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 area of state and local finance, and we are so delighted to have her as part of the urban team and working on these issues. And she is going to present work and research that shes done with colleagues at ucla and kick off our next panel conversation. Tracy . Thank you very much, erika. And thank to my colleagues at the urban institute and the Lincoln Institute of land policy. Such a terrific program. Very excited to be here today and talk about some of the work of my coauthors in l. A. At uc berkley. First, our unit of analysis is different. Were not looking at these fiscally standardized cities, but were looking at cities just how they exist. Were not capturing these differences that andy laid out between, say, baltimore and tampa, but we are capturing the decisionmaking unit as opposed to maybe you can think about fiscally standardized cities as the people who live in these cities who are paying taxes and receiving services. Were thinking a lot more about the Decision Makers in these cities. Also our time period is different. Theyre interested in the period after the Housing Market bust, and were entruinterested in th boom. Also our measure that were interested in is housing wealth as opposed to Housing Prices. And that gets at sort of our motivation and whats different, and thats the psychology of booms and how it applies to city financial Decision Makers. Okay, so i think as weve talked about a lot, the Great Recession really hit local governments quite hard. Local revenues fell by 5 , which is their greatest decline on record,toback recessions in the 1980s and the property tax revolt, which lowered property tax a lot, the second greatest decline happened during the Great Recession. This is the great eest decline record on state aid. About 3 that happened during the Great Recession. As my colleagues at the Pew Charitable trust have written, this was a double whammy or a great squeeze on local government revenues in a couple of ways. So we also are still seeing the effects of this in terms of depressed local government employment. State employment is depressed about 2. 5 . Local government about 2. 2 . Were not saying that the peak levels in 2008 were the right level of government employment, but were basically back to where we were in the mid 1990s in having 150 state workers per 10,000 residents. Oh, i should say also that i think someone brought up the idea i think it was Capital Investments and your work. State and local investments are also depressed below prerecession levels. That has effects on the larger macroeconomic economy. Those are patterns unlike weve seen in other postworld war ii recessions. You see derecordation fees and taxes. That was sort of the canary in in the coal mine. Those went up about 100 in the recent recession, but they also went up in the early 2000s recession. Property taxes went up 100 and income taxes went up by actually 200 . Income taxes are not a citys main source of revenue, but for cities that rely on those revenues, they certainly saw a lot of action there. Sales taxes were certainly effected. Theres a burgeoning literature in Housing Finance about this housing effect. In finance more generally theres this idea of a stock market effect that independent of peoples income, they spend more when the Housing Market is doing well. When you see your home price go up quite a lot, do you spend more . This is made easier by reduced transaction costs or second mortgages you can take out that you give you a second line of secured create. On average, theres a marginal prosecu propensity to consume 7 cents of every dollar in housing wealth. Ive got some pictures of San Bernardino which are all places that declared bankruptcy and all in my home state of california. Im thrilled to be here and mher from local Public Officials to learn about what happened in their cities. To answer this question, we calculated city level price indices. This is really important because the stuff you see reported in the news a lot, the fhfa shiller index at the metro level can be dislead i misleading. This is the Los Angeles Metro area. In 2005, this was from 2001 to 2006, but in 2005 alone, there were some places where home prices appreciated by less than 10 . 24r there were some places that appreciated by more than 15 . Then we also created this housing im sorry. This shows where places ended u our cities. Its similar to the previous paper, we have sort of a classic boom bust, by the places like San Bernardino, california, tampa, florida, we have sort of high cost places where they see a big boom and not so much of a decline, so these are pretty much high cost places to live like San Francisco, los angeles, sacramento. Then you have sort of status quo cities where tulsa, memphis, not a lot happening in the Housing Market. And then places where they did not see that much of appreciation, but they saw a decline, i think you would call them secular decline, places lik like baltimore. We see a wide range of city and were looking at 6,000 cities as opposed to about 90, giving us some insight to places like elmhurst, illinois. So there is evidence that spending goes up as housing wealth goes up. But we need to look at what is really going on here, we have this model here. But basically, this is sort of a paraphrase of the housing wealth literature that i talked about, where we have consumption on the one hand, spending or revenues on the other hand and housing wealth. But the question we asked, does housing wealth have an independent effect to the revenues coming in on the city coffers, we have control for things such as the age of the residents, the fact that its a year when a lot of people spend a lot. So were trying to really untangle what is going on here. We experiment