ISSUE # 47 .... Debt Financing in Aspen: The ReluctANT Truth
August 24
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In a new twist, this issue features a collaboration between The Red Ant and valley resident Phil Verleger, whose "Community Voice" was heard recently at The Aspen Business Luncheon.
Mr. Verleger is the David Mitchell Professor at the Haskayne School of Business at the University of Calgary. Phil is principal of his own company which provides economic consulting to firms, governments, and individuals on energy and commodity markets. He was a senior staff economist at the Council of Economic Advisers when Alan Greenspan was Chairman. And he was a Special Assistant to the Secretary of the Treasury from 1977 to 1980. He has taught at Yale University and the University of California Santa Barbara. He was also a Senior Fellow at the Peterson Institute.
ASPEN'S ECONOMY
Philip K. Verleger: Aspen's economy is extraordinarily fascinating to an economist. Almost nothing is manufactured here. Instead, income comes from two sources: visitors and investment. Most investment goes into private or public structures. What this means is that one portion of those living in town and the valley earns its income from construction, while another portion earns its income from providing services to visitors. A third, significant portion of those living in the area works for governments.
The Red Ant: It would be difficult if not impossible to accurately find - yet alone estimate - the number of construction workers in the area. But there are fewer and fewer every day. However, regarding the number and cost of local government workers, rather than embarking on another unscientific survey, The Red Ant decided to go scientific this time. The findings are APPALLING:
Aspen
- 320 "full-time equivalent" employees
- $26.5 million payroll budget (including benefits)
- Of a $91 million annual budget for the city, that's 29% to payroll and benefits
Pitkin County
- 244 full and part time positions, including 8 elected officials
- $22 million payroll budget (including benefits)
- Of a $60 million annual budget for the county, that's 37%
So, 564 people work for the local government -- on the public payroll to the tune of $48.5 million this year. That's ONE THIRD of the combined budgets of the City of Aspen and Pitkin County! (Are you angry yet?)
CONSTRUCTION CONSTERNATION -- IMPACTS BEYOND HAMMERS AND NAILS
PKV: Aspen's economy has been hit hard by the collapse in investment (construction). The impacts on the down valley economy have been even more severe. A very significant share of those working in construction has lost all or most of its income. The construction sector has experienced a depression, not a recession. The construction sector is not likely to experience a recovery in 2011 or 2012.
Furthermore, a recent Aspen Daily News article stated that Snowmass base village owner Related Companies had planned to spend $30 to $35 million constructing 73 residential condos that it "expected to generate (sales) revenue of approximately $130 million, thus resulting in an expected net profit of approximately $100 million." (If these stunning figures are correct, it's no wonder that Aspen is going bust.)
Here is the interesting question -- if the expected profits on the project were so large - even including the cost of the land purchase - then how far will prices fall when new owners take title after the auction? Assume they get the project for 35 cents on the dollar. Will they then try to sell at the original prices, or will they try to turn it quickly by sharply lowering the price?
Now extend the example to Aspen. There are several projects in bankruptcy. Will the buyers of these projects do the same? Now think of what happens to property values. These discounted sales will bring down property values. Mick could possibly then get his wish -- Aspen could become the playground for the middle class. What happens then to the market for the big homes? When Aspen is less exclusive, the rich start looking elsewhere. This, of course, does not help property values.
In the meantime, the new crowd will probably want more services. Remember the old saying "I would never want to be a member of a club that would admit me."
Oh yes - how do we pay the interest on all the bonds?
ANT: The following table illustrates the dramatic decline in building permits and associated revenue for the City of Aspen from 2008 through July 2010.
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2008
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2009
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2010 - YTD
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Permits
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Residential
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234
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253
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155
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Commercial
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475
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340
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109
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Electrical
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380
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309
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139
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Mechanical
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207
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174
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134
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Plumbing
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353
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318
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84
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Valuation*
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$ 144,934,032
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$ 101,310,160
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$ 38,507,185
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Average Valuation Per Permit
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$ 204,420
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$ 170,843
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$ 145,861
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Building Permit Revenue
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$ 2,162,363
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$ 1,300,501
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$ 494,035
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*Valuation total is based on residential and commercial permits, excluding tents and fire sprinklers.
