Wednesday, August 23, 2017

Shortfalls in non-profit disaster rebuilding

This post originally appeared at Market Urbanism, a blog about free-market urban development.

After receiving years of praise for its work in post-Katrina recovery, Brad Pitt’s home building organization, Make It Right, is receiving some media criticism. At the New Republic, Lydia Depillis points out that the Make It Right homes built in the Lower Ninth Ward have resulted in scarce city dollars going to this neighborhood with questionable results. While some residents have been able to return to the Lower Ninth Ward through non-profit and private investment, the population hasn’t reached the level necessary to bring the commercial services to the neighborhood that it needs to be a comfortable place to live.

After Hurricane Katrina, the Mercatus Center conducted extensive field research in the Gulf Coast, interviewing people who decided to return and rebuild in the city and those who decided to permanently relocate. They discussed the events that unfolded immediately after the storm as well as the rebuilding process. They interviewed many people in the New Orleans neighborhood surrounding the Mary Queen of Vietnam Church. This neighborhood rebounded exceptionally well after Hurricane Katrina, despite experiencing some of the city’s worst flooding 5-12-feet-deep and being a low-income neighborhood. As Emily Chamlee-Wright and Virgil Storr found [pdf]:

Within a year of the storm, more than 3,000 residents had returned [of the neighborhood's 4,000 residents when the storm hit]. By the summer of 2007, approximately 90% of the MQVN residents were back while the rate of return in New Orleans overall remained at only 45%. Further, within a year of the storm, 70 of the 75 Vietnamese-owned businesses in the MQVN neighborhood were up and running.

Virgil and Emily attribute some of MQVN’s rebuilding success to the club goods that neighborhood residents shared. Club goods share some characteristics with public goods in that they are non-rivalrous — one person using the pool at a swim club doesn’t impede others from doing so — but club goods are excludable, so that non-members can be banned from using them. Adam has written about club goods previously, using the example of mass transit. The turnstile acts as a method of exclusion, and one person riding the subway doesn’t prevent other passengers from doing so as well. In the diagram below, a subway would fall into the “Low-congestion Goods” category:

club goods

In the case of MQVN, the neighborhood’s sense of community and shared culture provided a club good that encouraged residents to return after the storm. The church provided food and supplies to the first neighborhood residents to return after the storm. Church leadership worked with Entergy, the city’s power company, to demonstrate that the neighborhood had 500 residents ready to pay their bills with the restoration of power, making them one of the city’s first outer neighborhoods to get power back after the storm.

While resources have poured into the Lower Ninth Ward from outside groups in the form of $400,000 homes from Make It Right $65 million  in city money for a school, police station, and recreation center, the neighborhood has not seen the success that MQVN achieved from the bottom up. This isn’t to say that large non-profits don’t have an important role to play in disaster recovery. Social entrepreneurs face strong incentives to work well toward their objectives because their donors hold them accountable and they typically are involved in a cause because of their passion for it. Large organizations from Wal-Mart to the American Red Cross provided key resources to New Orleans residents in the days and months after Hurricane Katrina.

The post-Katrina success of MQVN relative to many other neighborhoods in the city does demonstrates the effectiveness of voluntary cooperation at the community level and the importance of bottom-up participation for long-term neighborhood stability. While people throughout the city expressed their love for New Orleans and desire to return in their conversations with Mercatus interviewers, many faced coordination problems in their efforts to rebuild. In the case of MQVN, club goods and voluntary cooperation permitted the quick and near-complete return of residents.

March 22, 2013

Civil Disobedience and Detroit’s financial manager

Michigan’s Governor Rick Synder may be greeted by protestors when he arrives for a meeting today on Detroit’s financial condition. His recent appointment of Kevyn Orr as the city’s emergency financial manager has angered many of Detroit’s residents who are afraid he has powers that are far too sweeping and is thereby destroying local control. The purpose of the financial manager law is to help the city stave off bankruptcy and allows the emergency manager the ability to renegotiate labor contracts and potentially sell city assets. The last recession has worsened the already-struggling city’s financial outlook. Detroit has a $327 million budget deficit and $14 billion in long-term debt and has shown very little willingness to make the kind of structural changes it needs in order to stay solvent.

