Examining the Future of Commercial Downtowns

As we all look to understand what the post-Covid cities will look like, among the biggest concerns for the cities is making up the loss of business tax revenues in commercial downtowns. We will examine the current situation and some suggested solutions. 

Transcription:

Karen Daly (00:05):

Hi everyone. We've got a really interesting panel today, which is the future of commercial downtowns. The world has changed with the Covid pandemic affecting expectations around commuting to work, mass transit ridership, commercial real estate tax collections and more. Our panel intends to explore these topics with respect to cities that house commercial downtowns. So let's get to it. Our panelists are Suzanne Finnegan, Chief Credit Officer, Build American Mutual, Joseph Monaleas, Assistant Vice President, Moody's Investor Service, Jane Ridley, Senior Director and sector lead, S and P Global ratings. Erin Roseman, Director of Finance, City of Oakland, and Mark Schmidt, Head of Municipal Strategy, Morgan Stanley. Our first question will go to Aaron and it relates to the whole issue around return to offices. Our conference has just started and I've heard it mentioned twice already. So Erin, are office workers expected to return to offices more than a couple of days a week, or is that no longer in the cards?

Erin Roseman (01:31):

Thank you for the question. For the city of Oakland, we do expect office workers to come back to the office. We are probably experiencing maybe something that's a little more unique than other cities, but we have through Tuesday through Thursday, about 60% of our office workers are back in Oakland. We see a trend where they're coming back more and more where we don't have the expectation that they'll stay away. We have additional businesses that have been moving to the city of Oakland, which should continue to increase our office workers during the daytime.

Karen Daly (02:11):

So Suzanne, a major national newspaper, just published an op-ed that said the five day office week is dead. So what do you think?

Suzanne Finnegan (02:25):

I think that's a prevailing opinion. I think that's probably true. I don't think most, I think there are some sectors and industries that are going to have to be back in the office five days, but I don't think that we're going to see that across the board. I saw a poll that was reported on CNBC that showed that 90% of companies expect to implement return to office plans by the end of 2024. Again, not necessarily five days a week, and that most of the companies that are going to implement those strategies are going to have plan to enforce them either by firing people or having that be a part of your performance evaluation, which I think is something that Google just went to. So I think we will see how that plays out. But I think there's another piece of the puzzle too, which is it's not just office workers, right? It's all the service people who support those office workers and those industries. So some of those industries may have to be in the office more often than others.

Karen Daly (03:31):

Joseph, thoughts?

Joseph Manoleas (03:33):

Yeah, I don't think office workers are going to return in the same pre pandemic way, but that's not a death sentence for cities, right? Cities are dynamic. They've evolved through epidemics, natural disasters, terrorist attacks, and I still think even with fewer office workers, they can be viable places and maintain high credit quality. I think the real question is how cities adapt economically and financially to this structural shift.

Erin Roseman (04:02):

If I could add back onto that, I'd appreciate what your comment for Oakland. We are seeing a lot of people in the evenings come Thursday through Sunday. So in terms of the dynamic changing where we didn't have as much weekend traffic, now we have more weekend traffic than we can really handle. We're struggling with parking over the weekends and late evening. So I think it is definitely a dynamic that's changing.

Karen Daly (04:33):

So less office workers downtown that has obviously a budgetary impact and has had a budgetary impact on cities. So what is the tax impact for cities on weaker return to office performance than expected? And we'll start that question with Mark.

Mark Schmidt (04:59):

Sure. And thank you all for the chance to present to you. I would say that to the extent that there is a downturn in CRE, we think that it would have much more gradual and more localized impacts than in 2008 to 2010. I think you're really just looking at single digit property tax declines as being possible. A key difference versus the last cycle is that residential valuations are holding up much better, driven by large price increases during 2020 and 2021 and a lack of inventory to start 2023. I think overall, the outlook for investment grade general obligation credit remains very good. And to the extent we're talking about a downturn or a slowdown, it would need to be a prolonged slowdown for there to be a modest impact To Muni credit.

Karen Daly (05:53):

Jane?