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The local government's aversion to "development," which in their narrow minds is construction in general, is an enormous problem for Aspen. The construction industry is beyond hurting. And the concept of "development" should not be looked upon as inherently negative.
Take for example the city's 2008 purchase of the BMC West property for $18 million as part of its ill-fated "land banking" program. (The city bought this lumberyard land without an appraisal at the top of the market for future use as a subsidized housing development.) Just last week, the city agreed to cut the rent by one-third for the lumberyard. The rent cut was required because the lumberyard's sales revenues are down significantly due to the construction decline in Aspen. So here's the irony -- the city's anti-building stance, combined with the recession, now costs it over $200,000 a year in rental income! The cost will likely rise to $636,000 a year because the lumberyard will probably close.
And of course the local anti-construction stance pervades local politics. The Aspen Times, in their predictable endorsement of Jack Johnson for the open board of county commissioner seat, cited that he "will not cave in to development interests" as other candidates would. It's this sort of scare tactic that The Times hopes will convince voters that since Jack is "anti-development," his opponent therefore has an evil plot to pave Aspen and build skyscrapers. When "investment" (construction) is one of our key economies, The Red Ant points out that this endorsement actually perpetuates Jack's anti-jobs, anti-business stance and is extremely dangerous for Aspen!
The recent approval for the construction of a new, privately-funded Aspen Art Museum on the Wienerstube property will bring some building activity to town. (Recall: the city got itself into a legal pickle with the land owners there and was forced to settle a lawsuit by enabling the Museum proposal to go forward in order to protect the draconian Aspen Area Community Plan (AACP) that was sure to get shot down as a regulatory document by the district court.) It's a terrible precedent for future land-use issues for sure, but thankfully Aspen will reap great rewards from this exciting new project that will create short-term construction jobs and in the long term will be one more world-class amenity that will attract visitors to Aspen, especially given that admission is free there all the time!
PROPERTY VALUES AND PROPERTY TAXES -- REAL IMPACTS TO YOUR WALLET
PKV: The threat of falling property values combined with the wobbly situation of smaller banks will limit growth in areas such as western Colorado. Recovery may have to wait for the large, solvent national banks to acquire two or three of the local lending institutions. Aspen will benefit, however, from its popularity with a class of second home buyers that does not require financing. The local papers have reported recently a sales increase for very expensive homes. Such activity will continue because the location is very attractive and because there are winners, even in a prolonged slowdown (the third depression). Note the recent sale of Andrea Yeager's Silver Lining Ranch property: it was assessed at $13.5 million but sold for $10 million. That is a 25% reduction. And they say the rich are still paying!?!
But this activity should not mislead anyone. Local property values will decline. Valley communities should expect to see average property value assessments decline around 35 percent from their peaks. Prices and assessments could fall further if the fiscal stimulus (Obama's $862 billion program and the Fed's/Treasury's $2 trillion TARP bailouts) does not continue. In January all of this could end -- and taxes could go up. This is a prescription for real trouble. While there will undoubtedly be fudges, the implications of falling property values for the revenues of Aspen, Eagle County, Garfield County and Pitkin County are not good, not good at all.
ANT: Let's make the math simple -- if property values fall by 50%, then tax rates have to double to hold revenues constant.
In other words, with declining property values in our future, prepare for higher property tax bills. And that's to maintain the status quo. If voters approve additional bond measures, this will create even higher property taxes. Debt financing is NOT free money.
GOVERNMENT SPENDING -- NOW IS NOT THE TIME
PKV: Under these circumstances, one might ask whether now is the right time for government organizations in the valley to embark on large capital projects. To a Keynesian, the answer is obvious -- increased government expenditure is required to stimulate the economy and boost employment. On the other hand, Keynesian economists did not confront the prospect of ten years of stagnation as Japan experienced from 1990 to 2000. Those advocating new capital expenditure programs should consider the consequences of such an event for the valley.
