs.

These and other budget process problems help explain why, in 2008, the Pew Center on the States gave California a D+ rating in its Government Performance Initiative.

Compare that with nearby Utah, which received an A rating from Pew. While the two states' economies are not exactly the same, a look at Utah's process is informative. There, planning and budgeting are done through a well-informed collaborative process. Budget requests from state agencies are tied to performance measures and aligned with a state strategic plan. Everyone works from the same budget data, uses agreed-upon targets, and aligns priorities in accordance with that strategic plan. Public access to all fiscal and process information is completely open, so everyone can understand what's going on.

This system helped Utah's governor and Legislature close a projected budget gap in a more strategic manner than a slash-spending approach would have done.

Brown's speech and other observations he has made indicate he would like to move California toward a sounder, more flexible, and more responsive budget process. As he himself noted, tackling the political and institutional obstacles to that goal will be formidable, but we hope his colleagues and his constituents recognize this is the surest path to long-term fiscal sustainability.

Authors

Mark Muro
Matthew Murray

Publication: San Francisco Chronicle

State Budgets' Unsound Structures

Mark Muro — Fri, 07 Jan 2011 09:42:00 -0500

There’s been a lot of talk about state budget woes across the country as impacted by the Great Recession. However, beneath these cyclical declines in revenues are some far more daunting issues that states must confront to get themselves on a sustainable fiscal path.

Today in Phoenix, Brookings Mountain West and its Arizona partners are formally releasing an important new report we've done on the troubling state budget messes on display in California and three Mountain region states—Arizona, Colorado, and Nevada.

Produced by my group here at Brookings with University of Tennessee economist Matt Murray and the Morrison Institute for Public Policy at Arizona State University, the new study (entitled "Structurally Unbalanced") is meant to welcome Western legislators back to work with a clear comparative primer intended to motivate and inform the hard work of closing this year's daunting budget gaps and moving to reduce more entrenched longer-term problems. (Hey, welcome back lawmakers!)

Along these lines, the report—though focused on California and the three Intermountain states—serves as a kind guide to the varied ways almost all states have gotten into serious fiscal trouble in recent years.

At the center of our work is a key distinction between two types of budgetary trouble.

On the one hand, the large "cyclical" or deficits we flag in all of the Western states represent the temporary fallout of the Great Recession and its aftermath given the sharp and presently continuing decline of taxable economic activity in states. Ranging from 9 percent of stable general fund spending in Colorado to a whopping 17 percent of general fund spending in Nevada, these shortfalls are truly scary but at least will pass once the still-troubled Western economy picks up. In that sense, these gaps of hundreds of billions of dollars are the easier part the problem.

Harder because more entrenched, on the other hand, are what we call the states' "structural" deficits—the more or less permanent imbalances of revenues and expenditures that can arise from flaws in a state's fiscal structure, fundamental changes in the regional economy or the state's demographics, or, especially, imprudent or shortsighted policy choices. In Arizona, this sort of structural shortfall now adds up to a cool $2.1 billion—a chilling 21 percent of stable general fund expenditures. That structural gap is more than twice as mammoth on a percentage point basis as that of California, the leading poster-child for fiscal mismanagement.

But as I said the states in our report represent a catalogue of the varied ways states get in trouble. And that's true. Basically, the four Western states put on display four different styles of trainwreck that should be duly noted as cautionary tales elsewhere:

California basically enacted too many permanent spending increases (notably on education) during the dot.com boom and more recent good times even as it left in place a series of rigid voter mandates and tax limitations
Arizona, by contrast, basically gave away the store in better times by handing out a series of ill-advised tax cuts (total value, adjusting for inflation and growth: $2.9 billion since 1993) unaccompanied by spending cuts. Also a problem: Voter and court mandated spending on schools and Medicaid is combined with super-majority requirements for any revenue increase
Nevada, for its part, doesn't yet have a structural deficit (it just has a gargantuan 18 percent cyclical problem for FY 2011!) but it will soon. Here the problem is that the state's narrow, consumption and real estate-oriented revenue system may well now be ill-attuned to a post-Recession "new normal" in which migration, homebuilding, and gaming are permanently depressed
And finally there's Colorado. Colorado doesn't have a structural deficit, or even quite as large a temporary problem—it’s just damaging itself the slow way though adherence to its Taxpayer Bill of Rights (TABOR). Thanks to TABOR's spending and revenue raising limits, that is to say, expenditures and revenues track with each other but both are being inexorably ratcheted down. One indication of trouble: State funding for both K-12 and higher education as a percentage of personal income has declined precipitously under TABOR: from 35^th in the nation in 1992 to 48^th in 2006 and 2008, respectively, on both accounts.