Jane Ridley (05:55):

To follow on some of what Mark was saying, revaluation that we would see in those office buildings that goes onto the tax roll is going to take longer. It takes a little bit of time for some of those leases to come up, so we'll continue to see the impacts on that. But cities in most cases have, or in many cases have flexible taxing power so they can levy the taxes. It might just be different who pays them might be less on commercial and more on residential. So sort of a redistribution there. But given that we already do see a lot of home ownership, affordability being a question and a concern for people, it kind of creates a different issue. One of the things also when you think about people kind of shifting in the tax base changing is income taxes. Cities that rely on an income tax and then they don't have people in the office as much revenues might be coming down from that city of state of Ohio has fair number of cities like that. We haven't seen a significant decrease in those revenues for some of those major cities. And then lastly, sales taxes. And I think this is a little bit about what we were just talking about, sales taxes. If you're not coming in unless you're coming to downtown Oakland, Thursday through Sunday, sounds awesome. There could be a shift with that too. And so that's certainly something that could put pressure on it if you don't have other areas or some kind of offsetting times that people are buying and spending the sales tax.

Karen Daly (07:21):

Erin, thoughts?

Erin Roseman (07:22):

Absolutely. I think Oakland is an example of a very diverse economy, and so we don't have anything really concentrated in any one particular sector. We've seen our sales tax come back to the amounts collected from over 2019 in 2022. So we are back from pre pandemic back to pre pandemic levels in terms of our sales tax collection. In terms of the other taxes, we've probably benefited a lot from a flight from San Francisco to Oakland where our property tax values and our real estate transfer tax have gone up. We're experiencing really good revenues considering coming out of the pandemic and then being back to mostly pre pandemic levels. There's a couple of one tax, our TOT or transit occupancy tax that may not be doing as well, but it is definitely on the rise. We also have an electorate that supports additional taxes. We have 13 different local tax measures and our last two ballot measures passed by over 70%. So we have a mandate to provide services our residents are willing to tax themselves. We are just experiencing sort of all around a good opportunity from coming out of the pandemic.

Karen Daly (08:55):

Joseph?

Joseph Manoleas (08:56):

Yeah, so I broadly agree with my colleagues on the stage, but there can be some revenue sluggishness. But to reinforce the point that broadly speaking, local governments have time to adapt, given that we're in California, I do think that there's one important point to get across here. Since most California cities are property tax dependent. Prop 13 is a huge litigant here. So often in forums like this, we talk about it as being a revenue constraint, but in this instance, the delta between taxable assessed value and full market value provides such a meaningful cushion for all these office spaces that are selling for 25% on the dollar relative to pre pandemic levels. You see a lot of these headlines in the Wall Street Journal, like I said, the office buildings that are setting for 25% of their 2019 values. And then you say, well, what does this actually mean for local government tax revenues?

(09:46)

And it can oftentimes be minimis. Now, not to say that if the Chase Center or the Salesforce tower goes through a reassessment process, that that can have a meaningful impact on the city of San Francisco's property tax revenues, but it allows for time and it provides a meaningful downside cushion for property tax revenues. I want to go one step beyond though, talking about some of these more economically sensitive revenue streams. And I think that this is an area where there could be some sluggishness moving forward, real property transfer taxes, hotel sales taxes, a little bit less calm about the forward look for those. If people aren't coming back to offices in the same way, I think that there could be some slow performance of those revenue streams moving forward.

Karen Daly (10:30):

Suzanne?

Suzanne Finnegan (10:31):

And the only thing I'd add is that it's so specific to every city and its own situation. Even cities, even if you have a decline in the commercial real estate values, it really depends. The impact on the city will really depend on the mix between commercial to James Point, residential and other property types. And then there are so many different revenue sources. You have a mix of property taxes, sales tax, income tax and fees and charges, which probably is the one segment that most cities have fairly good flexibility in terms of raising and changing on their own.

Karen Daly (11:11):

A lot of it depends on where you are. So in our prep call, we were talking a little bit about revenues, and one of the things I said is mayors don't have magic wands. So I'm sure they wish that they did, but they don't. So if cities have started searching for other revenue streams, what have they enacted and what are they contemplating? And to the point I made at the beginning of this, what does it take to raise new revenues? And we'll start with Joe.

