The Only Economist Worth Trusting is Named ‘Hindsight’

Last Tuesday,  the City Council had a study session on the upcoming Redevelopment Agency (RDA) budget. RDA funds are regulated by state law and are almost entirely spent on land and construction, similar to how bond monies are restricted. We have funded some limited city services in RDA and Strong Neighborhood Initiatives (SNI) areas (not citywide), such as anti-gang programs and code enforcement. The bulk of RDA funds have gone to capital project like the HP Pavilion, numerous museums, the convention center, parking garages, hotels, Adobe and facade grants as well as industrial projects in North San Jose and Edenvale.  However, RDA also funded approximately $70 million for SNI capital projects like community centers, parks, traffic calming, etc.

The larger discussion was about how we spend or do not spend the limited RDA funds after the State of California raided the funds last year and again this year.  RDA funds are based on assessed property values in the merged RDA areas (Downtown, North San Jose, Edenvale). If those commercial and residential properties increase in value, that creates more tax increment dollars. If those values decline there is less. All 350 RDA agencies statewide are experiencing the same pain. As we know, property values have declined and may decline further depending on which economist you listen to.

San Jose RDA hires an outside economist every year to forecast future revenues for a third-party review. The economist has not always been accurate. The economist has projected higher tax revenues in years past which did not pan out. Economists do not have a crystal ball and economic conditions have not been this dire since the Depression, which makes future forecasting that much harder. We may consider a different economist next year however the current economist has already been paid so I do not see the need to spend more money and hire an additional economist. I would rather take the economist’s number, cut them in half, and budget based on conservative numbers.

The main question for me is: “When revenues are uncertain, do we budget on the lower conservative numbers or the higher optimistic numbers?” I would prefer to do a budget on the lower numbers as it is easy to spend money but harder to constrain spending. The only economist I trust is “Hindsight,” and we will only know the answer in the future.

The RDA laid off 20 percent of its staff last fiscal year and may have to do more layoffs this coming year from their current 72 employees. The RDA is the only city department that is non-union, so layoffs are done by the director and not necessarily by tenure. I believe that with limited funds, the scope of RDA should be narrowed to economic development which creates a tax base and net new employment. That may also mean refraining from issuing any new debt this year and next. Mayor Reed has suggested a mid year budget review for RDA so if revenues change, adjustments can be made.

I attended the ribbon cutting for the Brocade campus on Thursday.  The Mayor knocked the ball out of the park with his comments on how federal law, state law and local regulations hinder job creation. In addition, Mayor Reed pointed out a simple economic lesson—that this country will grow the economy through exporting, and Brocade is a testimony to that as the majority of its technology products are exported overseas.

The RDA spent $4 million to retain Brocade and the jobs in San Jose at a new campus at Highway 237 and North First Street. I believe strategic investments are good.  We cannot always predict which company will succeed, but we know these investments reap increased revenue for the city of San Jose.

Finally, here is a table from Mayor Reed’s RDA budget message last year that shows how RDA economic development is better for city tax revenues and ongoing jobs then RDA affordable housing. The chart shows the increased property tax revenues and both direct and indirect job increase.

Do you plan your household budget on your net paycheck or on expectations of increased wages and/or return on investments?

32 Comments

  1. Great post Pierluigi!

    Relating to the RDA funds topic, according to posts over at newballpark.org, a new “push poll” is being thrown out to SJ residents asking the following: “Do you support an initiative for a new A’s stadium?  Would you still support it if you knew that public money was being used for it at a time where there isn’t enough money for schools and public utilities?”  To say that ballpark opponents are lying through their teeth would be an understatement.  “Public money” won’t be used for construction of the proposed ballpark!  Lew Wolff/A’s will privately finance the new ballpark, meaning (again) you and I won’t pay for it through either city taxes or money from the general fund.

    You said it best Pierluigi: “RDA funds are regulated by state law and are almost entirely spent on land and construction” and “with limited funds, the scope of RDA should be narrowed to economic development which creates a tax base and net new employment.”  The ballpark fits both ideas perfectly.  Spend RDA funds on land acquisitions, which the city will then lease to the A’s, and infrastructure improvements such as the Autumn Parkway (which was planned anyway).  The tax base/sales-tax revenue generated by the ballpark, downtown patronage and associated private developments will in turn help fund city services and schools. 

    In closing, don’t let the ballpark naysayers fool yah with their false propoganda!

    • Come on Tony D., you of all people should know that RDA funds are tax payer dollars just as well.  Giving them away to billionaire team owners as free land that was acquired for tens of million dollars (let alone infrastructure improvements that could have been delayed until better economic times) for which the RDA had to sell off valuable downtown parcels is just not the way San Jose should be governed !
      Vote No ! bettersensesanjose.org

      • DSNo,
        Technically your right; RDA funds are tax payer dollars…and your point?  Land acquisitions for development (whether it’s a ballpark, shopping center, or retail center) and infrastructure improvements are exactly what RDA funds, BY LAW, are supposed to be used for.  Again, what’s your point?  As for “giving them away” and “free land,” what part of the city leasing the land to Lew Wolff/A’s don’t you understand?  This isn’t a free lunch.  And this is no different than RDA taxpayer funded land acquisitions being leased for other commercial/retail/residential developments.  Better San Jose?  Yeah right!  You’re really trying to hold our city back for your own selfish reasons…VOTE YES!