with all different kinds of regression. We use ordinary lease squares and generalized lease squares, we look at time frames and an error correction model. You dont need to know what it is. Basically we find results that are consistent with literature in terms of the delayed effect, the threeyear delayed effect and oh, dear, sort of the moderate delayed effect on revenues. On the spending stuff were not finding the irrational exuberance when we control what we would like to control. The demographics, in some cases for certain types of institutions which i will talk about hopefully if i have time. Okay, so we dont find evidence of the spending spree during the boom on average. That does not mean that it was not a problem for certain places, in particular places that had to come out from a crisis. We do find when we i forgot to mention among the many regressions, we do find limited evidence for Public Safety and transportation. Now is that sort of an exuberant response, or for voters who want more in those areas we need to spend more time looking into that. We do control the city income of residents. We find limited evidence that ple places where elected officials and cfos share Budget Authority and less response as opposed to only elected officials controlling that reaction. We find that places that started out in worse Financial Condition are more susceptible to home prices, the sort of gofa approval if you get your house in order you can withstand these shocks a little bit better. So i think as the next panel will discuss, there were the statewide efforts to monitor what is happening in local government. We think that is important. And the type of research we can feed into those discussions i want to say were looking into the quality and the financial officials and we plan to get a lot out of what is coming up. The people that estimate revenues tend to be pretty conservative. Looking at county accessible roles and are not as susceptible to the booming ecology, you have home price rent ratios that are way out of whack. We should have seen this coming. I look forward to the conversation and thank you for paying attention. Thank you, everyone, hi, my name is mary murphy, im at the trust where i manage the state and local Fiscal Health project and i am thrilled to have the privilege to moderate this conversation with the three gentlemen to my left. Immediately to my left is andy howett, Senior Vice President of the bank of new york, and deputy cfo and chief economist of the city, and curt wilson, city manager, stockton, california. And im really excited for this hours conversation. I think well get to build on some of the themes introduced in the last hour. And i think tracys work suggests some really interesting findings from how we can understand how cities responded to the previous cycle. But also of course with the last panel, suggesting conclusions for how the cities thought about putting policies in place following the last booming bust, but also ahead how can we think about how the state and local policymakers can improve on this concept of resiliency and better preparing for the next downturn. Im also really excited. I think tracy mentioned in looking at the big picture she is aware there is probably some more volatility or diversity in the big picture, so im really excited we have a couple of different pictures on the panel. So im looking forward to digging into the city experiences a little bit and from a sort of selfish perspective im also really discussing how the state context looks at some of the concepts or how state and local governments can go forward managing the volatility. So with that said to start us off, im hoping we can start a little bit with the individual city experiences and maybe curt, we can start with you. Stockton, of course, was disproportionately affected. And you can tell us about the moment you started your position. I wonder if you can talk a little bit about your citys experiences in the context of staceys research and how stocktons experiences lined up with some of the broader trends that stacey described. Sure, they also line up well with what tracy described. Stockton is a city of about 315,000 people in california. The nearest major Population Center would be San Francisco, so that probably would be the one, those of you who are not from the west coast would affiliate from San Francisco. So the housing bubble is a little different for cities that are not the major Population Center. It is a large city but the housing growth, so as you saw from tracy, slide, the correlation of big boom and big bust, that big boom is really the focal point. So that came from one of two Different Things. People live in a place that is inland or away from the coast for one of two reasons, so the consistent piece is quality of life. Some people dont want to live in the middle of downtown los angeles, they want the quality of life and the environment to raise their kids. There are things about that environment that they like and where they want to be. That is a very steady group. So people who do that they come there and stay there. That works out very well. The other side, which was really the bigger story of stockton, is that population of San Francisco is where the jobs are. So if you happen to work in San Francisco your ideal scenario would be to work to live in San Francisco. But as the supply and demand, the scarcity concepts come into play, that is not practical for many people. So there was an article in the l. A. Times this week that referred to the phrase you drive until you can find something that you can afford. You drive until you qualify. So people come outside of that area. Well, stockton ended up with the large influx of people who were there because they could not live next to the job that they have. So