Joseph Manoleas (11:48):

Sure. So revenue raising ability and willingness varies tremendously across states. In California, we talked about Prop 13 as a big litigant on the downside, but it is a constraint on the upside as well, right? There's not a lot of property tax flexibility, but we have seen particularly the larger cities in the state begin to implement some of these other revenue enhancements. I know LA passed a real property transfer tax. San Diego's considering a sales tax as well as a real property transfer tax. And San Francisco retooled some of their various business taxes in the aftermath of the pandemic. So local governments do have some tools, but they require voter approval in most instances, and that requires time. And it also introduces a huge political element, right? If you're putting a down ballot revenue measure, you're going to have to spend thousands of dollars on some consultant to say, how does that revenue measure sit on the ballot next to another bond measure or another revenue measure? So there are tools particularly for California local governments, but it takes time and it's not going to be really what the property taxes.

Karen Daly (12:54):

Suzanne thoughts?

Suzanne Finnegan (12:56):

Yeah, I was just going to mention too, a hundred percent agree, especially with respect to the voter approval. I think that is the key point for most local governments in order to be able to raise taxes. In particular, I did mention fees and charges. Normally that doesn't require voter approval, but those can be very expensive for the citizenry. So not always very popular and not frankly, very often very progressive. And I think the other thing is more fees around usage. And we're seeing this, we may come to this later to talk a little bit about transit, but we're seeing things like creative pricing tools around like congestion pricing for different services. So focusing on when a service is being used and pricing to those peak times.

Karen Daly (13:49):

Erin thoughts?

Erin Roseman (13:51):

Well, I think they said exactly what I was going to say, but for Oakland specifically, yes. We have just undergone a new ballot measure, a progressive business license tax projected to raise 120 million for the city of Oakland. It passed with 72% of voter approval. And so to the extent that we are hamstrung with all the different ways that you can make revenues, we see that that was successful for us. It did have a lot of political challenges, just how progressive was the business license tax going to be? How would the market receive a really, really progressive tax versus a moderately progressive tax? And so it passed really well and we are reaping the benefits of that additional tax revenue in this particular fiscal year.

Karen Daly (14:49):

So let's think a little bit about the other side of the equation, which is the expense side of the equation. So where are the shortfalls? We talked about that a little bit, and what are cities, localities doing to offset shortfalls? And we'll start this question with Suzanne.

Suzanne Finnegan (15:10):

Great, thanks, Karen. So for a lot of municipal governments, many of their expenses are fixed. We've seen in prior economic cycles, cities trying to balance budgets by, for example, not funding pensions, and the pension costs really are fixed, and we've seen people cut back as a way to sort of fill a budget gap. We haven't really seen that now in this cycle, but it is one of the reasons we focus on pension issues quite a bit at bam. I think some of the tools that we've seen cities use are to reduce overtime in different departments, consolidate departments not always popular, but can be done. And we're starting to see some cities privatize certain kinds of services that don't necessarily need to be done by city employees. I think there was a recommendation from the Citizens Budget Commission in New York, for example, that the city would save significant amount of money by privatizing janitorial services. So those kinds of things can be done, but it's a balance. It's a lot of small pieces.

Karen Daly (16:22):

Erin, can you help us with the expense side of the equation?

Erin Roseman (16:26):

Yes. So personnel, salary and benefits is generally the largest expense on the expense side. What we did to tackle it was to negotiate longer term labor contracts so that we have some, could be able to project better, understand longer term and keep those costs with the in check for a longer period of time to help balance on the expense side. There are lots of challenges. We have done consolidations where to create efficiencies within our departments where we've had turnover as someone leaves or department head leaves when we look at how we can consolidate two different departments or those functions to create efficiencies. And then from, I guess offshoot from the pandemic, there was a higher unemployment rate. And so we've had a difficulty in hiring. And so to the extent that we've been forced to be lean because we couldn't attract or a recruit because people just didn't want to work, we've saved money there on the expenditure side with a smaller workforce.

Karen Daly (17:44):

Joseph, what about the expense side of the equation?

Joseph Manoleas (17:47):

Yeah, the only thing that I would add that I think about as an analyst is staffing shortages. So a lot of times you're dealing with speaking with cities that have police and fires at 80, 85% capacity. And I wonder what that means two, three years from now, if the intent is to go to being fully staffed, what that's going to mean for these budget line items in the future when combined with inflationary pressure to wages.

