Credit Squeeze In Ohio

The city of Cleveland faces a credit squeeze. Lets take a look at the details.

Cleveland Mayor Frank Jackson said today that he and top advisers are working to stave off a money crunch that could jeopardize large capital projects on the horizon. Such projects, ranging from roads and bridges to developments such as Bob Stark's $1.5 billion plan for the Warehouse District, rely on the city's ability to borrow money.

But several factors have combined to cripple that ability. Among them: Successful appeals of property tax assessments and disappearance of the tax on business equipment.

"There's no room for us to borrow money," Jackson said in an interview with Plain Dealer reporters and editors Tuesday morning. "That means I have to find a new way to do business. What I don't want is anyone to interpret this in any way to discourage investment or induce panic that the world is ending, because it's not," the mayor said.

Well the world is not ending but no one in their right mind thought Cleveland was the world.

How Did This Happen?

Like cities throughout the state, Cleveland uses property taxes to pay back loans on development projects. State law forces governments to ask voters before collecting most property taxes. The amount is capped at about $306 per $100,000 of assessed value. Cleveland got in a jam because it will nearly hit that cap in 2008, meaning the city can't borrow any more money backed by property tax -- at least without voters' approval.

No, that's not how it happened.

The idea that Cleveland is in a bind because it cannot raise property taxes is preposterous. What happened was a flight of jobs and population from rust belt cities overly dependent on manufacturing.

However, it's not just Cleveland we are talking about. Ohio is in a recession. To turn things around consider this Brookings opinion from June 2007, The Goal for Ohio Metros: 43,000 residents.

We studied 302 cities and found Canton, Cincinnati, Cleveland, Dayton, Mansfield, Springfield, Warren and Youngstown among 65 cities that are underperforming compared to their peers nationwide. Most of these cities - and their metropolitan areas - are struggling to make a successful transition from an economy based on routine manufacturing to one based on more knowledge-oriented activities.

Here's one practical idea for Ohio: Strive to attract at least 2 percent of each metropolitan area's population to live in traditional downtowns. This is a challenge, no doubt. After World War II, Ohio cities were vibrant urban centers, catalysts of America's postwar boom and home to innovative industrial giants like Goodrich and Rubbermaid. Today, many of these once-proud cities are caught in a spiral of economic and demographic decline. Cleveland's core population is less than half of what it was when Harry Truman was president.

So how does Ohio achieve a "2 percent" goal?

• First, research has shown that the physical clustering of talented people is critical for economic growth. Targeted fiscal incentives such as homeowners' and employer-assisted housing tax credits encourage employers to help their workers with down payments. ...
• A second, complementary way to convert older cities to innovative economies is to locate new college and university campuses in downtown centers. ...
• Finally, transformative investments in infrastructure - waterfront redevelopment, the teardown of obsolete highways, investment in large urban parks - can be critical to downtown success.

Even a cursory visit to Europe's older industrial cities - Bilbao, Spain; Torino, Italy; Manchester or Sheffield, England - reveals the market-shaping, investment-generating impact of restoring the core. These cities endured the same economic shocks as American cities. But they responded not by distending their regions with sprawl-inducing subsidies, but by targeting their resources toward the reclamation of industrial land and historic buildings in the center. They prepared their places, in short, for the innovative economy of the future.

So while Cleveland is considering early repayment of Urban Development Action Grant loans awarded two decades ago and "leftovers from the city's subordinate income tax collections" as possible solutions, perhaps they need to think about what they are doing and why first.

"Early repayments would provide the city with a short-term infusion of cash but allow the developers who took out the loans to pay them off at a discount."

Note that those grants were awarded two decades ago. Did they work? Obviously they didn't, nor will raising taxes or spending "leftover" money randomly. Perhaps someone ought to figure out what's wrong before wasting any more money. Here's a hint: Unless and until the free market sees solid reasons to invest in urban areas, nothing is going to change.

For a look at California please see Turn out the lights California, the party is over. Coming up soon is a look at Michigan.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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