For him. This portion looks at the Lessons Learned from the housing and financial crises of 20072009, and what you cities have done since event to prepare for future market fluctuations. This is one hour 15 minutes. Its my pleasure to invite tracy gordon who is a senior fellow in the brookings urban tax policy center, she is a leading scholar and specialist in the air of state and local finance. We are so delighted to have her as part of the urban team and working on these issues, shes going to present work and research she done with colleagues at ucla, and kick off our next panel conversation. Tracy. Thank you very much, erika, thank you to my colleagues at the urban institute and the Lincoln Institute of land policy put together such a terrific program, very excited to be a today talk about some of my work with my coauthors at ucla and uc berkeley. First i wanted to take a couple minutes to explain why my paper is different from the previous paper that was discussed. First, argued of analysis is different. We are not looking at these fiscally standardized cities but we are looking a cities just as they exist. We are not catching these differences that andy laid out between say baltimore and tampa, bulger capturing a decisionmaking unit as opposed to maybe you can think about fiscally standardized cities asked the people who live in the cities that are paying taxes and receiving services. We are thinking about the decisionmakers in these cities. Our time appeared is different. They are interested in the period after the Housing Market bust and we are interested in boom. Also our measure we are interested is housing wealth as opposed to housing prices. Its a measure of not just the increase in home prices but the number of units you have that are susceptible to those increases and that gets at our motivation and whats different and thats the psychology of booms and how it applies to cities financial decisionmakers. Okay, so i think as we talked a lot about the Great Recession really hit local governments quite hard. Local revenues fell by 5 5 whih is the greatest decline on record, but for backtoback recessions in the 1980s and sort of the selfinflicted damage of the property tax revolt which lowered property taxes quite a lot. Local government revenues fell by about 10 in the 1980s, the second greatest to quite happened during the Great Recession. This is the greatest decline on record in state aid, 3 that happened during the Great Recession. As my colleagues at the Pew Charitable trusts and others have written this is a double whammy or great squeeze a local government revenues in a couple of ways. So also are still seeing the effects of this in terms of depressed local Government Employment, state and local payrolls have not gotten back up to their prerecession levels of employment. State employment is depressed about 2. 5 , local Government Employment about 1. 2 . Its hard not to imagine that shows up in services and delivery. We are not sink at peak levels in 2008 with the right level of employment that we are back to where you were in the mid1990s in terms of having about 157 state workers per 10,000 residents and about 434 local government workers per 10,000 residents. I should say also that i think someone brought up the idea of, i think it was Capital Investments in your work, state and local investments are also depressed below prerecession levels and that has affects for the larger macroeconomic economy both in terms of employment and investment, those are patterned unlike any weve seen in other postworld war ii recession. One major way this recession was different from previous recessions was housing. It was a housing centered recession or the beginning of it. They showed up and local revenues. The pink line you see things like the requisition season, taxation prices and thats the canary in the coal mine. Those without by about 100 and the groceries recession but you can see that all the wind up in the early 2000 recession to property tax went up by about 100 in the most recent cycle and income taxes when it might actually 200 income taxes are not a main source of bread for cities as was discussed at the end of the last panel buffer cities that rely on those revenues a saw a lot of action. Sales taxes as well were affected. There is a burgeoning literature in Housing Finance about this housing wealth effect. In finance more generally this and i get up a stock that independent of peoples income they tend to spend more when the stock market is doing well. Some economis economists asked e with housing wealth wax when you see your home price go up quite a lot, do you spend more quite this is made easier by reducing transaction costs are financial innovations like second mortgages you can take up to give you an unsecured line of credit so you can go by a big screen tv. Literature shows an average theres a marginal propensity to consume about seven cents of every dollar in increase in housing wealth. Our question was basically, did you see this kind of quoteunquote irrational exuberance at the city level . Ive got some pictures of san bernardino. Im just thrilled to be here and here from local Public Officials about what happen in the cities because thats how we can learn a lot about our research as well. The first step of the research to answer this question which actuated city level price indexes. This is important because the studiestuff you see reported one news a lot, the fhfa indexes at the macro level can be misleading. For local officials, is there to look at a macro level that would make a mistake. This is the Los Angeles Metro area, and in 2005 this was from 20012006, but in 2005 alone there were but in 2005 alone there were some place where home prices appreciated by less than 10 . Some place with a appreciated by more than 60 . Its important to get below the macro level. We did those calculations and then we also created this housing this shows workplaces ended up in our universe the cities and its similar to the previous