Karen Daly (18:10):

So now we're going to talk a little bit about crime and its impact on some of the topics that we've been discussing. And my question is how does the perception, not the actual statistics, the perception of crime factor into return to office trends? And I'm going to start with Jane.

Jane Ridley (18:36):

Yeah, thanks Karen. And I mean, we all know at some level that perception really does become reality. We really find it important though when we're trying to look at, when you're hearing a lot about crime, what else is going on in that particular city? And what's really happening? Is it affecting the tax base? If it's real or perceived, it can have an impact on your tax growth too. You have some people, it's a little bit of people are going to come in the office more if there are more people or vice versa. It's a chicken and the egg that whether or not you want to be in that area, if you think that it is dangerous, you're probably not going to come anymore. I know the primary analyst for the city of Chicago, one of the things that we talk about with them a lot is the crime that you hear about on the news.

(19:30)

There's a lot of crime you hear about on the news in the city of Chicago and does that have an impact on who's moved in? And if you look at a list of the, what they call the Chicago decisions, it's pretty significant that there's not a lot of people that, there's a lot of companies that have come in and not as many people that are leaving, but that's sort of that perception, reality part of it. But when it starts to hit the tax base or you start to see people significantly moving out in larger numbers, that's when it would become a bit more of a concern. So again, we want to drill down a little bit more to hear about what's behind those headlines.

Karen Daly (20:07):

Erin, how does the perception of crime kind of factor into the mix here?

Erin Roseman (20:13):

So for Oakland, we have our residents show up at our council meetings in droves, and they make their voices heard. And one of the things that they ask for is for the city council to do something about crime, the perceived crime, the real crime. And I take that as a mandate when we've polled for ballot measures, reducing crime, homelessness and creating affordable housing have been the top things. And that translates into our electorate willing to pay for it. So they will have been willing to tax themselves, are willing to do the things necessary to reduce the crime rate or the perceived crime rate crime going on. Our business owners have been showing up, do something about it. We're willing to pay more taxes, we're willing to do what we need to do so that you can reduce the crime. And so it's sort of perverted beneficial for us. Yeah.

Karen Daly (21:18):

Okay. Talk a little bit about foot traffic and tourism. So how does foot traffic and tourism factor into economic activity, tax revenues, that type of thing? And we'll start with Joe on that.

Joseph Manoleas (21:41):

Sure. So across the board, fewer people utilizing downtown can impact sales taxes, hotel taxes, and just broader economic vibrancy. I think whether thinking about foot traffic or tourism, there's just a huge amount of variance across cities across the country, and even within the state. San Francisco has, there was a study by the university of, I think Toronto and UC, Berkeley that tracks cell phone data, and it showed San Francisco on the lower end in terms of downtown utilization, while Salt Lake City and Bakersfield of all places is high downtown utilization. So there's a tremendous amount of variance in terms of how people are interacting with downtown, depending on commuters perception of crime, slow to open business centers. And then I think zoning also has a huge impact on this as well. If you're a place like downtown San Francisco that has such an intense density of office spaces, but not so many, so much residential or restaurants, that's going to impact how people engage with your downtown. On the tourism side, broadly speaking, tourism is approaching pre pandemic levels. Again, there's a lot of variance across markets. I think one of the impediments from surpassing 2019 levels has been the slow sluggish return of international travel, particularly amongst in gateway markets, but broadly speaking, very close to 2019 levels for tourism.

Karen Daly (23:11):

When I think about foot traffic and tourism, I sort of think about the economic multiplier effects of that. I haven't seen, frankly, any studies sort of measuring that out, but I'm guessing it's significant. And Erin, thoughts on foot traffic and tourism?

Erin Roseman (23:35):

Well, yes, I do have thoughts, and again, in Oakland, we're seeing our tourism come back. We've had at least three new hotels built in the last year or two, bring in another 600 hotel rooms to Oakland. Oakland is known for its culture and vibrance and diversity, and so that continues to attract people all around. So we are still experiencing sort of good foot traffic. And I think I said a little earlier that our Thursday through Sunday nightlife, it's come back or taken off. So we're experiencing a lot of foot traffic and it's a different, the dynamic has changed. So it's not your traditional tourism, but people are coming to Oakland and we're seeing that it's a good thing.