Detroit’s problems are acute. The city’s population has fallen from 1.8 million to 700,000, giving the city, “a look and feel that rivals post World War II Europe.” But as Public Sector Inc’s Steve Eide writes, the real problem is that local leaders have proven unable to deal with fiscal realities for far too long. His chart shows the consequences. The gap between estimated revenues and expenditures over time is striking. In sum, Detroit overestimates its revenues and underestimates its spending, by a lot, when it plans for the budget. That is a governance and administration crisis and one that the state has decided needs outside intervention to set straight.

Standard & Poors likes the appointment and has upgraded Detroit’s credit rating outlook to “stable.”

March 18, 2013

Implications of an emergency fiscal manager for Detroit

Reuters reports that an emergency financial manager might provide Detroit with a path toward bankruptcy. This week I’m at US News writing on how an emergency financial manager might help the city renegotiate the obligations that it cannot afford to pay:

An emergency financial manager will have a greater incentive than elected city officials to improve Detroit’s financial standing. For any Michigan politician, Detroit’s municipal employees make up an important group of voters. However, their political influence is more concentrated at the city level, and as an interest group they have diminished power at the state level. Because the emergency financial manager will be responsible to the governor and state legislature, he or she will not face the pressures to appease city employees that local policymakers confront.

March 6, 2013

Assorted Links

China’s Ghost Cities 

The Purple Line’s uncertain future

Maryland’s new gas tax for transportation

Is Maryland copying Virginia’s new sales tax?

The Micro-Apartment craze

 

 

 

 

March 6, 2013

A price tag on congestion

The research organization TRIP finds that traffic congestion comes at a steep price for drivers in the Washington, DC area. They determine that congestion and poor road conditions cost drivers $2,195 annually in lost time and the added vehicle operating costs of driving on congested, poor quality roads.

TRIP supports increased infrastructure spending, and I haven’t looked into their methodology, but undeniably DC-area drivers waste copious time sitting in traffic. Despite this, a Washington Post poll finds that Maryland drivers do not support higher taxes to pay for road expansion or maintenance. Perhaps increased taxes are unpopular because state residents believe that transportation projects involve wasteful spending that won’t improve conditions for drivers. Additionally, they may realize that traffic congestion is very difficult to overcome in a world of zero-price roads. Because additional roads lower the time cost of driving, additional lanes induce more people to drive farther. Building enough roads to eliminate congestion for everyone who would like to use them at zero-price in DC’s rush hour might not be possible, as reducing the region’s congestion problems would even lead more people to move to the area.

An alternative to raising taxes to fund new road construction would be to implement congestion pricing on area roads. Roads could be electronically tolled and priced at the rate that will eliminate congestion, varying with driver demand. So far municipalities have tended to implement congestion pricing on new highways. Here in the DC area, the 495 Express Lanes opened in November with congestion pricing. The new lanes were funded primarily by a private company, and the tolls are not yet meeting revenue projections; many drivers are choosing to continue driving on more congested, zero-price roads. However, congestion pricing doesn’t necessarily need to be implemented on a new road. Alternatively, policymakers could implement congestion pricing on existing roads or on specific lanes to reduce congestion for those willing to pay.

Tolls are often politically unpopular because, as Donald Shoup points out in The High Cost of Free Parking, people are often very opposed to paying user fess for a provision that has previously been funded by taxpayers broadly. However, the gains from congestion pricing may outweigh the political costs. Allocating road use through prices puts roads to higher-value uses. Assuming that TRIP’s estimate of the cost of congestion is correct for the average driver, this cost will vary widely among drivers who value their time differently, and drivers will value their own time differently depending on the day and the importance of being on time to their destination. Thus pricing roads according to demand allows those who have flexible schedules to drive when roads are otherwise uncrowded, and those who place a high value on their time will be willing to pay a high toll for the convenience of saving time and reaching their destination promptly.

 

March 5, 2013

Separation between art and state

In Utah, the Sutherland Institute is leading an effort to stop state support for the Sundance Film Festival. On the organization’s blog Derek Monson writes:

Given the amount of sexual promiscuity that Sundance Film Festival regularly brings to Utah, it seems similarly indecent that Utah’s major economic development agencies basically endorsed the event: providing “critical support” to the festival as a “global branding” opportunity, and being listed under the event’s “Corporate Support” banner.