paper. Weve got a classic boombust cycle, places, samberg in a california tampa, florida. Weve got high cost places where they see a big boom and also much of a decline. These are pretty much high places, high cost places to live like semper cisco, los angeles, sacramento. And you got sort of status quo cities where also, memphis were not a lot happened in the Housing Market and in places where they didnt see that much of appreciation but they did see a big decline. Think you guys call them the second because places, and that would include cases like baltimore, unfortunately but that a potential coming back. We see this wide range of expenses in a wide range of cities that we are looking at Something Like 600 6000 cities s opposed to about 90 which gives us some insight into suburbs like elmhurst, illinois, and culver city, california, in addition to the central cities like baltimore and boston and tampa. We find some suggestive evidence that there is a wealth effect, basically spending goes up as housing wealth goes up. We need to untangle whats going on. Weve got this model, im sorry to put this in front of you, but basically this is sort of a paraphrase of of the housing wh literature that i talk about where theres consumption on one hand, spending on the one hand and income or revenues on the other hand, and housing will. So the question were asking is as housing wealth have an independent effect apart from the revenues that are coming into city coffers . We got controls for things like income of your residence, the age of your residence, the fact you are a city that tends to spend a lot or the fact that the year when a lot of people spend a lot. Were trying to untangle whats going on. We experiment with all different kinds of regression. We experiment with different time periods. We looked at United States and california separately. We look at an error correction model. You dont need to know what that is. We find results that are very typical with literature in terms of the revenue affected we find threeyear delay defect and sort of moderate effect on revenues. On the spending side we are not finding evidence of irrational exuberance basically on average when we control for all the things we would like to control for, for these demographics can the fact youre a certain type of city compan compass or type r and and some cases certain types of institutions which i will talk about hopefully if i have time. We dont find evidence for spending spree during the boom on average. That doesnt mean it wasnt a problem for certain places and in particular places that had to come out from a crisis here we do find, i forgot to mention among the many regressions that we ran also struck rid of things by functional categories. We do find limited evidence for transportation. Whether thats an exuberant response a response to people, voters who want more in those areas we need to spend more time looking into that. But we do control for the income of residence so that to take care of that to a certain extent. We find limited evidence that places were elected officials and appointed cfos share of budget authority, there is less of an exuberant response as opposed to only elected officials controlling the reaction. We find places that started out in worse financial conditions are more susceptible to swings in home prices. This sort of good deal approval, if you get your house in order you can withstand these shocks a little bit better. As the next panel will discuss there have been statewide efforts to monitor whats happening in local government. We think thats important. We think this type of research can feed into those discussions, and i want to say we are entering into an interesting face when we look at qualitative work talking to city officials. Basically we are fighting for people to estimate revenues tend to be pretty conservative. They look at county assessor roles that are not a susceptible to the boom and bust psychology. Nevertheless, as one of our unity is responded said, you have home price rent ratios that were way out of whack. We shouldve seen this coming. I dont know thats different than any of us and the larger economy. I look forward to the conversation, and thank you for paying attention. [applause[applause][inaudible conversations] [inaudible conversations] so thanks everyone. My name is mary murphy. I am at the Pew Charitable trust where i manage our state and local Fiscal Health projects. I am thrilled to have the privilege to moderate this conversation with these three gentlemen to my left. Immediately to my left is andy haughwout, with the Federal Reserve bank of new york and fitzroy lee from writer in washington d. C. , deputy cfo and chief economist for the city. With a much longer commute, kurt wilson, city manager in stockton, california. And i am excited for this hours conversation. I think will get to put on some of the themes that were introduced in the last hour and i think tracys work suggest a really interesting findings from how we can understand how cities responded to the previous boom and bust cycle, but also of course as the last Panel Suggests an interesting policy conclusions for how cities bother putting new policies in place following the last boom and bust, but then also looking ahead how can we think about things at both state and local policymakers can do to improve on this concept of resiliency and better preparing for the next downturn. Im excited i think tracy mentioned that she, in looking at the big picture, shes aware theres policy to more volatility or diversity of city expenses underline that big picture. Im excited to have a couple of different city experiences on the pen and we have one in the audience, some looking for to digging into those cities specific spaces and little bit. From a sort of selfish perspective im also really interested in discussing how the state concept shape some of those responses are a state and local governments can better partner together Going Forward to manage some of his volatility. So