Author: Matthew Leiphon

  • Municipal Budget Mess

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

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

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

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

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

  • The Case for Walking Away

    First American CoreLogic, a real estate research company, recently released data on negative equity mortgages for the third quarter of 2009. The situation is stark. Nearly one in four U.S. mortgages (23%) is currently underwater, with the borrower owing more than the property is currently worth. According to First American, when mortgages “near” negative equity are tallied, the total number of mortgages near or currently underwater is around 14 million- “nearly 28 percent of all residential properties with a mortgage nationwide.”

    Being underwater does not necessarily mean that a borrower is at risk of default. Although foreclosures and payment delinquencies are currently at record levels nationwide in the wake of the popped real estate bubble, most borrowers facing negative equity continue to make their mortgage payments. While being underwater “is the best predictor for loan defaults,” according to Sam Khater, economist with First American, “if you have your job and don’t encounter economic shock, you’ll most likely keep paying on your home.”

    But should you keep paying if you’re underwater? Brent White, an Associate Professor of Law at the University of Arizona has examined the situation, and argues in a recent discussion paper that homeowners “should be walking away in droves.” According to White, millions of homeowners “could save hundreds of thousands of dollars by strategically defaulting on their mortgages.”

    Such a strategic move comes with consequences for the borrower- most notably a negative impact on one’s credit score. This has a quantifiable cost, but White states that “a few years of poor credit shouldn’t cost more than few thousand dollars,” and notes that individuals can rebuild their credit rating over time, and can “plan in advance for a few years of limited credit.”

    Such costs are, argues White, “minimal compared to the financial benefit of strategic default.” White makes use of the hypothetical example of a California couple purchasing an average priced ($585,000), averaged sized home in 2006 to demonstrate the case for default:

    “Though they still owe about $560,000 on their home, it is now only worth $187,000. A similar house around the corner from Sam and Chris recently listed for $179,000, which, with a modest 5% down, would translate to a total monthly payment of less than $1200 per month – as compared to the $4300 that they currently pay. They could rent a similar house in the neighborhood for about $1000.

    Assuming they intend to stay in their home ten years, Sam and Chris would save approximately $340,000 by walking away, including a monthly savings of at least $1700 on rent verses mortgage payments… If they stay in their home on the other hand, it will take Sam and Chris over 60 years just to recover their equity”

    White argues that in such cases, borrowers are better off taking a short-term hit to their credit, and strategically defaulting to escape a long-term, crushing financial burden. By staying in the home, borrowers are taking money that could otherwise be saved for retirement or used for other purposes, and throwing it away to service a liability that is unlikely to show positive equity in their lifetime.

    Such advice seems most likely to appeal to those upside-down in particularly hard-hit areas of the country, including California, Florida, Nevada and Arizona. However, as noted, most homeowners are sticking it out, and continuing to pay their mortgages. According to White, many who might otherwise make such a decision avoid doing so due to “fear, shame, and guilt,” sentiments which are “actively cultivated” by the government and financial industry to keep homeowners from walking away.

    It remains to be seen if underwater borrowers will overcome fear of the consequences and take White’s advice to strategically default. Mortgage lenders most likely hope that his ideas remain firmly in the minority- as one mortgage executive stated in comments reacting to White’s report, the argument for strategic default is “incredibly irresponsible and misinformed,” and, if widely embraced, has the potential to “‘tear apart the very basis’ upon which mortgage lending rests”. Losing otherwise performing mortgages to strategic default, whatever the economic sense for borrowers, could be yet another blow to an already reeling industry.

  • Vertical Urban Farming? Pull Your Head from the Clouds

    Dickson D. Desposmmier, in a recent op-ed in the New York Times, argues that the world, faced with increasing billions of mouths to feed, will soon run out of land. According to Mr. Despommier, “the traditional soil-based farming model developed over the last 12,000 years will no longer be a sustainable option.”

    Despommier’s answer to this ‘problem’: “move most farming into cities, and grow crops in tall, specially constructed buildings.” Such vertical farms, argues Despommier, would “revolutionize and improve urban life,” while also addressing issues such as agricultural runoff, air pollution, and carbon emissions.

    To sophisticated urbanites with little or no exposure to agriculture, vertical farming may seem to present a sort of utopian panacea. But first one must look at the underlying problem Mr. Despommier claims to address: land shortages.

    In this case, Despommier fails to show that land shortages will be a debilitating issue, rather than a manageable challenge. Desposmmier presents figures from the UN showing that the amount of arable land per person has dropped from one acre per person in 1970 to about half an acre in 2000, and may drop toward a third of an acre per person by 2050. This simply means that future generations will have less land available per person. But, does this necessarily translate into impending, persistent, worldwide food shortages?