Karen Daly (24:29):

Great. So Jane, what about foot traffic and tourism?

Jane Ridley (24:35):

Well, as Joe mentioned yet, international travel, a lot of that is still down. I read today inbound travel down about 27%, which is significant from pre pandemic hotel RevPAR year over year growth is weaker than anticipated, but it is still growing again, so that's a good sign. One thing that I think we hadn't talked about as much as business travel and business travel coming back, it doesn't impact everywhere because some places you want to go to as a tourist and or for business, but places that have limited desirability for non beyond business travel, I should say, that's going to make it definitely harder. And so we want to know a little bit more if they're relying on tourism taxes or hotel taxes or something, how they're balancing that, especially if the business travel still is not coming back.

Karen Daly (25:31):

So our next topic is commercial real estate, and it's a particular interest to me because when I look out my office window across the street and I look at the office buildings across the street, there's no one in it, unbelievable, as that might sound. So I'd like to give the audience just a little bit of a snippet and then we will get to our discussion of commercial real estate. But in a recent research piece that KBRA's CMBS team did, they found that older properties, older properties in every city has older properties are struggling to retain and attract tenants. These properties are more likely to become functionally obsolete due to their age, and they're losing tenants to newer properties with a more contemporary look, floor plans that better suit today's business needs and greater amenities. The impact of this flight to newer properties is now manifesting itself in commercial real estate loan performance and higher distress rates. So panelists, what about commercial real estate? Will cities have vast pockets of empty office buildings in distressed, scattered over their landscapes for the foreseeable future? We're going to start with Mark.

Mark Schmidt (27:16):

Well, we still think that the outlook for general obligation credit quality remains very good. I would say that with a 12 to 24 month lag, you could see localized effects to commercial property taxes as noted earlier, single digits in general, we think as noted before, that effects would be greater outside the general obligation sector, given some of the factors that my panelists have discussed.

Karen Daly (27:53):

Jane, what about commercial real estate?

Jane Ridley (27:56):

Yeah, I want to talk about CMBS a little bit too. Our CMBS team did an article a few months ago that focused on San Francisco, so I want to talk a little bit about that before I talk about the Muni part of it. But overall, there's about 22 billion in CMBS exposure here in San Francisco that is third only to New York and la an office account for about half of that. So that continued high vacancy rate that Karen was talking about too is certainly concerning from a lot of different angles. San Francisco itself, office vacancies went up a bit in the second quarter of this year, 26% to 28% over the first quarter. That's different than the national office vacancy rate, which is a little bit closer to 15%. So to directly answer Karen's questions about vast pockets of empty office buildings, I don't think we're going to have an apocalyptic type scenario with that, but cities that aren't more proactive in how they manage it and those shifts and what's coming, the pendulum is going to swing, it's swung one way, it's going to swing back the other way. There's demand for the kinds of properties Karen was talking about sometimes called trophy properties. You still have interest in that. Those are class A, but there are a lot of class A that isn't the trophy. So what are you going to do with the class B and the class C? That takes a lot of planning, that takes a lot of money in order to be able to sort of redo that. And so starting now or before now is going to be pretty important for the longer term.

Karen Daly (29:25):

Yeah, I've been reading about what it actually takes to convert an office building to an apartment. It's not easy and there are architectural considerations and engineering considerations, so that is not a panacea. So Joe, what about commercial real estate?

Joseph Manoleas (29:51):

Yeah, I would echo what my colleagues said. Vacancy rates, particularly in the office space, are going to remain elevated for certainly in the near term. There are some green shoots in San Francisco with AI companies absorbing I think a couple million square feet, but that's not going to make a dent in the 30 million square feet that the city needs to deal with. The only other point that I would add is that we're using commercial real estate and office real estate interchangeably and commercial real estate does extend beyond office space. And our broad house view in the state of California at least is that while there's certainly some pressure on the office space that large cities are better positioned relatively speaking with multifamily retail and industrial space.

Karen Daly (30:36):

Erin, what are your thoughts on commercial real estate?