The institute’s president Paul Mero says that the organization is opposed to all corporate subsidies. From an economic position — and one of fairness — this makes sense. As Matt has written, subsidies that favor one type of business lead to inefficient investment thereby decreasing economic growth. When Utah policymakers tout the economic benefits that the festival brings to the state, they are ignoring that the festival would likely be held in Park City for its scenic location without a subsidy and the unseen costs of directing taxpayer resources away from what they would otherwise be invested in.

In this case of subsidized art, however, those receiving the subsidies should be as wary as the taxpayers providing them. No one at the Sutherland Institute has suggested placing restrictions on the content of the films allowed at Sundance, rather they object to their tax dollars supporting supporting a film festival, and one that contains films some may find offensive at that. But in many other cases, public funding for art breeds censorship.

In 2010, the Smithsonian’s National Portrait Gallery famously removed a video by David Wojnarowicz which had been a part of an exhibit called Hide/Seek in response to conservative groups and the Catholic League which described the work as  as “designed to insult and inflict injury and assault the sensibilities of Christians.” Understandably, these groups protested their tax dollars being spent on art they found offensive, but just as understandably artists participating in the exhibit objected to government censorship of their colleague’s work. In reaction, AA Bronson asked the National Portrait Gallery to remove his work in protest, but his request was denied by the museum.

The many examples of censorship of government-funded art and art museums provide compelling reasons for art and state to remain separate, both to protect taxpayers and economic growth along with artists’ freedom of expression.

January 24, 2013

Virginia’s transportation plan under the microscope

Last week Virginia Governor Bob McDonnell shared his plan to address the state’s transportation needs. The big news is that the Governor wants to eliminate Virginia’s gas tax of 17.5 cents/gallon. This revenue would be replaced with an increase in the state’s sales tax from 5 percent to 5.8 percent. This along with a transfer of $812 million from the general fund, a $15 increase in the car registration fee, a $100 fee on alternative fuel vehicles and the promise of federal revenues should Congress pass legislation to tax online sales brings the total amount of revenue projected to fund Virginia’s transportation to $3.1 billion.

As the Tax Foundation points out, more than half of this relies on a transfer from the state’s general fund, and on Congressional legislation that has not yet passed.

Virginia plans to spend $4.9 billion on transportation. As currently structured, the gas tax only brings in $961 million. There are a few reasons why. First, Virginia hasn’t indexed the gas tax to inflation since 1986. It’s currently worth 40 cents on the dollar. In today’s dollars 17.5 cents is worth about 8 cents. Secondly, while there are more drivers in Virginia, cars are also more fuel efficient and more of those cars (91,000) are alternative fuel. In 2013, the gas tax isn’t bringing in the same amount of revenue as it once did.

But that doesn’t mean that switching from a user-based tax to a general tax isn’t problematic. Two concerns are transparency and fairness. Switching from (an imperfect) user-based fee to a broader tax breaks the link between those who use the roads and those who pay, shorting an important feedback mechanism. Another issue is fairness. Moving from a gas tax to a sales tax leads to cross-subsidization. Those who don’t drive pay for others’ road usage.

The proposal has received a fair amount of criticism with other approaches suggested. Randal O’Toole at Cato likes the idea of Vehicle Miles Travelled (VMT) which would track the number of miles driven via an EZ-Pass type technology billing the user directly for road usage. It would probably take at least a decade to fully implement. And, some have strong libertarian objections. Joseph Henchman at the Tax Foundation proposes a mix of indexing the gas tax to inflation, increased tolls, and levying a local transportation sales tax on NOVA drivers.

The plan opens up Virginia’s 2013 legislative session and is sure to receive a fair amount of discussion among legislators.

January 14, 2013

More money for FEMA does not guarantee improved results

Before Congress passed $9.7 billion in Hurricane Sandy relief spending today, Governor Christie made headlines for his angry response to the House GOP’s delay in approving relief funds. The new spending will provide FEMA with money to pay out claims to those holding federal flood insurance. While the Hurricane Sandy relief effort gives political immediacy to FEMA funding, the Center for American Progress proposes a longer term strategy for dealing with natural disasters:

There must  be a dedicated source of revenue to fund predisaster mitigation programs that is not susceptible to budget cuts or political manipulation. Since the frequency and/or severity of extreme weather events will be exacerbated by climate change, it makes sense to raise revenue for resiliency from the fossil fuels whose combustion emits carbon pollution responsible for climate change.