    Even prior to the time of Thomas Malthus, there have been voices warning of disaster lying just around the bend with regards to food production and consumption. Yet, over the past two centuries, those tilling the soil (full disclosure: the author comes from a long line of family farmers, and has, from time to time, taken part in some ‘soil tilling’ of his own) have continued to keep pace with ever-increasing demands for food. True, the equitable distribution of this increased productivity sometimes leaves something to be desired (often for reasons of politics, not of production), but one cannot dispute the fact that farmers worldwide have made massive leaps and bounds in productivity.

    In the face of less acreage per human, the UN’s Food and Agriculture Organization continues to track increasing output per capita, and projections for the future show production levels able to meet increasing demand. One notable Dutch study showed the world’s farmers, using existing land resources, capable of feeding up to 10 billion people at least a “moderate diet,” if not an affluent one. Such projections have been supported by a “sizable literature,” some of which argues that future production of food will not be an overwhelming challenge, even at populations up to 12 billion. Between 1960 and 2000, the world’s farmers were able to increase food produced per capita, while the world’s population nearly doubled. We have now reached a point where Americans throw away around 14% of the food they buy.

    Making better use of the food we already produce, including gleaning of wasted food, and shifting land away from production of non-food crops, would be common-sense steps towards combating current and future food insecurity. Making better, more efficient use of our existing arable land makes more sense, both now, and in the future.

    High-rise urban farming, however, is not the solution. Even if we assume that the world will, as Despommier fears, face potential shortages of arable land in the future, the solution he proposes is far from the most feasible initial solution. In his piece, Mr. Despommier states that a prototype farm, covering one eighth of a city block and consisting of 5 stories, would cost around 20 to 30 million dollars to construct. A vertical farm of such size might mean around five acres of indoor production space (city blocks vary in size from place to place). Despommier states that one indoor acre might be able to replace 20 acres of outdoor farmland. So, giving the benefit of the doubt on cost to Despommier, for 20 million dollars his vertical farm might be able to match 100 acres of outdoor production: a cost per acre of around 200,000 dollars.

    For that same 20 million dollars, Despommier could purchase nearly 7,500 acres of productive, existing farmland in a state such as Minnesota or North Dakota, (the national average cost for an acre of farmland is about $2,600) and farm it with the latest in sustainable, organic, and/or low or no-till methods, already being implemented by many American farmers. Such practices can minimize or eliminate chemical use, reduce fossil fuel use, and help prevent erosion of valuable soil. In order to match his indoor production, financed at massive cost, Despommier would only need to find a way to increase the outdoor output by very small percentages, using land that is far less costly and readily available. As an added benefit, he’d have the opportunity to protect and preserve the very land he sees as under threat.

    Potentially more valuable still would be aiding farmers worldwide in the use of the most modern, sustainable, and environmentally-friendly practices in areas facing severe underutilization and degradation of valuable arable land resources. Since 1961 farmers in Asia have been able to increase their output by nearly threefold, while yields per acre in Africa have remained stagnant. Investing more resources in agricultural extension services to educate and empower local farmers in soil conservation, land stewardship and sustainable production techniques would be a common sense step towards addressing such challenges that would not require the construction of expensive towers, and would allow farmers to protect and preserve the world’s existing arable land while battling local food insecurity. In fact, according to one prominent soil scientist, protecting and restoring soil, the “most basic of resources,” offers “the chance not only to fight hunger but also to attack problems like water scarcity and even global warming.”

    Unfortunately, investing resources in such plans, using existing, tenable resources, might preclude Mr. Despommier from building a shiny new building in New York City, where “everyone” could see it. The more cynical observer might also point out that it could cut off a potential revenue stream for his new vertical farm business, which he envisions being financed by “venture-capital funds.”

    While vertical farms might be an interesting topic for light-hearted discussion, there is a reason we don’t farm intensively in urban areas: the land is too expensive, with costs that rise even higher building towering structures. That said, encouraging use of local agricultural products, even adjacent to or within urban areas, is a laudable goal. This supports the sort of family farmers that serve as good stewards of the land Despommier sees as under threat. Mr. Despommier need look no farther than his employer’s own Columbia University Greenmarket to find a farmer’s market supplying the very sort of agricultural product he extols and desires. Encouraging urban gardening is also a great idea, allowing people to take an active role in providing some of their own food, while making use of potentially underutilized spaces, at much less cost than “building up.”

    There are, to be sure, challenges to be faced moving forward: recent commodity price spikes (which have since abated) inflicted increased food insecurity on the world’s poor. However, such populations are the least likely to be able to afford the gleaming towers of Despommier’s dreams. Despommier and those interested in sustainable agriculture, including many farmers, will be better off trying to protect our existing farmland from urban sprawl, and supporting the use of the latest in sustainable agricultural practices worldwide, to better use and protect the farmland we already possess.