Anyone proposing capital projects also should consider the consequence of current and prospective voter anger. The experience of towns and cities in California that borrowed heavily before 1978 was terrible. Those localities had to make serious job cuts after being forced to raise property tax rates to make payments on bonds.
Voters need to consider the consequences of mandated freezes on expenditures. Bond holders MUST be paid first. Therefore, road repairs, other maintenance and/or employees may have to be cut if Aspen and Pitkin County are forced to curtail expenditures. Aspen would be wise to look at the experience of Vallejo, California. The town is in bankruptcy; bond holders are demanding that the town allocate revenues from car registration to pay interest on bonds rather than pay the police! I
t is all together possible that outside supervision could be forced on many towns and cities across Colorado and the United States in the coming years as the depression eats out the core of the nation's economy. Those cities and towns that do best will be the ones that have the least debt.
ANT: With the abundance of local bond measures under consideration, the debt burden contemplated by our elected leadership (and electorate) could prove to be a financial disaster. The Aspen Valley Hospital expansion, Burlingame subsidized housing project Phase 2 and a ridiculous purchase of The Given Institute to save the building from demolition would likely require north of $200 million in new debt. For example, at 4.25% interest (the city -- as well as other Pitkin County jurisdictions -- is still a good credit risk therefore it has good market access, even now), these borrowings would require roughly $8.5 million a year to service, depending of course on the type of debt issued, length of the issuance and other factors. This $8.5 million annual debt service -- in addition to the annual debt service already on the books -- will be the first payments out of the public coffers each year. (The city currently pays approximately $3 million per year in debt service, but this does not include the schools, the hospital, or county-wide overlapping debt so the overall existing debt service number is actually much higher.) In an environment of decreasing revenue (read: a smaller overall budget), the impact of increasing debt service payments makes for mandatory cuts. The big question is - from where??
Steve Malanga of City Journal warns of an impending "local debt bomb." In his Summer 2010 installment, Malanga states, "State and local borrowing, once thought of as a way to finance essential infrastructure, has mutated into a source of constant abuse." He goes on to highlight that "cities began to expand the scope of what bonds financed to include everything from subsidized housing to private hospitals," creating a scenario where "total state and local debt has soared from $1.5 trillion in 2000 to $2.4 trillion (in current dollars)"...with total liabilities increasing from "15% of GDP in 2000 to 22% this year." Even more disturbing is what this debt has paid for: development projects "including many in which the private sector has wisely shown little interest, expect when the government subsidizes them." The Red Ant cannot help but be reminded of the enormous bonds that will be necessary for the Aspen Valley Hospital expansion.
While some in Aspen live for the day when "the quiet years" return, those with common sense should worry that an outside mandate which limits the ability of the town and the county to provide services to visitors could quickly chase tourists and wealthy second home owners away. No one wants to visit or own a home in a town where the roads aren't plowed, where the services are poor and where police protection is non-existent. Cuts in expenditures (such as Pitkin County's recent Armageddon warning) will quickly convert the area from a popular stopping point for the wealthy to a second Leadville. It will also lead to a further drop in the value of all real estate and a serious decline in tax revenues and services.
If the rich know one thing, it's how to write off a bad investment!
THE SERVICE SECTOR
PKV: The situation faced by the service sector (especially those taking care of visitors) could also be troublesome. The deflationary environment that is developing could cause many potential visitors to re-evaluate vacation plans. Aspen does compete with other destinations, although many seem oblivious to this fact. Tighter incomes will reduce vacation spending and boost the price sensitivity of some visitors. Merchants and those marketing lodging may have to become more competitive on pricing.
Aspen could also confront the further loss of foreign visitors. The recent drop in the euro/dollar exchange rate has been a boon for German exporters and American consumers. However, it raises the cost of U.S. vacations for European visitors.