The perspective that disaster recovery is a core responsibility of the federal government is widely shared, and voices as diverse as Governor Christie to the Center for American Progress express this opinion. However, the Mercatus Center’s Gulf Coast Recovery Project conducted in the wake of Hurricane Katrina demonstrates that funneling federal dollars toward disaster relief does not guarantee positive results for disaster victims. While the FEMA response to Hurricane Sandy went more smoothly than the Hurricane Katrina response, the federal government simply doesn’t have the capability to respond quickly and efficiently to individuals’ needs following a disaster, and channeling more resources to FEMA from any revenue source will not change the this fact.

As Pete Leeson and Russ Sobel write in a 2007 paper (pdf):

Following a natural disaster, on the one side there are “relief demanders”—individuals who desperately need disaster-relief supplies, including evacuation, food, shelter, medical attention, and so forth. On the other side, there are “relief suppliers”—individuals ready and willing to bring their supplies and expertise to bear in meeting the relief demanders’ needs. On both sides of this “market,” information is decentralized, local, and often inarticulate. Relief demanders know when relief is needed, what they need, and in what quantities, but they do not necessarily know who has the relief supplies they require or how to obtain them. Similarly, relief suppliers know what relief supplies they have and how they can help, but they may be largely unaware of whether relief is required and, if it is, what is needed, by whom, and in what locations and quantities.

[. . .]

Government’s informational deficit in the disaster-relief context is an unavoidable outcome of the centralization of disaster relief management when relief is provided by the state. Disaster-relief reforms that leave government as the primary manager of natural disasters are thus bound to fail. Correcting government’s information failure in the context of disaster relief requires eliminating its root cause: government involvement itself.

Researchers on the Gulf Coast Recovery Project found that non-profits, civic organizationsprivate firms, and individuals were more successful at providing the goods and services needed for recovery than the federal government.

Aside from the inherent challenges facing federal disaster response, funneling federal tax dollars to coastal areas prone to flooding leads to moral hazard. Because residents of flood-prone areas purchase federal insurance, taxpayers subsidize those who choose to live in these high-risk areas. Eli Lehrer of the R Street Institute explains this aspect of the Hurricane Sandy Relief Bill to Climate Wire:

“The mitigation piece of it is problematic,” said Eli Lehrer, president of the R Street Institute, a conservative organization that works with environmentalists and insurers to reduce subsidies in public insurance programs. “I think the bill should be drastically scaled back overall.”

He suggests that the disaster supplemental package could be cut in half. That would save taxpayer money, he says, now and in the future — by reducing incentives to develop coastlines. Lehrer also proposes cutting the federal share of post-disaster rebuilding costs to 50 percent. Currently, the government pays for 75 percent of recovery efforts, and Obama is asking Congress to increase that to 90 percent for Sandy survivors.

Politicians and activists who support a large role for the federal government in responding to disasters may have the best of intentions, but these intentions cannot circumvent the knowledge problems that government faces in disaster relief. By reducing the cost of developing in flood plains, greater reliance on the federal government for disaster mitigation and relief will be a costly effort unlikely to provide an adequate response when the next disaster strikes.

January 4, 2013

More money for FEMA does not guarantee improved results

Before Congress passed $9.7 billion in Hurricane Sandy relief spending today, Governor Christie made headlines for his angry response to the House GOP’s delay in approving relief funds. The new spending will provide FEMA with money to pay out claims to those holding federal flood insurance. While the Hurricane Sandy relief effort gives political immediacy to FEMA funding, the Center for American Progress proposes a longer term strategy for dealing with natural disasters:

There must  be a dedicated source of revenue to fund predisaster mitigation programs that is not susceptible to budget cuts or political manipulation. Since the frequency and/or severity of extreme weather events will be exacerbated by climate change, it makes sense to raise revenue for resiliency from the fossil fuels whose combustion emits carbon pollution responsible for climate change.

