Local Government Finances

The New York Times article on Rhode Island’s pension system “Little State with a Big Mess” is an excellent read. Rhode Island is a microcosm of the national issues of public sector debt, pensions, and the political difficulty in rebalancing government finances. Rhode Island’s pension problem is best articulated through three facts. First, the state has more retirees than current state workers, a problem facing many old industrial firms in the U.S. Second, and more importantly, the Times stated,

“In each of the last 10 years, the state pension fund paid more money to retirees than the fund collected from state employees and taxpayers combined.”

Lastly, the state pension fund assumes annual returns of 8.25%, versus the actual return of 2.4% a year over the last decade. Clearly not a sustainable path for the state. The situation in Europe and Greece reinforces why this is an important issue and one best tackled in a timely manner, before it becomes a crisis. My friend Bill says, “Bad news doesn’t get better with age.” Not only will the cuts be more painful in a crisis, but the political calculus becomes more complicated. Europe has been fighting to solve the crisis for Greece with half measures and the situation threatens to boil beyond their control.

The article reminded me of the role local and state government finances play in corporate site selection. It’s an important issue that doesn’t get much coverage. Site selection consultants evaluate state and local government credit ratings and overall finances during the site selection process. If the client cares about tax rates, they certainly care about the potential for future tax rate increases. U.S. states are generally considered low risk by the rating agencies as you can see from the map below. Although it is worth noting California’s credit rating is lower than the recently downgraded Italy.

 

A state with serious existing fiscal problems, which is cutting services and raising taxes, is less appealing than the alternative. A looming fiscal problem is a forecast for service cuts and tax increases. The political process to solve a serious fiscal problem is never fun. The ensuing fight will only worsen political infighting and corporate end-users are sure to be targeted for tax increases.  When has a tax increase not caused trouble?

Locations of most concern:

• States and cities downgraded or put on a ratings watch by a major credit rating agency.
• Company towns or small cities with a concentrated tax base.
• Cities and states with limited flexibility in budgeting or taxing.

Resource: http://www.municipalbonds.com/  Excellent site. Free registration provides access to state and municipal bond ratings, current yields, and related research. 

More Questions About Litebox

I was too polite about Litebox yesterday. No way this project is real. It could become a real project one day, and I hope it does, but the facts released to date don't lend credibility. In addition to the questions raised by the Indy Star and in our post yesterday, the project numbers just aren’t plausible.

Employee Density – 900 employees in 125,000 square feet, or 140 sq. ft. per employee. I looked back through our past projects and couldn’t find a project with even twice that density. The national average for manufacturing is over 500 sq. ft. Transportation equipment manufacturing is even higher due, in part, to the large size of the finished product. Each tractor-trailer is 500 sq. ft. This number isn’t in the ballpark of reality, which means the 125,000 sq. ft. building requirement isn’t a real requirement.  

Construction Timeline – Begin construction in 60 days and be completed by late spring. A seven month process isn’t realistic with no architects, engineers, or contractors hired, and no site development or building permits issued. Litebox does not appear to have an established manufacturing process, which takes time and expertise to develop. And I don’t know about Indiana, but winter usually slows the construction process down a bit as well.

A plausible answer exists for each issue raised about Litebox, but not in the aggregate. Hopefully the company figures out the details and this ends up just being a premature press conference and public announcement. 

Red Flags on Litebox Inc.

The Indianapolis Star reports Litebox Inc. plans a new manufacturing facility in Indianapolis. A quick look at Litebox Inc. sends up red flags. I'm all for government taking chances on new companies, especially when any incentives are tied to actual job creation and investment. And I happen to believe Indiana has some of the strongest, smartest elected officials and economic development organizations in the nation, but Litebox doesn't pass the smell test for me. 

• Litebox Inc. is a Delaware Corp using a registered agent in Wyoming. The company does not appear to be registered to do business in either California or Minnesota. 
• Finance tracking tools show no funding announcement for Litebox or Mr. Yanagihara. 
• I'd be quite surprised if Panasonic or Bose allowed the use of their logo in that manner. 

I'm guessing people in Indianapolis came to the same conclusion and are looking into the matter. Here are a few options for Mr. Yanagihara to clear this all up. 

• Provide a copy of the Litebox contract with Panasonic or Bose
• Provide a copy of the Litebox funding commitment papers
• Provide a copy the Litebox California tax return, workers comp payment slip, or lease contract
• Even the business name Litebox operating under in California or Minnesota

I hope I'm wrong, my research was inaccurate, and that Indianapolis gets every one of those jobs. 

Edited to add - No way you can fit 1,000+ employees in a 125,000 square foot manufacturing space. Production equipment, parts and materials storage, and the actual trucks take up space. A call center might have that employee density, but not manufacturing. 