  2. The one thing that is certain is uncertainty. The sensible course is to assume that there will not be as much money as we hope. Works for my household. It’d work for the City.

  3. Pier states, “Mayor Reed pointed out a simple economic lesson—that this country will grow the economy through exporting”…The only thing our country is exporting is our jobs. I heard an economist saying that our country is reaching a breaking point where as consumers we will not be able to buy the very products we sent overseas to be produced with lower cost outsourced labor. We are on the verge of entering deflation which will be very destructive to every single one of us.

    • Tom,
      Welcome to the competitive world of high tech.  The forces of global competition do not report to any country. They report to shareholders like Pension Funds. Cities do not create private sector jobs.

      • Tony,
        It is not just high tech jobs that are being outsourced; it is every segment of our workforce. Obviously it is global competition at work. I guess this means the playing field will eventually be level when our workers are on par with those in India, Vietnam, and China.

        Also, cities may not create private sector jobs, but they sure can chase them out of their city with bad policy, over regulation, and being in bed with housing developers.

  4. Santa Row= built in 18 months w/ ZERO public $ and hugely successful w/ lots of tax revenue.

    Dowtown 10th largest city in the country RDA = 30 years, $3Billion and the only place to buy a pair of underpants is a junior version of a discount Marshall’s – – there’s probably some math in here someplace so I stop.

    • And we’ll throw all that RDA dough into the dumpster when we have an elevated high speed rail in DTSJ—welcome to the new ghetto.  Well, it’s already begun with Ross DTSJ.  The place has more security than Mineta Airport, presumably based upon Ross management’s evaluation of its customer base in DTSJ.

      The big three medium rise condos are now going to get subsidies for BMR units.  Touted heavily in SJDA’s recent newsletter.  Sorry, Scott, that is a huge step BACKWARDS for DT. There go the values of those who have bought already, and many who might have bought at market rates will now wait and see..

      Scrap the RDA—after $3-4 billion of OUR money, we still don’t have a real DT.  More privately financed Santana Rows are way better than ROSS and more BMR units if DTSJ is EVER gonna be ANYTHING.

  5. I attended the ribbon cutting for the Brocade campus on Thursday.

    Glad you like sleezy business people.  Did they tell you that after taking San Jose’s money they are doing virtually all engineering hiring in India and China?  And, that they are in the process of eliminating San Jose jobs and sending them overseas?

    Now pat them on the back again so they will give you some money.

    • > Glad you like sleezy business people.  Did they tell you that after taking San Jose’s money they are doing virtually all engineering hiring in India and China?  And, that they are in the process of eliminating San Jose jobs and sending them overseas?

      > Now pat them on the back again so they will give you some money.

      So, what lesson did you learn, More Money?

      If I had to guess, I would imagine that you might be one of those type of people who get tingly feelings up your leg thinking about “public-private partnerships”, and government “stimulus” money to “jump start” the economy.

      Private businesses are in the business of making money for private owners.  If the government gives them money, they will use it to make more money in the way that makes the most business sense, NOT the way that politicians and government bureacrats would do it.

      If you want businesses to create jobs in San Jose, stuffing their pockets with government money is NOT the way to do it.  Charging the government with GETTING OUT OF THE WAY and fostering a supportive business environment that allows businesses to make ACTUAL PROFITS by employing people is the way to do it.

      Unfortunately, the domininant political establishment gets positively ill at the thought of businesses making profits.  It’s much more important for them to be able to take credit for “doing something” no matter how badly if screws up the economy.

    • Welcome to the competitive world of high tech.  The forces of global competition do not report to any country. They report to shareholders like Pension Funds. Cities do not create private sector jobs.

  6. The City of San Jose has known that revenues in the General fund (and Redevelopment fund) have been declining for almost 10 years.  10 years, but only this year did they arrive at the conclusion that employees need to cut 10% or face layoffs.  How much did SJ lose on the Grand Prix?  Hispanic University? Office furniture at City Hall? Countless bad fiscal decisions that resulted (and still result) in wasted dollars.

    More than enough to staff fire stations and Southern police precinct.  The grass in parks should be brown and 5’ tall and the City pools dried up before any cops or firefighters get laid off… Both Departments have been understaffed, by any measure, compared to other large cities for over 8 years!  Long term poor planning Pierluigi.  And now you have the gall to blame City workers- you’re a piece of work pal.