The perspective that disaster recovery is a core responsibility of the federal government is widely shared, and voices as diverse as Governor Christie to the Center for American Progress express this opinion. However, the Mercatus Center’s Gulf Coast Recovery Project conducted in the wake of Hurricane Katrina demonstrates that funneling federal dollars toward disaster relief does not guarantee positive results for disaster victims. While the FEMA response to Hurricane Sandy went more smoothly than the Hurricane Katrina response, the federal government simply doesn’t have the capability to respond quickly and efficiently to individuals’ needs following a disaster, and channeling more resources to FEMA from any revenue source will not change the this fact.

As Pete Leeson and Russ Sobel write in a 2007 paper (pdf):

Following a natural disaster, on the one side there are “relief demanders”—individuals who desperately need disaster-relief supplies, including evacuation, food, shelter, medical attention, and so forth. On the other side, there are “relief suppliers”—individuals ready and willing to bring their supplies and expertise to bear in meeting the relief demanders’ needs. On both sides of this “market,” information is decentralized, local, and often inarticulate. Relief demanders know when relief is needed, what they need, and in what quantities, but they do not necessarily know who has the relief supplies they require or how to obtain them. Similarly, relief suppliers know what relief supplies they have and how they can help, but they may be largely unaware of whether relief is required and, if it is, what is needed, by whom, and in what locations and quantities.

[. . .]

Government’s informational deficit in the disaster-relief context is an unavoidable outcome of the centralization of disaster relief management when relief is provided by the state. Disaster-relief reforms that leave government as the primary manager of natural disasters are thus bound to fail. Correcting government’s information failure in the context of disaster relief requires eliminating its root cause: government involvement itself.

Researchers on the Gulf Coast Recovery Project found that non-profits, civic organizationsprivate firms, and individuals were more successful at providing the goods and services needed for recovery than the federal government.

Aside from the inherent challenges facing federal disaster response, funneling federal tax dollars to coastal areas prone to flooding leads to moral hazard. Because residents of flood-prone areas purchase federal insurance, taxpayers subsidize those who choose to live in these high-risk areas. Eli Lehrer of the R Street Institute explains this aspect of the Hurricane Sandy Relief Bill to Climate Wire:

“The mitigation piece of it is problematic,” said Eli Lehrer, president of the R Street Institute, a conservative organization that works with environmentalists and insurers to reduce subsidies in public insurance programs. “I think the bill should be drastically scaled back overall.”

He suggests that the disaster supplemental package could be cut in half. That would save taxpayer money, he says, now and in the future — by reducing incentives to develop coastlines. Lehrer also proposes cutting the federal share of post-disaster rebuilding costs to 50 percent. Currently, the government pays for 75 percent of recovery efforts, and Obama is asking Congress to increase that to 90 percent for Sandy survivors.

Politicians and activists who support a large role for the federal government in responding to disasters may have the best of intentions, but these intentions cannot circumvent the knowledge problems that government faces in disaster relief. By reducing the cost of developing in flood plains, greater reliance on the federal government for disaster mitigation and relief will be a costly effort unlikely to provide an adequate response when the next disaster strikes.

January 4, 2013

This Week in Economic Freedom

It’s been a promising week for supporters of freer markets as several states and municipalities have taken steps toward deregulation and consumer choice. Here’s a roundup of some new developments:

1. Washington state is making headlines by being the first state (and first place globally) to legalize recreational marijuana. This policy change comes after recent polls indicate that most Americans favor legalizing marijuana. Of course what remains to be seen  is how the federal government will respond to this change in state law. The U.S. Attorney General’s office has issued a letter stating that marijuana remains illegal under federal law in these states and under the Obama administration the office has aggressively prosecuted medical marijuana dispensaries that are legal under states’ laws.

2. In Michigan right to work legislation looks poised to pass. The change would make it legal for employers to pay workers who choose not to be union members. James Sherck explains the political calculus behind this potential policy change:

Republicans have large majorities in both houses of the state legislature. Until now, however, Governor Rick Snyder has insisted right to work was not on his agenda. But today he changed his tune and called for the legislature to pass the bill — Snyder’s support removes the last obstacle to right to work passing in Michigan.

How did this happen? For one, unions badly miscalculated. They tried to amend the state constitution to preemptively ban right to work and attempted to elevate union contracts above state law. Michigan voters roundly rejected the proposal, but the debate put the issue on the public’s agenda.

Unsurprisingly, Michigan unions strongly oppose this change and are currently rallying against this potential change.