as those dynamics change within the San Francisco market that created some havoc within the stockton markets. So those foreclosures were pretty significant to us. Obviously as you said it led to the bankruptcy. But on the last panel we had some discussion about the idea of okay, we have that money so in the boom cycle we should put it away and make sure we dont spend it. But its actually a little more complicated for us. So in california, property tax is not even the largest revenue generat generator. Its actually sales tax, so that population who is making that feedback and forth that creates a little sales tax continuing for us. The other component is as we build all of these houses for all of these people there are infrastructure things that come along with them. Well have to put a water pipe, sewer pipe, parks, we have to ramp up on staffing for pickup safet Public Safety, so while that is not a big overnight spike in spending, it does log some pretty strong commitments. So as you have the foreclosures, those people have gone away and stockton now is paying for this expensive infrastructure for a group of people who are not there. And then maybe to contrast the experience in stockton and for the contextual factors that go into the cities we talked about this morning maybe you can talk a little bit about d. C. s experience. And i think we also mentioned this morning that d. C. Is experiencing a quick growth in housing values and weve also had the experience of housing crisis and having a control board in place. And the cfos office, and of course tracy mentioned about the staffing and government. Thank you, marion, thank you again for inviting me here. First of all i want to say like you said, d. C. Had a bit of a different experience in terms of the financial crisis and that happened for a number of reasons. Of course, as you know, d. C. Is a piece of the federal government. So the federal government provides us a stabler source of jobs and income for the district. But in addition to that, d. C. Also has a unique fiscal structure. So if you look at the district and somebody mentioned that its not a state but in terms of its revenue structure it has both the revenue portfolio of a state, county and municipal government. So that helps. If you look at our Real Property tax, for example, unlike most cities it provides only about 30 of the revenue to the district. And more importantly, in terms of the residential sector its a third of that amount. Because two thirds of the Real Property tax revenue actually come from the commercial side. So in terms of the impact on the district, the financial crisis had a very small impact from the rail property standpoint in that even though we experience the same amount of price drops we recovered much more quickly than most other places because right about that time the federal government went into an expansion mode. So we benefitted from the jobs that were created and the income. So that was sort of a buffer. In the immediate aftermath, though, of the financial crisis like everybody else we suffered from income tax drops. From the capital gains. Sales taxes and the biggest drop actually occurred from the real estate transaction taxes. Sort of a commercial sector, that has been a really big part of d. C. s revenue portfolio. And right after the stock market crash, the Real Property market, we experienced upwards of 50 decline in real estate transaction taxes. So we did have an the financial crisis did have an impact on the district, not as much as many other cities. And we recovered much more quickly than most places. Uhhuh, and if i can ask you having heard these two city experiences if there is something particular about new york experience that you think would be helpful to share, that we benefit from that. Also if i can ask you to help us move out a little bit more of this concept of a rational exuberance, and if you see things in tracys work or observe things in this boom bust experience, maybe we can start to talk a little bit about some of the rational response growth experiences and here is how we can identify what irrational exuberance really looks like. Thank you for inviting me to be here, im also speaking only for myself and maybe well talk about the particulars of that situation which i think are kind of interesting in some ways, with the other two cities. New york also had a fiscal crisis and a very similar problem in the mid70s and got loots lots of institutions put in place that have served it very well in the last 40 years, including the leadup to the last recession and in the wake of the Great Recession, so when the Housing Market started to fall apart in 2006 and 2007 and it was clear the Banking System was put under increased stress a lot of us who work in new york looked around and found this is going to be a very, very bad situation for new york city. Because new york of course has very high Housing Prices and lots of leverage against that Housing Market. But also the Banking Industry of course is very heavily concentrated in new york city. Many expected this would be an extremely difficult period for new york, as the banking stress in a pretty major way. So it turned out that that was true but not as true probably as we might have expected. And there are a couple of reasons for that. One, i think a very important set of reasons is from these institutions that were put in place in the wake of the new york city financial crisis. And so you know, very careful accounting, extreme transparency in budgeting, institutions like our independent budget office, a state con tromptroller for the itself, et cetera, all means there are lots and lots of eyes and attention paid to the citys budget. And its also the case that the mayor and the council have worked together pretty well to