In sum, there are few ways to completely avoid fiscal problems in bad times (well, a well financed rainy day fund can help) but there are many ways to create a deeper mess and they frequently begin in good times.

With that said, narrowness and rigidity and voter mandates sure turn up often as sources of trouble, which is why our report suggests that states wanting to improve their fiscal stability commit to a balanced approach (including of revenue- and spending-side responses), a broadening of the tax base, and the preservation of lawmakers' flexibility. Creatively restructuring government is also essential. Such adjustments—along with improved information sharing and budget processes—represent the only way states will be able to ease the present crisis while using it to get onto a more stable course into the future.

With many of them facing similar problems as legislatures reconvene this month, lawmakers in lots of places should study carefully the past mistakes and current predicament of the Western states.

Authors

Mark Muro

Publication: The Avenue, The New Republic

Cyclical and Structural State Budget Deficits in California and the Intermountain West

Sue Clark-Johnson, Mark Muro, Matthew Murray and Jennifer S. Vey — Wed, 05 Jan 2011 00:00:00 -0500

As state legislatures reconvene this month, numerous states are contending with substantial budgetary turmoil, aggravated by the recent Great Recession and slow recovery. Such turmoil has visited substantial hardship on citizens and threatens to weaken many states’ ability to provide basic services and make in vestments for their long-term economic vitality.

This brief takes a careful look at the fiscal situation in Arizona, California, Colorado, and Nevada and examines the states’ serious cyclical budget shortfalls—those resulting from the recession and its aftermath—as well as the critical longer-term structural imbalances between revenues and expenditures that have developed in Arizona, California, and, to a lesser extent, Nevada. Along these lines, the study—produced by Brookings Mountain West in partnership with the Morrison Institute for Public Policy at Arizona State University— uses a unique methodology to estimate the size of the states’ structural deficits (or, in Colorado, the surplus) and explores the mix of forces, particularly the policy choices, that created them. After that, the authors highlight the dramatic impacts these states’ fiscal challenges, and government responses to them, are having on service delivery as well as local governments. The brief concludes by suggesting some of the steps state policymakers must take to close their budget gaps over the short and longer term. Accompanying the brief is a special single-state drill-down on the particularly dire situation in Arizona.

Downloads

Authors

Sue Clark-Johnson
Mark Muro
Matthew Murray
Jennifer S. Vey

Publication: The Brookings Institution and the Morrison Institute for Public Policy, Arizona State University

California's Budget: The Year of Magical Thinking

Tracy Gordon — Wed, 13 Oct 2010 16:04:00 -0400

It’s never really fun to say “I told you so.” Well, it’s a little fun. The Germans even invented a word for this – Schadenfreude – which loosely translates as “sour grapes.”

Maybe it’s sour grapes that has the rest of the country repeatedly turning to California’s budget mess. Or maybe California is just always in a budget mess. Indeed, the state has faced operating shortfalls – or gaps between inflows and outflows – in every year since 2002.

But this year, it would seem that state lawmakers and outgoing Governor Arnold Schwarzenegger have really outdone themselves. They busted through last year’s tardiness record by enacting a budget 100 days into the new fiscal year. Like last year, they balanced the books – but with a combination of spit and polish and pixie dust.

In particular, they assumed that the feds would pony up $5.3 billion, although only $1.3 billion has been promised so far (as an internal presentation said: “Still more work to do in Washington”). They hoped for a speedier economic recovery ($1.4 billion). They borrowed from internal funds ($2.7 billion) and deferred payments to schools and community colleges ($1.7 billion). They also suspended a Net Operating Loss tax deduction ($1.2 billion) and planned to sell and lease back 11 state properties ($0.9 billion) – actions which simply put off today’s problems until tomorrow.

To be sure, states often substitute happy thoughts for hard choices. And all states – not just California – are still reeling from the recession, when they suffered their worst revenue declines on record as caseloads mounted for Medicaid and other public assistance programs. Although the latest data show a slight uptick, state and local revenues remain essentially flat. Meanwhile, state and local governments are slashing payrolls to make ends meet.

