Reed and Oliverio discuss the fate of the Google project and pension reform (3 of 3)

Ex-Mayor Reed and Planning Commissioner Oliverio discuss if the Google project is going off track by adding too many "community benefits" and the status of pension reform and municipal borrow in the third and final installment of their exclusive discussion for Opportunity Now.

Pierluigi Oliverio: The United States is a free society in which you can live where you want to live--in an expensive community with something small, or you can live in a more affordable community with something larger, or something in between. A friend of mine recently sold in downtown San Jose, they ended up buying a brand new custom-made home in Madera. It was three bedrooms, brand new for $284,000. There's a difference between the communities, but still. As you brought up earlier, if it costs upwards of $500,000 to build a low income housing it won’t pencil out. Should there be some type of incentive to build lower-cost communities? Or will people relocate to where it’s cheaper, and should we provide some sort of incentive for that?

Chuck Reed: People tend to live where they work and people tend to move across the country because of jobs. Now that's less the case these days than it used to be and maybe that'll change with the COVID crisis and the surge in work from home.  But jobs drive the economy and jobs that drive the demand for housing. Selling your place in San Jose and moving to Madera makes a lot of sense if you can work remotely or your company moves jobs out there. And for a period in the dotcom era, the boom era, the jobs that were being created in Silicon Valley were being moved around the rest of the State of California. But since the dotcom boom those jobs tend to be in other states and in other countries because the headquarters can manage worldwide from Silicon Valley without having to pay Silicon Valley prices for every employee.

PO: Let’s talk about the Google proposal which originally appeared to help the jobs/housing imbalance in San Jose. But the plan has changed over time such that there is tremendous amount of housing in it now. The Planning Director has said the proposed project, as now envisioned, would have a negligible effect of improving the jobs/housing imbalance. So it would just keep us at pace with the current subpar ratio we have today.

CR: I'm not surprised by that outcome--I'll be surprised if it doesn't continue in that direction and end up more new housing than new jobs. But fundamentally it's not that housing is the problem by itself-- it's the revenues out of housing compared to the revenues out of jobs that is the problem. We’ve done the math many times, and the fiscal problems San Jose faces are driven by that jobs/housing balance.  One of my favorite bad pieces of data is comparing San Jose's per capita revenues with the per capita revenues with the other cities in Santa Clara County. That data tells you that if I was mayor of Palo Alto I would have twice or more per person to spend on services for my people--that’s roughly a $1,000 a person difference. There are a million people in San Jose, and a thousand dollars a person then is a billion dollars a year difference.

PO: Do you think pension reform is cyclical?

CR: It’s cyclical because it’s hard and it’s not in politicians’top three priority items of things they want to do while they’re in office. But you reach a point where you realize the pension situation is killing us, so we have to do something about it right now. So to that extent, it’s cyclical. We have had nine years of generally positive economic growth so the incentive to enact pension reform has been very low.  A few states and cities have realized that you can’t wait til the recession to do something about it, so there has been some work that has been done. The COVID recession has flattened or depressed state and local government revenues and the federal government hasn’t made up for it yet with some giant bill. So if that doesn’t happen you can expect people will be saying “we’ve got to do something about pensions because it’s just eating our lunch.”

PO: This year’s revenue from all property taxes for the city of SJ is $370 million; the annual pension payment was $431 million. The delta of difference changes over time:  if there are the boom times on property then things are flat, but the pension number is typically not a flat number. It can spike for a number of reasons, including demographics. Do you think this will become a major issue in the future?”

CR: I think it will and I think we will look back to what we accomplished on pension reform as having given SJ a little bit of relief.  Because if we hadn’t it wouldn’t be $430 million this year it would be $530 million. But we did provide if not a decade, then quite a few years of relief. 

PO: The city council is considering pension obligation bonds (POB) in 2021.

CR: When it comes to politics, finding new ways to borrow money, like a POB, is the new way to fix things. It lets politicians avoid making any hard decisions, they can  just take out a credit card and gamble. If you get found out, you’ll get found out when you’re probably out of office. 

In aggregate POBs work well if your timing is right, and work poorly if your timing is wrong. It’s just a market timing thing which cities are so good at. I mean it’s their core competency (sarcasm).

But even as a private investor or municipality you don’t know what the market is going to do. I think the better strategy is to aim for a consistent rate of guarantee or a higher percentage guarantee,  than to take on a bunch of risk, which can happen when you chase venture capital money.  Venture capital companies can fail. 

When I was talking to municipal bond analysts around the country part of my discussion was about pension obligation bonds. We know that when somebody does a pension obligation bond it’s a giant red flag because they’re borrowing money to pay for operations. So they’re in trouble. About 12 years ago, Detroit borrowed around $4 billion dollars on pension obligation bonds--and they received the Bond Buyer Deal of the year. The mayor got his picture on the cover of magazines. He is now in prison. And when Detroit filed bankruptcy, the one criteria of bonds that got wiped out were the pension obligation bonds. So those people got nothing in the bankruptcy.

But people will lend money no matter what. One of the things I learned when Puerto Rico failed a couple years ago that they were issuing investment grade bonds about two years before they cratered. I was at a municipal analysts’ conference and we were having a roundtable discussion and I asked the audience who was giving money to Puerto Rico before they cratered, because they had had ten years of downward trend, you could see it coming. No one in the room would admit to it, but what they said was it was those other guys that gave Puerto Rico money--the hedge fund guys.

PO: Because they saw some return even with the risk.

CR: They were getting something like 10% return. So the person who was placing the money was getting bonuses for the high rate of return and the people who had to collect it were a different group. So I’m sure that SJ can find someone who will lend them money at a high interest rate.

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Images by Matt Bruensteiner and Peter S. Carter