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By Jim Morris,
Paul Gilbert,
and Harry W. Miley Jr.
The Federal Reserve recently suggested the recession has ended, but in terms of meaningful economic growth, reductions in unemployment, and rebounds in state and local revenues, a “sustainable recovery” across the nation and in South Carolina remains a long way off.
Government forecasts or budgets projecting significant economic upturns in 2010-2012 aren’t supported by key data, and unless local government officials adopt several proactive economic development strategies, they will face difficult decisions between further cutting services or increasing taxes to maintain current levels.
The recent announcement that Boeing plans to employ thousands of people at a new airplane assembly plant in North Charleston is good news, but it is no panacea for the entrenched pockets of unemployment across the state.
Although the origin of the current economic crisis is complex, the root cause stems from the enormous number of subprime mortgage loans that reset monthly mortgage payments to levels that far exceed mortgagors’ ability to pay. As millions of subprime mortgagors tried (and often failed) to meet higher monthly payments, the resulting delinquencies, defaults, and foreclosures rose greatly, causing a flood of product on the market and plummeting housing values. Further troubling is that millions more subprime, “Alt A,” and regular ARM resets are still to come through 2012.
The dramatic shift of personal income away from consumer spending to meet rising housing costs has led to subsequent reductions in retail sales and manufacturing output. These reductions greatly increased unemployment, which put a further strain on both housing and consumer spending. The circle was complete, and the cancerous effects of “subprime” loans on all residential real estate values prompted one economist to remark, “we are all sub-prime now.”
Impact on state, local government?
At the state and local levels, higher housing costs will continue to depress retail sales, increase vacancies, preclude new commercial construction, and limit any significant increase in industrial output. New industrial-type projects will be few and far between, and sales tax and corporate income tax revenues are likely to decline for the next 3-4 years.
The dearth of housing starts and slow sales of existing homes will result in additional declines in local government revenue from construction-related fees (recording fees, building permit fees, impact fees, water and sewer hook-up fees, utility usage fees, etc.) The loss of fee revenue will be especially troublesome in rural areas where a single business scaling back or closing affects not only its workers, but could depress local tax revenues and result in local government job cuts.
There is also no reason to expect that South Carolina’s unemployment rate will drop below 10% in the next few years. Persistent unemployment will cause continued declines in state personal income tax and sales tax revenues. With residents holding onto their current taxable items longer (automobiles, boats, etc.), further depreciation will generate lower local personal property tax revenues. And this will occur in a context where consumer spending has become more conservative.
Given future mortgage resets, foreclosure projections, and the supply of existing homes on the market, a decline in housing values is expected for another 3-4 years. When values stabilize, they may be as low as 50% of their 2006 values in some areas. Accordingly, local governments must prepare for the possibility of housing values dropping below current assessed values, resulting in precipitous declines in real property tax revenues.
Don’t wait; communities can be proactive
Despite the challenging economic climate, communities can counteract its effects with proactive economic development efforts. To begin, prior economic development plans must be completely reviewed and drastically modified in light of the new economic realities, since many of the “business as usual” strategies and initiatives adopted before September 2008 have become irrelevant. Communities must fully understand that many of the jobs lost in the past eighteen months are never returning. Moreover, the number of “new” prospects will be far fewer in the next 3-5 years, and they will be more aggressively pursued by the tens of thousands of economic development agencies throughout the U.S. Those that actually occur are likely to create fewer jobs, and may result from consolidation rather than expansion. With this in mind, the key proactive strategies should include the elements below.
Recruitment should continue to be part of an economic development strategy; however, due to fewer opportunities, smaller returns, and shrinking budgets, local agencies should rely much more heavily on state and regional organizations. While local officials may need to be given substantial political cover, operating protocols could help ensure that all jurisdictions see viable prospects. For greater effectiveness, Target Industry Studies should identify industry clusters, sectors, and niches that make sense for regions and their counties and municipalities.
Local agencies must have shovel-ready sites, with an emphasis on quality over quantity. Existing building space should be available; however, rural areas should consider “virtual” (speculative) industrial buildings and adopt fast-track permitting processes.
Communities must focus and intensify their efforts at business retention and expansion to identify at-risk businesses, expansion opportunities, and suppliers that could become prospects. Innovative financial and non-economic incentives should be packaged for quick application to retain and grow jobs internally.
Economic development stakeholders must cooperate and coordinate their resources to more aggressively promote entrepreneurship and small business development internally. This would include non-traditional economic sectors such as tourism, eco-tourism, (destination) retail, retirement communities, agri-business, and other niche projects that can be spun off from existing economic activities.
Finally, communities must be far more committed to developing a workforce skills infrastructure. A proven model is the creation of regional technical networks throughout the state to promote expanded collaboration between 4-year universities and private industry to facilitate commercialization of breakthrough processes and technologies in ongoing and emerging areas of expertise and growth. Within this framework, technical colleges could be designated as centers of excellence to provide specialized training and technical skills for the region’s targeted growth sectors. The regional technical networks would rely on the creation of virtual links among the 4-year universities, technical colleges, K-12 education districts, major employers, and economic and workforce development stakeholders to coordinate future employment growth sectors; skills and training requirements and opportunities; and access to and among regional employment centers and sub-centers.
There will be areas that do not see the breadth and depth of the sobering forecasts outlined above, particularly the metropolitan areas that have more diverse economic bases; however, rural counties and their smaller municipalities are much more vulnerable. If local officials misread the economic tea leaves and wait around for the economy to pick up where it left off, their wait may be a very, very long one.
Jim Morris and Paul Gilbert are with Genesis Consulting Group. Harry W. Miley Jr. is a principal of Miley, Gallo & Associates LLC.
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