Erin Roseman (30:40):

Well, in Oakland, we're experiencing about a 15% office vacancy, which you've quoted as the national average, but we're also seeing some of the companies leaving San Francisco coming to Oakland. So we had PG and E moved to Oakland, they leased a building and then have now purchased it. And so we're seeing that as a benefit to us and not necessarily following the trend of there being this overall vacancy or this void in downtown or through commercial real estate. We also have other entities that have been moving to Oakland to fill in what we have had on the books fill in the other space. We have a Samuel Merrick College that is breaking ground recently and they're bringing 10,000 new nursing students to downtown Oakland. So I mean, we're reaping the benefits and feeling pretty excited about the trend that's going in our way and don't feel like that we'll have this big void or vacancy in our downtown.

Karen Daly (31:53):

We're going to switch topics a little bit, and we obviously read about big city issues in the press every day, but there are a lot of medium and smaller size cities in the United States. And maybe we should talk a little bit about the credit quality of smaller or medium-sized cities. And let's start with Suzanne on that question.

Suzanne Finnegan (32:22):

Great, thanks Karen. So I think I'd like to start with good news, which is that smaller cities really fared very well during Covid for the most part, and certainly much better than most people expected. I think in the current environment, many smaller cities are less reliant on commercial, but as Joe pointed out, office commercial and they tend to be one area of concern though, is that they may be more reliant on retail commercial space, including shopping centers and strip malls and things of that sort. And we are still seeing a lot of sluggish performance in that piece of the market. So less office reliant, but a little more retail commercial reliant, but having less reliance on the office. Real estate is also offset by the fact that a lot of them have less flexibility in terms of revenue raising capability. Changing a tax rate in a big city can generate a lot of dollars. Making a small change in a tax rate in a small city isn't going to generate that same volume of revenue. And so it's a little bit more of a challenge, I think.

Karen Daly (33:42):

Yeah, it's interesting. I've been reading a lot about overbuilding in smaller and medium-sized cities. I'm just wondering if anybody has any thoughts on that, but Jane, what are your thoughts about cities other than big cities?

Jane Ridley (34:02):

Yeah, there are a lot of them out there and they're doing well for the most part. We think local governments really are well positioned to be able to handle some of the challenges coming from the economy between federal stimulus and just other ways that they coped with the pandemic, really doing really from a position of really strong, solid credit quality. One of the things that we did see also with a lot of places is the ability to accelerate some of the capital projects that they had planned for using the federal money. So there are things that may have maybe taken longer to happen that now might be happening sooner, and some of those projects maybe that they wouldn't have tackled at all. So we do see in terms of the economic forecast, and Suzanne was talking a little bit about this with when you have a reliance on retail, our projections from our economists talk about the retail isn't going to drop off over the next few years, but it is going to flatten a little bit. So that's something that might not grow as much unless inflation stays high, which I don't think we're projecting. We are not projecting inflation to stay high, but those are some of the things that can have an impact there. And frankly, the federal money isn't going as far as you would expect given inflation and some of the supply chain limitations on what could have been done. So I think it's that higher for longer rate environment too, that's going to pressure some of those smaller cities, but not to the point probably of eroding credit quality.

Karen Daly (35:33):

So Mark, what's going on in smaller cities?

Mark Schmidt (35:37):

Well, I think in general, the outlook for sales tax growth and the fact that governments generally follow conservative forecast assumptions, keep our favorable credit quality view intact right now for local governments.

Karen Daly (35:53):

I'm going to talk a little bit about demographic changes because that's part of the overall equation here. So how do demographic changes in the state of California factor into this discussion, which is obviously many, many tentacles. And we're going to start with Aaron, that question.

Erin Roseman (36:26):

Well, I think we've recently seen reports where there's a flood of people leaving California. For states like Texas, there's this sort of mass migration out, but I think there's also an internal rearrangement or internal migration. So people going from higher cost cities to lower cost cities, and we've seen that in our population projections for Alameda County and for the city of Oakland. So Alameda County over the next 10 years is projected to grow by 21%. And so how can that be if 10% of California's leaving the state, well, they're coming to Alameda County. And so while there's this, you hope to be the city on the receiving end of the rearrangement, that you are providing enough affordable housing and the amenities that it still attract new people to your locale.