3. In Washington, DC City Council took two steps toward greater economic freedom. On Tuesday, the DC Council passed legislation allowing Uber, a popular sedan service which customers use their cell phones to book, to continue operating in the city. The new legislation legalizes ”digital dispatch” and permits this new type of service that fits between taxis and traditional car services. Uber still faces legal challenges in San Francisco, Boston, Toronto, New York, and Chicago. Also on Tuesday, DC joined its neighbors Maryland and Virginia with legal Sunday liquor sales. As is so often the case with regulation,  many liquor store owners supported the status quo of mandatory Sunday closings. Store owners testified that they appreciated the mandatory day off and worried that the policy change would allow competitors to cut into the profits of stores that choose to close on Sunday.

December 6, 2012

The lessons of bankruptcies and near-bankruptcies

Last week I had the pleasure of speaking at the plenary session for the Association for Budgeting and Financial Management (ABFM)’s annual meeting in New York. My co-panelists included NYU finance professor Dall Forsythe who as Budget Director for the State of New York during the fiscal crisis that pushed New York City to near bankruptcy in the mid-1970s, gave us an inside look of what went into staving off fiscal collapse.  Professor Forsythe explained New York City may not be a generalizable example of municipal bankruptcy but it is an excellent study of  how a major city avoided collapse and rebuilt itself into a financial powerhouse over the following decades.

Ted Orson also spoke. As lead legal council for Central Falls’ recent bankruptcy proceedings, Mr. Orson gave a riveting talk about how leaders in Central Falls worked with the state government and retired workers to come to terms with the city’s empty coffers. It was not easy. Retired firemen and police officers were asked to take a 55 percent cut in their pension benefits. I think his talk underscored the importance of transparency and truth in pension accounting. No one wants to have it get to this point.

Newsmakers 9/23: Gallogly, Orson

My talk zoned in on pension accounting – the new GASB rules and what they mean. In a followup post I’ll explore how GASB 67 and GASB 68 are likely to affect government’s accounts. And also the role that Moody’s decision to discount pensions using a corporate bond rate is going to change the way we view municipal and state finances.

 

October 15, 2012

The lessons of bankruptcies and near-bankruptcies

Last week I had the pleasure of speaking at the plenary session for the Association for Budgeting and Financial Management (ABFM)’s annual meeting in New York. My co-panelists included NYU finance professor Dall Forsythe who as Budget Director for the State of New York during the fiscal crisis that pushed New York City to near bankruptcy in the mid-1970s, gave us an inside look of what went into staving off fiscal collapse.  Professor Forsythe explained New York City may not be a generalizable example of municipal bankruptcy but it is an excellent study of  how a major city avoided collapse and rebuilt itself into a financial powerhouse over the following decades.

Ted Orson also spoke. As lead legal council for Central Falls’ recent bankruptcy proceedings, Mr. Orson gave a riveting talk about how leaders in Central Falls worked with the state government and retired workers to come to terms with the city’s empty coffers. It was not easy. Retired firemen and police officers were asked to take a 55 percent cut in their pension benefits. I think his talk underscored the importance of transparency and truth in pension accounting. No one wants to have it get to this point.

Newsmakers 9/23: Gallogly, Orson

My talk zoned in on pension accounting – the new GASB rules and what they mean. In a followup post I’ll explore how GASB 67 and GASB 68 are likely to affect government’s accounts. And also the role that Moody’s decision to discount pensions using a corporate bond rate is going to change the way we view municipal and state finances.

 

October 15, 2012

Nanny state could save Madrid from EuroVegas

Las Vegas real estate developer Sheldon Adelson selected Madrid as the site of his next proposed casino project, EuroVegas, last month. The project is estimated to create 250,000 jobs in a country with 25% unemployment. On the one hand, this project may look like a good bet for the city, bringing both short term construction jobs and hopefully creating a long-term tourist destination.

However, EuroVegas will not be financed completely with private investment. Instead, Adelson wants to pay only 35% of the projects construction costs, asking the city to finance the rest. Additionally, he requires that the project receive property and business (IAE) tax breaks. Since most of the investment will be taxpayer funded, the risk is borne largely by the public and the project requires Madrid taxpayers to take on even greater debt. The tax-exempt project will not contribute to the tax base for public services. Adelson selected Madrid as the EuroVegas site after receiving better breaks there than Barcelona policymakers offered.

