Will the last person to leave please remember to turn out the lights

Posted by AzBlueMeanie:

Arizona has gone from Governor Janet Napolitano and the Republican legislature enacting a ten percent income tax cut in 2006-07 to give back a tax surplus because "it's your money," to a state in economic free fall and financial collapse in 2008-09.

As anyone who attended school in Arizona from the 1950s to the 1970s will tell you, Arizona's economy was based upon the "Five C's": Copper, Cattle, Citrus, Cotton and Climate. The reality is, Arizona's post-war economy was based upon one thing: real estate. Arizona's economy is entirely dependent upon home construction fueled by the demand of rapid population growth, doubling in size approximately every twenty years. The first four C's have greatly diminished in importance as land was taken out of useful production to provide water for a burgeoning residential population. At least it's always sunny in Arizona.

Since the late 1960s Arizona, like the national economy, has gone from being a manufacturing economy that produces goods to a service economy that consumes goods. This trend has been exacerbated since the 1980s by corporate globalism, so-called "free trade" policies (a euphemism for shipping American manufacturing jobs to third world countries to exploit cheap labor), and the deregulation of the financial services sector in the 1990s which resulted in "casino capitalism," a giant Ponzi scheme on Wall Street that produced a false economy of artificially inflated values marked by the Dot-Com stock bubble bursting, followed by a far more devastating speculative housing bubble bursting. The Great Recession may yet turn into a Great Depression.

As Gertrude Stein once wrote, "There is no there there." Or as Chrissie Hynde of The Pretenders sang, My City Was Gone. The world we knew no longer exists.

Arizona's political leaders have not faced up to this economic reality. Instead of reexamining the policies of the past 60 years which have brought us to this place in time and setting a new course for a bold and innovative future with a sustainable economy, Arizona's political leaders prefer to simply tinker around the edges of tax policy and pray for an economic recovery soon so they can get back to business as usual. There is no vision, no leadership, no plan for the future.

Instead, Arizona has pursued “sale-leasebacks” of state buildings, which are sold to private owners. The state then leases the buildings and takes back ownership after 20 years. State budgets lean on property sales

The deals afford the state quick cash from the sales, while guaranteeing investors a profit after recouping the cost of the building through the long-term lease payments from the state. Arizona officials said they have received about 100 inquiries from interested buyers, including real estate investors, financial investors, the private sector and nonprofits.

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In Arizona, the sale-leasebacks are part of the state’s budget plan to help close a $3.2 billion deficit in the fiscal 2010 budget. Lawmakers have approved the sale of a tentative list of state-owned buildings, including the executive office tower, possibly the House and Senate buildings, 10 prison complexes and a state mental health facility.

The sales are expected to generate $737 million for general operations, according to news reports, while costing taxpayers more than that from the lease-back payments during the next 20 years. The state, which has not released what these agreements will cost, will continue to pay for the operations and management of the property.

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Some critics suggest that selling off state property allows policy makers to put off making more difficult decisions, such as raising taxes or cutting services.

“We’re in the second full year of huge budget deficits. The typical gimmicks have already been employed. Now this new one has surfaced,” said Kevin McCarthy, president of the Arizona Tax Research Association. “They are masking the budget deficit and creating a one-time infusion of revenue that will go away next year. Then what will you do? Politicians are kicking the can down the road and crossing their fingers that next year will hold a better set of circumstances.”

Jon Shure, deputy director of the state fiscal project at the Center on Budget and Policy Priorities, agreed. “It tends to be a short-term, one-time fix that avoids the difficult decisions of having to find revenue,” he said.

“Public buildings should belong to the public. When you sell or lease them, you’ve given up a piece of real estate that at least symbolically should belong to the public. It says a lot about the desperation the states feel, but desperation is clouding long-term judgment.”

Arizona's economy may be worse than Michigan's — Michigan! (a rust belt manufacturing economy in decline since the 1970s). Tough times in Michigan, but Arizona may have it worse:

You know Arizona's economy is in bad shape when it ranks worse than Michigan's.

Even after years of mind-numbing hits to its construction industry, it's a jolt to realize Arizona has lost a larger percentage of jobs in this recession than Michigan, even as that state's auto-based economy continued to melt down.

The states share the dubious distinction of having two of the nation's most recession-scarred economies.

Arizona reports the highest percentage, 9.9 percent, of job losses in the country since the recession began in December 2007, according to the Economic Policy Institute. Michigan (9 percent) ranks No. 3, behind Arizona and Nevada (9.1 percent). Over the longer term, the states' trajectories have been markedly different. Arizona was the nation's first- or second-fastest growing state for at least 25 years through 2006. Michigan's auto industry has been in decline for 30 years.