U.S. Exposure to Euro Crisis

As the economic situation in Europe worsens, its important to understand U.S. exposure. While any slowdown in an economy as large as the EU will be felt globally, the U.S. has closer ties than most. Europe and the U.S. are greatly interconnected, through financial holdings, direct investment, and trade. 

1) U.S. financial institutions hold large amounts of EU bank debt, from banks in France, Italy, and Germany. Exact exposure is difficult to know with certainty and firms are sharply reducing exposure, but U.S. firms face losses as the crisis spreads. 

2) Europe accounts for 75% of U.S. foreign direct investment. These investment levels are likely to decline as the EU credit markets contract. 

 

3) Europe accounts for 22% of U.S. exports. During a protracted recession exports to European countries will decline. 

VISIT USA Act Won’t Help Real Estate

The VISIT USA Act, proposed by Sen. Chuck Schumer and Sen. Mike Allen, includes seven separate components, some of which are important, long overdue reforms. Two critical pillars of U.S. economic development are foreign investment and tourism. This bill will make it easier for people to invest and spend money in the U.S., both good things. Unfortunately some included components, such as providing visas for foreign citizen real estate investors, are ill-conceived and won’t produce significant benefit. Positive parts of the bill include;

Premium Visa Process – Premium visa processing will allow travelers the option of paying a much higher visa processing fee in order to receive a visa interview within three business days. This applies to both tourist and business travel visas. Currently, the State Department fails to meet its goal of processing visas within 30 days of an application submission in critical travel markets, with wait times reaching upwards of three months in countries like Brazil and China.  This delay is bad for business and needs to be fixed.

Videoconference Pilot Program – Establishes a videoconferencing pilot program to conduct visa interviews, lowering the hassle and additional costs of obtaining a U.S. visa. Currently, an in-person interview is required of each applicant seeking a U.S. visa but millions of potential travelers do not live in a city where a U.S. Embassy or Consulate is present.  A pilot program is a no-brainer.  

Encouraging Canadian Tourism to the U.S. – A new “Canadian retiree visa” (non-immigrant visa) is created that lasts 240 days and is renewable every three years for Canadians who are: 1) over age 50; 2) can show that they own a residence in the U.S. or have purchased rental or hotel accommodations in the U.S. for the duration of their stay; and 3) are not otherwise inadmissible.

The visa for foreign real estate investors, which has received the most press, would provide a visa to anyone purchasing at least $500,000 in residential real estate assets. This may be the least important part of the bill and will have little impact on domestic real estate. The visa offered is low value, with significant strings attached;

• The visa issues is not a work-visa, nor an immigrant-visa
• The visa recipient is required to live in the home for 6 months of every year
• As such, the immigrant is taxed  by the U.S. on foreign income
• The visa expires when the home is sold

The visa holder is not able to work, but will be taxed on foreign income, which seems to limit the target audience. Truly wealthy people would invest capital through the EB-5 program, which offers a proper green card, not just a tourist visa.

The program provides no criteria regarding jurisdiction or type of real estate to be purchased. The price of condos in Miami may go up, but it’s hard to see how this program will benefit the broader real estate market which needs to work off inventory in areas less appealing to foreigners. Since the visa holder can’t work in the U.S. the country is importing unemployed investors. Even then, why require them to live here six months a year? The Visit USA Act has merits and Congress should pass the bill, but no one should anticipate any benefit to the real estate market.  

Does China play fair in international trade?

This post is a modified version on an answer I provided on Quora. You can see the original here - http://qr.ae/75Ikc

Mitt Romney and others like Columbia University economist Glenn Hubbard argue China does not play fair when it comes to international trade. Do their arguments have any merit?

As a grumpy old man once said, "fair has got nothing to do with it." China maintains an aggressive stance with regard to economic development and international trade. They use the same tools available to any other country, including the United States. The Chinese are simply industrious economic developers and adept at exploiting weaknesses in our political and economic systems. China is still a poor country in many ways and sometimes they want that next dollar of GDP more than developed nations.

But to answer the query - yes China is aggressive and many would agree unfair. Most academics and policy makers agree China engages in currency manipulation to support domestic exporters. Artificially undervaluing your currency provides a meaningful advantage in global trade and is a tried and tested approach used by many countries over the years, Japan being a prime example.

China denies domestic market access to foreign companies, through legislation, bureaucracy, and red tape. Lenovo, a Chinese computer firm, is free to compete on equal footing with Apple in the U.S. market. To sell cars in China, General Motors is required to enter into a joint venture with a Chinese owned firm. GM is required to split profits, license technology, and share manufacturing best practices.

China provides strong incentives to Chinese companies including cash grants, low interest loans, infrastructure development, protected domestic market access, and expedited government permitting. The U.S. and other countries provide similar incentives but usually on a smaller scale than China. Chinese firms are accused of using these incentives to engage in illegal dumping, or selling goods for less than the cost of production in order to drive the competition out of business.