Carlos Ruiz, a retired engineer, heads the group EuroVegas No. He sums up the feelings of some who feel that the project would benefit Adelson at the expense of Spanish taxpayers who already have a high debt burden:

“Citizens from the whole of Europe are lending money to Spanish banks because they are in a bad situation — hoping that someday these banks will start to give credit to small enterprises, to families, to people,” Ruiz says. “But this money is going to go to Mr. Adelson, who is one of the richest men in the world. This is quite unfair.”

Madrid officials seem poised to offer Adelson all of the concessions he seeks, including subsidies, tax breaks, and exemptions to labor laws, except for one. The sticking point in the deal may be that the project requires an exception to Spain’s nationwide ban on smoking in bars and restaurants to go forward. Prime Minister Mariano Rajoy said that lifting the smoking ban for EuroVegas would give the development unfair political privilege over all of the country’s other establishments where smoking is not permitted. He said he thought that making an exception to the ban for EuroVegas would be unconstitutional.

Whether or not EuroVegas will go forward in Madrid remains to be seen. Either way, Rajoy’s approach to a level playing field is worth noting here. As Matthew Mitchell explains in his paper “The Pathology of Privilege,” creating special advantages for projects like EuroVegas tends to benefit well-connected people at the expense of the general interest and limits economic growth as resources are directed according to political favor rather than by the market.

October 9, 2012

Opportunity for States to Protect Land Use

This post originally appeared at Market Urbanism, a blog about free market solutions to urban development challenges.

If this season’s political campaign rhetoric has demonstrated anything, it’s that governors love to take credit for job creation. What I haven’t seen any governor mention, though, is that there is huge opportunity for economic growth in relaxing zoning codes. Most obviously, allowing new opportunities for infill development will create construction jobs. More significantly though, in the long run, cities allow for faster economic growth (and job growth) than other locations.

The regulations that prevent cities from growing keep economic progress below what it otherwise would be. While researchers disagree over whether population density or total population is the variable that is most significantly correlated with economic growth, either way zoning plays an important role in holding back job growth, providing policymakers who are willing to deregulate with opportunities to improve their competitive standings next to other cities.

Political incentives stand in the way of this growth opportunity, however. Most zoning restrictions benefit a city’s current residents at the expense of potential residents. For example, minimum lot size requirements serve to raise the price of homes, preventing low-income people from moving into neighborhoods that current residents wish to keep exclusive. By changing this current order, policymakers risk losing the support of their homeowning constituents, and interest likely to be better organized than renters and potential city residents. Limitations on housing supply raise the value of existing homes, artificially raising the value of residents’ assets, which homeowners strongly fight to protect.

At the local level, policymakers are therefore incentivized to privilege homeowners’ interests at the expense of broad economic growth. At the state level however, the incentives may be different, such that economic growth may benefit state policymakers more than protecting home values. State policymakers have constituents who live in a wide variety of municipalities, some where land use restrictions are less binding in some than others. Additionally, homeowners will face greater challenges in organizing to support artificially propping up home values at the state level compared to the municipal level. State policymakers could therefore benefit themselves by setting limits on the how much municipalities are permitted to restrict development. Importantly, limiting the degree to which municipalities can restrict development does not force density; rather, it allows developers to provide more density if residents demand it.

California legislators considered a bill of this model earlier this year which would have limited cities’ abilities to set parking requirements in neighborhoods where transit is widely available. As Stephen explained, this bill came under criticism from both the American Planning Association and the Reason Foundation, both citing the need for local control of land use. However, this misses the key role of higher level governments within a federalism model.

After the Supreme Court decided in Kelo v. City of New London that municipalities have the power to use eminent domain for economic development, 44 states adopted amendments to protect their citizens from eminent domain for non-public use to various degrees. States did not have this type of reaction to Euclid v. Ambler, which set the precedent allowing cities to create zoning codes, but there is nothing stopping them from setting limits on cities’ zoning power now.  Federal and state governments have a role to set a floor of freedom for all of their residents, which gives states an opportunity to set limits on how much their municipalities can restrict land use.