That Arizona can be ranked alongside a state that is iconic for job loss underscores the seriousness of the its challenges.

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Although Arizona and Michigan economies are markedly different, they both have depended on, and been hurt by, a cyclical industry: auto manufacturing (Michigan) and growth and construction (Arizona).

Since the recession began, Michigan has lost 24 percent of its manufacturing jobs and Arizona has lost 36 percent of its construction jobs, according to U.S. Department of Labor data.

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"In a funny way, both states face the same issue, which is economic restructuring," said (John Hagen, economic-development director in Surprise who has related experience in Michigan and other Midwestern states.)

Just as Michigan can't depend on the auto industry, Arizona can't count on population growth to boost its fortunes in the near future, Hagen said.

"I don't think we are going to have the rapid growth and speculation," he said. "The boom was built on cheap mortgage money and credit. There will be changes in the (financial) system."

In a new report from the Pew Center on the States entitled "Beyond California: States in Fiscal Peril" the news is not good:

This examination by the Pew Center on the States looks closely at nine states, in addition to California, that are particularly affected by the recession. All of California’s neighbors–Arizona, Nevada and Oregon–and fellow Sun Belt state Florida were severely hit by the bursting housing bubble, landing them on Pew’s list of states facing fiscal difficulties similar to California’s.

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In a nutshell, here are the major challenges facing each of the nine states profiled in detail in this report:

Arizona

As the economic news grew bleaker and state revenues sank during the past two years, Arizona’s lawmakers relied on one-time fixes to balance its budget instead of making long-term changes. In part, they were hamstrung by voter-imposed spending constraints, a tax structure highly reliant on a growing economy and a series of tax cuts, made in the 1990s, that has limited revenue. At this writing, policy makers still had not decided how to bridge a $1 billion gap in the current fiscal year’s budget.

Read the full Arizona report at http://archive.stateline.org/images/2009_Nov_11-BeyondCalifornia/Arizona.pdf

Tax revenue to the state continues to decline as the economy falters. Tax revenue down in at least 44 states:

Tax collections declined in the third quarter in the 44 states for which early data are available, according to a report released today (Nov. 23) by the Nelson A. Rockefeller Institute of Government.

States collected 10.7 percent less in tax revenue in the July-September period than during the same three months a year ago, according to the report, ["Old News Is Bad News: Third Quarter Brings More Decline in Tax Revenues"] which predicted that tax collections in the final three months of the year “will continue to be weak.”

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All three major sources of states’ tax revenue — sales, personal income and corporate income taxes — shrank in the third quarter. Corporate income taxes were most volatile, dropping 19.4 percent, followed by the personal income (11.4-percent drop) and sales taxes (8.2-percent drop).

Much of the political debate over Arizona's budget deficit this year has focused upon the Accidental Governor's demand for a temporary one cent increase in the state sales tax. But Arizona is already overly dependent upon the regressive sales tax as a source of tax revenue. The Rockefeller Institute report demonstrates how devastating Arizona's over-reliance on the sales tax has been during a steep economic downturn (Table 2).

Arizona's rapid population growth/home construction based economy is not likely to recover any time soon. Statewide, 48 percent of homeowners — 655,540 mortgages — are underwater, the second-highest percentage in the country after Nevada, says a third-quarter report released Tuesday by First American CoreLogic, a real estate tracking firm. One-third of local homeowners are now 'underwater':

Most of the underwater properties were purchased between 2005 and 2008, with 2006 being the peak year, the report says. Many borrowers relied on adjustable-rate mortgages.

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The report warns of the potential for increased foreclosures as homeowners who find themselves severely underwater — where it could take years for values to recover — might walk away from their properties, choosing to take the credit hit that comes with foreclosure over years of what they see as overvalued payments.

With a large inventory of unsold homes and homes in foreclosure, particularly in a weak economy with sustained high unemployment and tight credit markets, there is little demand for new home construction. The old formula Arizona has always relied upon in the past will not work this time. And it would be foolish for us to continue on this course. (This is the third, maybe fourth, real estate downturn since I have lived in Arizona).

It is time to reexamine the old policies and to set a new course for a bold and innovative future with a sustainable economy. Arizona needs political leaders with vision, leadership skills, and a plan for the future. Unfortunately, that is not what we have today.

My friends in Michigan who used to have good jobs in the auto plants before they closed down have a gallows sense of humor. They often joke about Michigan, "will the last person to leave please remember to turn out the lights." Without a dramatic change in the course of the economy and political leadership in this state, Arizonans may soon share their gallows humor.