Karen Daly (37:23):

Mark, what about demographic changes? What do you think?

Mark Schmidt (37:27):

I think it's important to keep in mind that in many cases, residents who pay the most taxes have the deepest roots in a community and therefore are less likely to leave. There isn't always a strong or clear relationship between revenues and population.

Karen Daly (37:46):

Joe, what about demographic changes?

Joseph Manoleas (37:48):

Yeah, the state in large coastal California cities have been experiencing net domestic out migration for some time leading up to the pandemic. I think the pandemic has accelerated a lot of what we've seen. So some of the population declines in say San Francisco or la, New York particularly stark, but we're reluctant to call that a trend yet. So as data comes in in 23 and beyond, we'll get a better feel for San Francisco really hemorrhaging people. It's seven and a half percent a year, or is this a blip on the screen? But certainly if it continues at that pace, both at the city level or at the state level, California lost population for the first time, I think in its history through the pandemic that could become a growing credit challenge.

Karen Daly (38:31):

Jane, what are your thoughts on demographic changes?

Jane Ridley (38:35):

Well, I did want to just carry on something that Erin was saying too. And I know I live in Denver and all of the Californians that have moved into my neighborhood have really pushed up the prices on the houses, which is really my husband and I really appreciate who's buying that house for that much money and oh, they're from California because it is affordability. And so they find that affordable in Denver, but that prices out a lot of people who otherwise could not. I can sit here and make a joke about it because I own the house already. If I didn't own the house, I wouldn't be able to buy the house. So that affordability is really a key, is really a key part of what's going to look like in those demographic changes. I believe the state of California does require local governments to construct sufficient levels of affordable housing, so within in their jurisdictions. So there is a possibility though that those kinds of changes, and again, that's something that takes time, that takes money to be able to make a real difference with, but that could help stem some of the out migration trend.

Karen Daly (39:39):

So our next topic is Mass transit and it effects on what we've been discussing. And we all know that Mass transit has been impacted in the aftermath of pandemic, the changes in commutation, New York City's MTA, which is a large, large system, is currently about 69 to 70% of its pre pandemic level. And that's comparatively speaking, doing pretty well. So I want to ask the panelists, how does the state of Mass transit play into the vitality of central business districts? Certainly has a big role. We talked a little bit about congestion pricing, which is on the horizon in New York, so we're going to start that question with Jane.

Jane Ridley (40:46):

Yes. Well, there are two things among a lot of other things, but that are really essential for local governments, big local government cities to be vibrant and have vitality. As Karen said, one of those things is a viable school district for people to be able to live in the city and send their kids to school and not have to go to a private school, but also Mash transit. The federal money that came in during the pandemic to support mass transit was really significant. And if you're relying on fairbox revenues right now and you don't have another tax source or another support, you're going to have another government support, you're going to have a much more difficult time with that. Karen mentioned the MTA. We recently upgraded the MTA. Everybody has an opinion on it. Some people thought it was great, some people didn't think it was great, but the MTA is a creature of the state of the city, and without that as the engine there, that's going to make it a lot more difficult for the city of New York, the state of New York to be able to carry on as it has before, even if they're only 70% of pre pandemic, that's still significant, and to make sure that the support is there going forward, we wanted to recognize that.

Karen Daly (42:02):

Well, we'll see how congestion pricing plays out, what the charges will ultimately be. I know that it's slated to be basically implemented May of next year, barring, of course, litigation and all matter of complaints from the people who are going to have to pay up. But Suzanne, mass transit.

Suzanne Finnegan (42:32):

As Jane said, critical, critical for the residents of the city, critical for all the workers of the city and the cities are trying to reduce traffic and congestion, and that makes mass transit even more critical. So it's this kind of building cycle. A number of communities are considering the congestion pricing. I recently was on a panel with Jeremy Fine, who's the finance director for CTA Chicago Transit. They are trying to do a couple of different things. They're looking at a different pricing model for their commuter passes that's more reflective of a higher cost during the higher peak days, not Monday, not Friday, Tuesday to Thursday. So they're looking at a lot of kinds of creative pricing tools. One of the things that sets CTA apart from other fairbox systems is that they have a mandated Fairbox recovery ratio, which they are looking to get from the state, some relief on that Fairbox recovery ratio. And I think that is reflective of the fact that we're seeing more of a nationwide movement to get additional government support behind transit. And I think those kinds of things, we've seen it in New York with the MTA. I think BART is working hard to get some additional governmental support because the fair box obviously is not going to support the system completely.