ANT: One of the most troubling aspects of the current race for a rare board of county commissioner seat is that candidate Jack Johnson intends to refashion Aspen into a "sustainable non-profit arts and culture economy." Huh? Without a benefactor to underwrite such a wreckless endeavor, this is at best the misguided pipe-dream of someone who simply has zero dollars and cents sense. Does he not recognize that Aspen's arts and cultural programs are largely supported by those who come here to enjoy the exclusive resort and its amenities and/or their vacation homes? Jack additionally stated at the pre-primary candidate "squirm night" his desire to "return" Aspen the world-class destination resort to its roots as an "agricultural economy." He was not referring to the community garden either. Yes, it's outrageously funny for sure, but could be frighteningly impactful if he is to be elected and actually pursues such nonsense, especially given the property tax exemptions for those who allow cattle grazing in their subdivisions, for example. The Red Ant reads this as Jack's plan to "completely transform" Aspen. Where have we heard THAT before?
With construction already in the pits, it's dangerous attitudes such as this that threaten the service sector of our fragile economy as well. If we're not careful, the "quiet years" may just be on the horizon.
ARE WE BEYOND THE TIPPING POINT??
We all know that tax measures usually pass in Aspen. This happens for a variety of reasons, but none are so obvious as the fact that those who pay much of the property tax revenue cannot vote here, and those who do vote here pay a disproportionately small amount.
Consider -- in 2009, property tax revenue for Pitkin County was $110 million. Of this, tax revenue from the deed-restricted, subsidized properties in the Aspen/Pitkin County Housing Authority (APCHA)'s portfolio was $966,000 (0.9% of the total), while property tax revenue from non-resident property owners was $64.3 million (59% of the total). Next, factor in that of the 13,616 registered voters in the county, over 4,000 are residents of subsidized housing. And that number is artificially low. It's probably more like 5,000. (The Red Ant ran the APCHA owner/tenant list* against the voter rolls, but there are presumably additional registered voters who live in subsidized housing units who are not on the title or lease.)
So, nearly 40% of registered voters pay less than 1% of property taxes. And when just 23% of all registered voters show up to vote as was the case for the August 10 primary, you can easily see what can happen! Of course, those 40% of voters who pay less than 1% of property taxes could soon be paying 2%, 3% or even 4% of these taxes if assessed values fall as projected. Those owning deed restricted properties are unlikely to see any notable change in their assessed values while second homeowners and those living full-time in free market properties will see substantial reductions in their assessed values. This means that the burden will rise disproportionally on the 40%. The Red Ant wonders whether Aspen voters will be as generous with their own dollars as they are with other people's money.
*The APCHA owner/tenant list was incomplete, and did not include all rental tenants, nor did it list the owners or tenants for its full portfolio of 2,800 units. However, the list received by The Red Ant "is the most up-to-date list that we have on our system at this point in time." But I digress.
THE RED ANT ASKS -- WHAT'S NEXT??
While all of that is fairly obvious to anyone who thinks about it, there is another, extremely shocking reason why the Ba'ath Party remains in office year after year, making life difficult for all residents who have a shred of capitalistic inclination and raising taxes regularly for further publicly-funded amenities. Many local residents who CAN vote here DO NOT. It's true. The Red Ant finds it a wee bit Big Brother-ish, but the voter rolls as well as the list of who actually showed up to vote are matters of public record. Therefore it was one of the easiest research projects ever undertaken in the history of The Red Ant.
For the August 10 primary, just 3,107 registered voters participated. Maybe you didn't care about the primaries for the state and national races. But if you are reading The Red Ant, it's a safe bet that you have a shred of concern for the future of Aspen and Pitkin County - this place we all on some level call home.
Why is it then that narrowing the field of 4 candidates to 2 for a rare, open board of county commissioner seat and the race for sheriff didn't warrant three minutes of your time? As The Red Ant stares at the list of those who did vote, it's shocking (and sad) to see who didn't. Is it any surprise that former city councilman Jack Johnson, the instigator of 2007's overnight emergency Ordinance 30 that placed all structures over 30 years old on a list preventing even the smallest exterior changes without government approval that plagues homeowners to this day, the tyrant who single-handedly drove the community-minded owners of the Broadmoor Hotel to sell the Hotel Jerome, the father of Aspen's controversial, likely illegal and ill-fated Instant Run-off Voting, and hater of private property rights, made the cut? This is serious, folks.