September 25, 2012

Central Falls bankruptcy exit plan approved

In what is described as, “the quickest bankruptcy adjustment in U.S. history,” Central Falls, Rhode Island has reached an agreement to exit from bankruptcy with a plan that will fully repay bondholders (including any legal fees incurred), while slashing worker pensions by as much as 55 percent. None of Central Falls’ workers will get less than $10,000 and all will have to contribute 20 percent more for their health care until they are 65 and eligible for Medicare, according to Bloomberg News. The agreement was reached when the state promised to help supplement retiree pensions for five years.

Bondholders will be repaid via higher municipal taxes, or a four percent increase in property taxes each year for the next five years. No one escapes unscathed, except the bondholders, which is attributable to the fact that Rhode Island passed a law explicitly protecting them from municipal default last year. The bondholder protection law appears to have the intended effect with Moody’s promising to increase Central Falls’ credit rating.

Retirees are understandably upset but it’s important that the cause for plan underfunding be properly diagnosed. Accounting distortions rooted in risky discount rates are to blame. Central Falls’ Police and Fire Plan was deeply underfunded based on numbers that underestimated the liability. That is the lesson to be learned and the inescapable problem facing many other jurisdictions with defined benefit plans in the US. It is in the best interest of governments to accurately calculate their unfunded liabilities with reference to a risk-free discount rate and come up with a plan today. Waiting and gambling on a future market boom doesn’t do retirees any favors.

September 10, 2012

Fort Lauderdale issues a Pension Obligation Bond and adds to its debts

To fully fund its city pensions the City Council of Fort Lauderdale has voted to issue a $340 million pension bond. One problem with this plan is the city’s pension plans are underfunded to a far larger extent than the accounting recognizes. I calculate, using their 2011 CAFR, that while Fort Lauderdale’s two pension systems report an $388 million unfunded liability when using a risk-free discount rate, the total unfunded liability is closer to $1.7 billion.

In that year, both the General Employees’ plan and the Police and Fire Plan used a discount rate of 7.75 percent to calculate their liabilities. Today the 15-year Treasury bond is close to 2 percent. Thus, the source for great difference between the two unfunded liability calculations.

The rationale for issuing the POB is that the city’s pensions will earn better than the 4 percent assumed interest rate on the bond, and thus they will capture the arbitrage benefits. But that is a bet on both the bond market and the stock market, and not a certainty.  The pensions remain valued as though they are risky and now the city has effectively put more risk on the balance sheet, all in the service of lessening the pain of rising annual contributions. The POB does not address the structural reasons for rising costs even if it gives the Council a temporary sense of budgetary relief.

 

September 7, 2012

SEPTA and interest rate swaps

Interest rate swaps became a relatively popular means for municipal governments to save some money during the 1990s and into the 2000s. The basic idea is that an issuer (the government) enters into a contract with a bank to exchange interest rate payments on a cash flow. These can be structured to exchange a fixed payment for a variable payment in return, or vice versa.

These interest payments are calculated based on an underlying asset or instrument, such as a bond. That makes interest rate swaps a derivative, as their value is derived from an underlying financial instrument.

The issuer’s goal is to hedge against fluctuating interest rates and impart some stability to their budget.The bank’s incentive is to make a fee. It works for the issuer when they guess correctly and – by way of example -the issuer agrees to a payment based on a fixed rate of interest that is low relative to the adjustable rate of interest the bank pays to the municipality in return.

But that’s not what happened as rates began to fall after 2008. Many municipal issuers found themselves paying banks a fixed rate that was high relative to the variable rate the bank was paying in return. Jefferson County, Alabama is the most notorious example, as my recent article in US News explains. At work in this larger story is the role the LIBOR interest rate rigging scandal played in suppressing the variable rate leading some governments to sue banks for damages.

Pennsylvania governments were particularly keen on interest rates swaps, with 626 swaps having been entered into across the Commonwealth. Depending on how they were structured, some entities have come out ahead. The majority have lost on the contracts. That includes SEPTA, as Pennsylvania Watchdog explains.

Is the problem with the interest rate swap concept? I’d argue that the answer lies in how they are used. What might be a good hedging instrument for the financial sector exposes the public sector to a set of risks that aren’t fully appreciated. The risks -including the real hazard that the municipality incorrectly guessed the direction interest rates would travel- are passed on to taxpayers or service users.

 

 

August 31, 2012

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