Intelligent people disagree on the scale of these activities and resulting benefit. For my own part, the growing trade imbalance between the United States and China provides meaningful evidence of a distorted market. China accounts for ~45% of the U.S. trade deficit. The competitive advantage to manufacturing in China is one of the many headwinds facing U.S. manufacturing today. It's an issue of concern for state and local economic developers trying to support existing firms and win new site selection projects. 

Are you prepared for a corporate site selection project?

Last week I participated in a war game produced by the American Enterprise Institute. The game revolved a crisis on the Korean peninsula, with teams representing China, South Korea, North Korea, and the United States. Each person was given a character to play and two briefing books, one public and one private. The public book, which everyone had a copy of, provided situational background, location and size of military assets in the region, and broad information on each country. The second book included detailed information on your character, including your political ambitions, personal and country alliances, and assets at your disposal.

Twenty “civilians” participated, with five AEI experts managing. I was on the North Korean team, playing Chang Sung-Taek, regent and political advisor to Kim Jong-il and his son Kim Jong-Un. Three hours later the world was safe, but only after much drama, including in no particular order;

• China stopped buying U.S. treasury debt
• Nuclear missiles prepared for launch on civilian targets
• Large scale military invasion
• A foreign leader died, another was assassinated
• Much politicking

It was great fun, and quite educational. The game was setup with great distrust amongst the North Korean team, similar to real life apparently. Dan Blumenthal, representing a key Chinese official, later related that no one could negotiate with the North Korea team as we were busy conspiring to save ourselves from other North Koreans.

War games exist to help develop and improve planned responses to potential crisis. Communities seeking corporate investment should war game a site selection project, grade their response, and make improvements. This is especially true for newly aggressive communities, or those without recent site selection experience. Understanding the site selection process will;

• Educate participants on the process, requirements, and community response
• Make it appear you’ve done this before
• Identify areas for improvement  

Not a minor undertaking, but worth the time and effort. 

Cool economic development mapping tool

The Michigan Economic Development Corporation projects page has a great interactive mapping tool. The map allows you to filter MEDC projects by geographic location, industry, and type of incentive provided.  The filtering tools provide an appropriate balance of detail without causing the user too much hassle. The map provides a site selection consultant with a quick overview of activities in the state, and the ability to drill down to applicable projects. If I am researching alternative energy projects, the mapping tool provides project location, detail on job creation and private investment, and public support provided. I get an idea of the projects MEDC is funding, areas of geographic activity, and some insight into the level of public sector support. It’s a good example of a user friendly tool, which reduces the time required for a reader to get a quick overview. Compare this to a word document listing projects, at 10-20 pages long.

The map works because it shortens the amount of time between me and the info. It’s also an answer to a larger question, how best to provide relevant information to site selection consultants and corporate real estate professionals? Marketing to us is tough when we spend so much time using the information, and each person is working on different projects with different needs. A couple of tips come to mind;

• Get to the point. Whether you are using text, data, or a visual tool, the quicker it leads me to the point, the better. For both of us, my ability to remember data decreases as the volume of data increases.
• Interesting data, relevant to us. Small cities, all bunched around the hub of a large metro, don’t need to spend as much time on workforce and demographic issues.  If I’m driving past lots of empty land to get to your city, then make me feel comfortable about the local workforce.
• Data we can’t get on our own. We have access to most demographic, industry, and workforce data, so a quick summary will do. Information on the local development process is more difficult to come by, such as timeline to occupancy, and rarely available with any specificity.
• Anything that mitigates a perceived weakness. Does your 53% of your rural town’s population have a college degree? Reasonable electric costs in an otherwise high cost state?

The MEDC map succinctly provided information I couldn’t get elsewhere, and was easy to use. 

U.S. FDI and site selection

China is the world's second largest economy, the United States second largest trading partner, and our 17th largest source of foreign direct investment. Investment originating from Sweden was three times that coming from China, despite the Swedish economy being 10% the size of China. India, Brazil, and Russia provide similar, although less striking examples. The lack of large Chinese corporate site selection projects is another example of the unbalanced nature of the economic relationship between China and the United States. And another interesting aspect to a developing nation becoming such a large economic force. 

China and Brazil are certainly targets for local economic developers, but they are a long way from rivaling Europe or Japan in overall deal flow.

Site selection resources

We use a large amount of data in our site selection work, and we've posted a few data sets we use. 

Gross metropolitan product includes;  

• 2010 GMP for all U.S. metropolitan statistical areas
• Rank by MSA
• Compound Annual Growth Rate from 2001 to 2010
• 2010 Population 
• 2010 GMP per capita
• 2010 GMP per captia rank 

Gross state product includes;

• 2010 GSP for each state
• Rank by State
• Compound Annual Growth Rate from 2001 to 2010
• 2010 GSP per capita
• 2010 GSP per captia rank 

 We'll post updates as we add additional resources.