    On the other hand, promoting wildly expensive, Buckminster Fulleresque “leaps of faith”, while neglecting existing resources, is not the path towards long-term agricultural sustainability. Instead of pouring limited financial resources into building fields in the sky to serve as playthings for the urban elite and venture capitalists, farmers, governments and investors worldwide would be better served by plowing resources into making better, more sustainable use of the land that already exists, for the benefit of all.

    Matthew is a Research and Development Analyst for Praxis Strategy Group, and a native of Crary, ND.

  • Rural-Urban Rift on Healthcare Reform

    While much of the media coverage on the ongoing healthcare reform debate has focused on partisan division, a less mentioned point of conflict exists between rural and urban healthcare interests.

    Rural healthcare providers have long received lower Medicare reimbursement rates than their urban counterparts. Such geographic disparities are set by complex formulas that take into account (among other things) prevailing wage rates and assume higher costs of care provision in urban areas. Rural providers have argued that while wage rates may be lower in their communities, they face challenges in providing care not seen in urban environments, and are less able to take advantage of economies of scale potentially available in higher volume urban settings.

    Rural concern over reimbursement rates has now become a point of contention in the heated healhcare reform debate. At issue is a proposal to have the so-called ‘public option’ “pay health care providers at reimbursement rates used by Medicare”. Rep. Earl Pomeroy (D-North Dakota), a member of the House Ways and Means Committee, voted against what he stated was “a very urban bill.” Another Democrat, Ron Kind of Wisconsin’s 3rd District, also voted against the reform bill in committee, arguing that the proposed reimbursement rates were unfair, and that he didn’t “want to lock our providers into a system where they continue to be penalized”.

    Perhaps sensing a growing threat to their healthcare agenda, the Obama administration appears to be making conciliatory moves to placate rural Democrats. On Tuesday, House “Blue Dog” Democrats, representing the more conservative wing of the Democratic Caucus, met with President Obama to discuss their concerns. On the table were proposed changes to the legislation focused on “protecting rural areas and small businesses.”

    Upon leaving the White House, Rep. Mike Ross (D-Arkansas) expressed hope that the meeting had yielded progress towards creation of an “independent Medicare advisory council”. Such a council would, reports the Wall Street Journal, be empowered to “to make binding recommendations on how Medicare pays doctors and hospitals.” This would appear to be a concrete step towards addressing rural concerns over potential geographic disparities under the public option. However, it remains to be seen if the proposed changes will be acceptable with representatives from more urban districts.

  • Mobility on the Decline

    Faced with an economic downturn and a bursting real estate bubble, Americans look to be staying put in greater numbers. According to Ball State demographer Michael Hicks, interviewed in an article examining the trend in the San Francisco Chronicle, “Property values have dropped so much, people can’t pick up and move the way they used to.”

    In April, the Census Bureau reported that in 2008, the “national mover rate,” declined to 11.9 percent, down from 13.2 percent in 2007. This marks the “lowest rate since the bureau began tracking these data in 1948.” As William Frey, a demographer at the Brookings Institute, puts it, “the most footloose nation in the world is now staying put.”

    According to Frey, the middle of the decade was marked by a “mobility bubble,” spurred on “by easy credit and superheated housing growth in newer parts of the Sun Belt and exurbs throughout the country”. As the recession took hold through 2008, migration to suburbs and exurbs fell “flat in a hurry,” showing “just how rapidly changing housing market conditions can affect population shifts.”

    While, as Frey suggests, people may be moving into suburbs and exurbs at a slower rate, central cities within metro areas continue to lose population. The Census Bureau reports that during 2008 “principal cities within metropolitan areas experienced a net loss of 2 million movers, while the suburbs had a net gain of 2.2 million movers.” While the downturn in migration may help central cities hold onto some of their population, Frey contends that “it remains to be seen whether the migration-fueled engines of the early 2000s—especially the Sun Belt and outer metropolitan suburbs—will regain their former status.”

  • Balancing the California Budget

    The battle to find ways to close California’s gaping $24 billion budget shortfall continues, with Governor Schwarzenegger calling for deep cuts and reorganization throughout state government. Last week, making a “rare speech to a joint session of the Legislature,” Gov. Schwarzenegger argued that the state has “run out of time,” and faces a situation where “Our wallet is empty, our bank is closed, and our credit is dried up”.

    The challenges facing California’s policy makers in balancing the budget can be examined by checking out the Los Angeles Times’ “Interactive California Budget Balancer”. While the state has many different options available to it, making cuts to potentially popular programs will only serve to irritate interest groups which argue for the efficacy and essential nature of their favored programs. Couple this reluctance to make cuts with popular resistance to tax increases, recently seen when voters rejected a set of measures on May 19, and one can better understand the true magnitude of the budget impasse facing the state.