Karen Daly (44:08):

It's pretty interesting that the state's been pretty forgiving with respect to the recovery ratio. Did, we didn't talk about this on the panel. Do you think that's going to continue?

Suzanne Finnegan (44:22):

They seem to think so. I don't know. You seem to know that too. They seem to think they're going to get some relief on that.

Karen Daly (44:29):

Yeah. So Mark, mass Transit, what are your thoughts?

Mark Schmidt (44:35):

Well, I think the takeaway from the past couple of years is that when a service is viewed as essential, there will be a will and a way to solve fiscal shortfalls. And some of the options are what my colleagues on the panel have discussed.

Karen Daly (44:53):

So Joe, what about mass transit and how it fits into the big picture here?

Joseph Manoleas (45:00):

The only thing that I would add here, greater reliance on Fairbox is those entities are going to be an increased challenge. And I think the examples of the Bay Area transit systems are really illustrative. I think Caltrans, which is the commuter rail system that gets you from the peninsula up to San Francisco, had declined ridership broadly in line with the office utilization return to office of downtown. They were generally a fair box heavy system, and I think it was in 22, they went out and they got a sales tax. It really res sculpted their revenue composition. So that's just a great example of the competence, the sophistication of these transit entities saying, look, we're not going to get ridership back to these pre pandemic levels overnight. That's not going to be a magic bullet. So what tools do we have in our toolbox to go out there and try to stabilize our finances?

Karen Daly (45:53):

In this last topic, we really haven't spoken about service cuts, and I'm just wondering if anybody, mostly we've been talking about federal aid, state aid, New York City's case congestion pricing, but does anybody have any thoughts on in terms of when you reach that point of disequilibrium, which will come for various systems at some point, do you think governments or transit agencies would be willing to cut service?

Jane Ridley (46:40):

I mean, I would think if that's what they have to do, they would do, but that's again, another chicken and egg. I'm not going to go downtown if I have to wait an hour for my train each time, or I don't have an express train. I live in Denver and drive to work. But that sort of thing, that's a real decision point too. So I think that's got to be part of the trade-off. I'd be curious to hear what Jeremy Fine and CTA said that.

Suzanne Finnegan (47:03):

Well, I mean I think they've talked about that exact problem, which is they have to serve a community. They still have a million passengers that they're moving, and there are people who need to take that train every single day. And so they've tried to reduce equipment usage by going to shorter train sets on off schedule type things, but you still have to run the train. One of the things that I think some of the transit agencies are doing is taking advantage of some of the federal money that's still available to move to electric train sets and things like that that will be more efficient, maybe reduce overhead, but there that's a big capital outlay, and so you have to have that balance. The federal money hopefully will fill in some of those gaps, but it's a big challenge.

Karen Daly (47:56):

It's certainly going to be an interesting topic to follow. So we have one minute left. I'm looking at the big clock here. Does anybody in the audience have a short question for our panelists?

Audience Member 1 (48:14):

Yes. I have a question for Erin. So no city has lost as many professional sports teams in such a short succession as Oakland. I was wondering, has that hurt tax revenue collections downtown and does Oakland have a plan to rebuild its professional sports infrastructure?

Erin Roseman (48:38):

So right. We have lost a number of professional sports organizations, but what we are looking at is trying to capitalize on local and soccer and cricket and other things that aren't football and basketball and that other sport, and sort of utilizing the infrastructure that we currently have. Our coliseum is still there. It still has useful life. The arena part of the Colosseum complex has been going like gangbusters. We have brought in more revenue in this last year than a long time with concerts and alternative activities, Disney on Ice, monster Truck, and just a number of things. And so the world isn't ruled by sports franchises and cities can overcome the loss of three sports agencies.

Audience Member 1 (49:39):

Thank you.

Karen Daly (49:41):

Thank you. Let's give a hand to our great panelist.