Apathy is costly. While there were no bond measures on the ballot in the primary round, the politics of our elected officials ultimately bears a great cost. And yes, we will see several debt financing measures for extremely costly capital projects on the ballot in November.
TO FOLLOW UP ON THE HYDRO PLANT ISSUE
While one reader of The Red Ant is currently looking into the determination of just who owns the Castle Creek water rights with both the bond underwriter and its law firm to examine possible misrepresentations and unlawful conduct by the city, another local resident and Castle Creek homeowner, Dick Butera, addressed council on August 9 with the following noteworthy points in his request that the city deny the land use application for the hydro-electric facility:
- It is not true that 70% of aspen voters approved the hydro-electric facility. In the November 2007 election, just 13.8% of those registered voted, and 70% of them approved the hydro measure. That's just 9.4% of Aspen voters.
- The city sold $5.5 million of bonds in 2007 with the statement that the cash flow would start in 2010. The hydro plant won't be operational until 2013 so this gross misrepresentation means that $1.4 million in debt service for the intervening 4 years must be added to the original projected costs of $6.1 million.
- The public was told that there would be a $300,000 positive cash flow per year from the hydro-electric plant. After inspecting the books, I found that the first positive cash flow year is 2026.
- The public was not told that this "green" project was going to lower the river to 13cfs which is a mere trickle, when the last real scientific study that was done said that 23 cfs was the minimum flow to maintain aquatic life.
- The public was not told that over $2 million of the money would be spent PRIOR to obtaining state and federal permits for a pipeline that is absolutely not necessary.
- The public was not told that of the $6.1 million cost, $1.9 million was for fees and permits.
- The public was told that 5,000 tons of carbon in the air would be saved. This is a total myth promoted by the city and perpetuated in the local media.
- The adjoining property owners along the river in question have NEVER received a legal notice that their river was about to be drained for a totally unworkable hydro plant.
No surprise -- Mayor Mick could not contain himself and rudely berated Mr. Butera for his comments about government out of control.
AN ADDENDUM TO THE RECENT ISSUE "THE NANTUCKET EFFECT"
The Red Ant was recently contacted by the director of senior services for Pitkin County, Marty Ames, who kindly shared what the appointed "senior council" does in our community, and I happily include this below. "Senior services and the senior council acknowledge the need for 'cradle to grave' options in our community, and were instrumental in development of the existing assisted living facility, growing our home services options, and creating care management services to help seniors remain in their homes. It continues to work diligently to identify the current needs of area seniors, as well as to study and strategically plan for the future needs of the senior population.
Pitkin County Senior Services works together with the Senior Council, senior customers, local and regional entities to provide a wide range of programs and services including congregate and home-delivered meals (85-90 per day currently), transportation, exercise classes (yoga, arthritis, balance, tai chi, conditioning), information and assistance including a monthly newsletter, care management services, legal services, tax assistance, personal assistance navigating resource programs such as Medicare D, health clinics and health fairs, lectures, collaborative programming with CMC and the Given among other entities, music and intergenerational programs with MAA and local schools, trips and outings, skiing and hut trips, bicycling and too many more to list. In addition we manage a volunteer program that utilizes over 160 individuals providing over 4,000 hours of service per year."
Thank you, Marty. I hope that APCHA, City Council and the Board of County Commissioners include you in their critical current discussions regarding retirees in subsidized housing, retiree rentals of their subsidized housing so they can travel, plans for designing and publicly funding a continuing care facility affiliated with AVH, etc. The expertise of your organization should be a determining factor in any such decisions. In fact, the input of your group should lead the way for our seniors and those who will be utilizing your services in the future, beyond just the scope of your current programs. Keep up the great work!