California’s budget also makes some real cuts – including $1.6 billion from pay and benefits. And it increases employee contributions toward retirement for all new hires and ends the practice of “spiking,” or boosting final salaries to raise pensions. These reforms may pave the way for other states, which together confront unfunded promises of more than $1 trillion.

Finally, in his last California budget deal, the Governor insisted on a constitutional amendment increasing the maximum size of the rainy day fund and requiring deposits of above average revenues. Of course, this measure would have to go on the ballot – and voters rejected a similar proposal just last year. Some would call this sunny, California optimism while others would say it’s Peter Pan naivete.

Unfortunately, it’s no fun to be right when it comes to calling bad news, but sometimes you’ve got to at least start fixing the roof when it’s still raining. Wishing for the sun to come out is just not enough.

Authors

Tracy Gordon

Publication: Urban-Brookings Tax Policy Center

The Social Service Challenges of Rising Suburban Poverty

Scott W. Allard and Benjamin Roth — Thu, 07 Oct 2010 00:00:00 -0400

Cities and suburbs occupy well-defined roles within the discussion of poverty, opportunity, and social welfare policy in metropolitan America. Research exploring issues of poverty typically has focused on central-city neighborhoods, where poverty and joblessness have been most concentrated. As a result, place-based U.S. antipoverty policies focus primarily on ameliorating concentrated poverty in inner-city (and, in some cases, rural) areas. Suburbs, by contrast, are seen as destinations of opportunity for quality schools, safe neighborhoods, or good jobs.

Several recent trends have begun to upset this familiar urban-suburban narrative about poverty and opportunity in metropolitan America. In 1999, large U.S. cities and their suburbs had roughly equal numbers of poor residents, but by 2008 the number of suburban poor exceeded the poor in central cities by 1.5 million. Although poverty rates remain higher in central cities than in suburbs (18.2 percent versus 9.5 percent in 2008), poverty rates have increased at a quicker pace in suburban areas.

Watch video of co-author Scott Allard explaining the report's findings » (video courtesy of the University of Chicago)

This report examines data from the Census Bureau and the Internal Revenue Service (IRS), along with in-depth interviews and a new survey of social services providers in suburban communities surrounding Chicago, IL; Los Angeles, CA; and Washington, D.C. to assess the challenges that rising suburban poverty poses for local safety nets and community-based organizations. It finds that:

Suburban jurisdictions outside of Chicago, Los Angeles, and Washington, D.C. vary significantly in their levels of poverty, recent poverty trends, and racial/ethnic profiles, both among and within these metro areas. Several suburban counties outside of Chicago experienced more than 40 percent increases of poor residents from 2000 to 2008, as did portions of counties in suburban Maryland and northern Virginia. Yet poverty rates declined for suburban counties in metropolitan Los Angeles. While several suburban Los Angeles municipalities are majority Hispanic and a handful of Chicago suburbs have sizeable Hispanic populations, many Washington, D.C. suburbs have substantial black and Asian populations as well.

Suburban safety nets rely on relatively few social services organizations, and tend to stretch operations across much larger service delivery areas than their urban counterparts. Thirty-four percent of nonprofits surveyed reported operating in more than one suburban county, and 60 percent offered services in more than one suburban municipality. The size and capacity of the nonprofit social service sector varies widely across suburbs, with 357 poor residents per nonprofit provider in Montgomery County, MD, to 1,627 in Riverside County, CA. Place of residence may greatly affect one’s access to certain types of help.

In the wake of the Great Recession, demand is up significantly for the typical suburban provider, and almost three-quarters (73 percent) of suburban nonprofits are seeing more clients with no previous connection to safety net programs. Needs have changed as well, with nearly 80 percent of suburban nonprofits surveyed seeing families with food needs more often than one year prior, and nearly 60 percent reporting more frequent requests for help with mortgage or rent payments.

Almost half of suburban nonprofits surveyed (47 percent) reported a loss in a key revenue source last year, with more funding cuts anticipated in the year to come. Due in large part to this bleak fiscal situation, more than one in five suburban nonprofits has reduced services available since the start of the recession and one in seven has actively cut caseloads. Nearly 30 percent of nonprofits have laid off full-time and part-time staff as a result of lost program grants or to reduce operating costs.

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Authors

Scott W. Allard
Benjamin Roth

Publication: Brookings Institution