with that said, to start us off im hoping we can start a little bit with these individual city experiences. And maybe kurt, we can start with you. Stockton of course was disproportionately affected by the housing bubble, in the wake of the crash filed for bankruptcy. As we were just discussing you came into City Management at, perhaps you are sympathetic to baltimore, that was the moment you are starting your position there. But im wondering if you can talk a little bit about your experiences in the context of tracys research and out stock tends experiences lined up with some of those broader transit that tracy with describing. A light up very well with what tracy described. Stockton is a city of about 350,000 people in california. Or away from the coast for one of two reasons. The consistent piece is qualityoflife and some people dont want to live in the middle of downtown los angeles. They want the qualityoflife, the open space, environment to raise their kids. Thats where they want to be. People who do that, they come there, stay there. The other side, which was really the bigger story is the Population Center in San Francisco is where the jobs are. So if you have been working with cisco, the ideal scenario would be to live in San Francisco. But as the supply and demand scarcity concepts come into play, that is not practical for many people. There was an article in the l. A. Times this week they referred to the phrase, you drive until you can find something you can afford. You drive until you qualify. People come outside of that area. Ending up at the large influx of people who are there because they couldnt live next to the job they had. So as those dynamics change within the market, that created some hobbit. As for closures are pretty significant progress. Obviously you mentioned that led to the bankruptcy. It wasnt simply unless we had some discussion about the idea of that money when the boom cycle we should put it away and make sure we dont spend now. In california, not even the largest revenue generated. Its actually sales tax. That population and that continue on for us. The other component as we build all these houses for all these people, there is an infrastructure things that come along with them. We have to put a water pipe from a sewer pipe. They have some of those things. While thats not an immediate big spike in spending to the fiscal year. It is now paying for the infrastructures that we now have this outside expensive infrastructure for a group of people that arent there. And then maybe to contrast the experience and the factors that go along with california that referred a lot about this morning, maybe you can talk a little bit about the experience of it also mentioned this morning experiencing this rapid growth in housing values. We also had the experience be in for a financial crisis, having a control board in place in an independent cfos office also attacked his governance. Thank you. Thanks again for advising me here. I want to say like i said coming to see you had a bit of a different experience in terms of the financial crisis. That happened for another person. Of course d. C. Has built a federal government said the federal government provides us a source of jobs and income for the century. In addition to the come in d. C. Also has a fiscal structure. So if you look at something thats not a state. In terms of its revenue structure, and that the revenue portfolio of the state, county and municipal government. So that helps. If you look at our property tax, for example, its only about 30 of those revenues for the district. More importantly, in terms of the residential sector is a third of that amount. Two thirds of the tax revenue comes from the commercial side. So in terms of the district, the financial crisis and the impact from the rail property standpoint in that even though we experienced the same amount of price drop can only recover much more quickly those right about that time and the federal government to an expansion poll, so he benefited from the jobs created in the interim. So that was sort of a buffer. In the immediate aftermath of the financial crisis, like everybody else, we suffered from income tax. Sales taxes in the biggest occurred from the real estate transaction in the sort of commercial sector has been a really big part of the d. C. Revenue portfolio. Right now as though Real Property market we experience upwards of 6 decline in real estate. So the financial did have an impact on the district. Not as much as many other things and we recover more slices. A bike and i still having heard these future city experiences, or something particular about a new york experience would be helpful to share, we would benefit that. Help us move out a little bit more to this concept of a few teams in traceys work or behavior that you observed over this boom and bust spirit. Maybe we can talk about was some kind of irrational response to stem to rapid growth might be in why we might say what irrational exuberance looks like in todays spending. Thanks for inviting me to be here. Im also speaking only for myself and not for the Federal Reserve system. Maybe well start a little bit with new york and talk about the particulars of the situation, which are interest in and maybe in some ways in between the other two cities. New york is well known also in a fiscal crisis that it varies. Problem in the mid1970s and lots of institutions put in place has served very well over the last 40 years, including in the lead up to this last recession ended in the wake of the Great Recession. So when the Housing Market target to fall apart in 2006 in 2007 and it was clear the Banking System was put under increased stress, a lot to work in new york to work in new york have drawn about this to be a very, very bad situation for new york city because new york of course has very high housing prices and not have leverage against against the Housing Market. The Banking Industry is heavily concentrated come so many expected this to be an e