    • Declining for 10 years? Better check your facts. The general fund grew from $746M in 2001-2002 to $984M in 2009-2010, then fell to about $870M in 2010-2011. I would hardly call a 17% increase a decline. Not to mention the mostly compensation driven increase of nearly 32% between 2001-2002 and 2009-2010.

      Safe neighborhoods require much more than police and fire departments. They require park maintenance to create safe places for us to recreate; open libraries for our children to go after school, and for our unemployed to go for job searches and training; streetlights that work; and roads that are in reasonable repair among other things.

      Eliminating all of the above in the interest of keeping every police & firefighter employed would just drive up the need for police & fire employees.

      It’s not a question of blame, it’s a question of fiscal reality. Would you rather have employees retiring after 30 years at 70-90% of a spiked salary, or libraries open an extra day a week?

    • You must be an out of state Firefighter that does not care about the quality of life for San Jose residents.  Cutting all libraries, parks and pools is ridiculous. Instead you should take a pay cut.

      Pierluigi-Please support crossing guards at Frost Elementary

  7. I told Judy last week I don’t want to be critical of the council anymore PLO, I understand what a hard job it is.

    I consider temporary school buildings to be urban blight and bad for business.  Same can be said for burned out school buildings (like trace elementary) Can we use RDA to give our students more permanent structures?

  8. What I find stunning in all this is that the Mayor is able to state with such clarity one of the major causes of San Jose’s structural deficit and yet neither he nor anyone else on the city council seems sufficiently motivated to resolve the issue – that San Jose is one of the least business-friendly cities in the county. Rather than spending so much time demonizing labor, how about if the Mayor, City Council and City Manager spend some quality time doing things like simplifying the City’s tax and fee structure and coming up with serious enticements to lure both large and small business back to the city.

      • Greg’s right. “Structural deficit” is just a term that our politicians use to deflect the blame for their own irresponsible spending decisions.

        The most costly of these bad spending decisions fall into the “employee compensation” category and that’s why the city workers are “scapegoated”. If the poor hard done by firefighters can figure out a way to dismantle the new City Hall, have a yard sale for the glass and steel, and recoup the 450 million dollars we wasted- great! Until then they shouldn’t be so critical of the politicians who OK’d that white elephant because they’re the same politicians who OK’d the generous compensation packages that they now enjoy. Fire fighters have been the biggest beneficiaries of these wasteful spenders they are now “scapegoating”.
        O’Connor’s always harping on the Dept. of Cultural Affairs. Well here’s another one. Why in the world does San Jose need a Housing Department? Get rid of the entire department and all the bloated salaries and bad loans they make. Oh I’m sorry. I’m “scapegoating” again.
        Speaking of Campbell. When I visit Jack Fisher Park or Edith Morley Park in Campbell I almost always see one or two parks workers there and they are doing actual physical work. They appear to genuinely be interested in keeping those parks running well and looking good. In San Jose’s parks the city workers are usually sitting in their trucks talking on the phone, standing around talking to each other, or if they are actually doing something it’s robotically fulfilling the barest minimum of their responsibilities. It’s obvious they take no personal pride in keeping the park nice.
        Parks workers are among the few city employees that we can observe while they’re at work. Extrapolating from my own direct observations and unfairly drawing conclusions based on the only direct evidence that I’m allowed to collect, I’d have to say that Campbell’s workers earn their pay while San Jose’s do not. My intuition tells me that if the Parks Department is poorly managed and operated then other departments, which I can’t observe, are probably poorly run too.

        Evan Low should consider that perhaps he is lucky to be the Mayor in a City that is institutionally well run at many levels and already had good, efficient departments in place before he took office. He should not be taking it for granted lest he allow the City of Campbell to degenerate to the degree that it begins to resemble it’s inefficient and wasteful big brother, San Jose.

    • Anon1, the problem that makes San Jose such an un friendly city place to do business is that small and large businesses are at the mercy of city staff – who are the unions!  So it is a union issue.

      The union employees / ie city staff make it very hard to get a business permited and opened.  Then once open they literally beat the business at everyone opportunity for additional fees and fines.

      If the city staff errr unions would help make it easier, more businesses would open, tax revs would grow and the union jobs wouldn’t have to be cut.

  9. Do you know of any other public agency aside from the U.S. Government and the Redevelopment Agency that is authorized to sell bonds without a vote of the public?
    I would like to see a change in State Law to require Redevelopment Agencies to get taxpayer approval before selling bonds.
    San Jose Redevelopment Agency has sold more than $2 billion in bonds so far. Enough already!

    • The Murky News reports that SJ RDA will be terminating more folks.  It once had well over 100 employeees.  What did they all DO?  Now it has 78, but will be downsizing further.

      So, Have Harry Mavrogenes and the other higher-ups taken cuts in pay now that the RDA will soon have only about half the sstaff and budget it had a few years back?

  10. In hindsight, the staunch fiscal conservative, Pete Constant, should not be getting both a disability and a salary from the same employer at the same time.

%d bloggers like this: