Kiran Cunningham & Hannah McKinney
Kalamazoo College
Michigan Municipal League
September 23, 2009
1
Who we are
 A PhD Anthropologist and a PhD Economist
 McKinney has been an elected official for 12 years
 Over a decade of experience working with community
leaders throughout the country
 Helping leaders reorient their work in changing social,
political and economic environments
2
Overview of the Session
 Goal: Facilitate a better understanding of the changing
economic landscape and catalyze the kind of new thinking
necessary to prosper in the New Normal
 Presentation on the changing economic environment you
are likely to face for the next few years
 Engage in conversation about how municipal leaders can
best navigate through the downturn and prosper in the
new normal
3
Think about your community. In your
opinion, how much longer will the
economic downturn last?
 It’s about over
 1-2 more years
 3-5 more years
 More than 5 years
4
Welcome to the New Normal
 The long term impacts of the current economic downturn are
not well understood by anyone.
 Even while some economists believe that the recession has
ended, foreclosure rates continue to rise, unemployment is
increasing, and incomes continue to fall.
 Local governments struggle to keep their budgets balanced
today knowing full well that their fiscal constraints will be even
tighter tomorrow as the impacts of fall property values,
reduced sales and income tax revenue, and an ever increasing
demand for public and social services.
 Welcome to life in the “new normal.”
5
Fundamental structural changes have
occurred in the economy
 Financial sector
 Manufacturing sector
 Employment & Income
 Housing market
6
Federal Reserve monetary policy still in crisis mode
The Federal Reserve has
taken on many of the
functions of Wall Street
On Aug. 17, the Fed
announced that it would
extend its Wall Street type
programs until mid-2010.
A Year After Financial Crisis, the Consumer Economy is Dead, Kevin Hall, Sept. 8, 2009, McCatchy News
7
The number of problem banks continues to rise
81 banks have been
closed by the FDIC
so far this year
421 banks are on the
unofficial list of problem
banks
http://www2.fdic.gov/qbp/grgraph.asp
http://www.calculatedriskblog.com/2009/09/problem-bank-list-unofficial-sep-4-2009.html
8
Manufacturing employment has been
falling for 10 years
In the same period, Michigan has lost 1 million jobs (20% of all jobs in Michigan).
9
All private employment has fallen over the
past decade in the U.S.
10
Yves Smith, www.nakedcapitalism.com
11
Larry Summers, National Economic Council
Director, says:
“The level of unemployment is unacceptably high and
will, by all forecasts, remain unacceptably high for a
number of years.”
Read more: http://www.politico.com/news/stories/0909/27052.html#ixzz0R5s8BSnA, 9-11-2009.
12
Slow job growth and sluggish wage
increases will be the norm
 "Those things are likely to be subpar for a long period of time,"
said Martin Regalia, the chief economist for the U.S. Chamber
of Commerce. "I think it means that we probably see potential
rates of growth that are in the 2-2.5 (percent) range, or maybe
. . . 1.8-1.9 (percent)." (A growth rate of 3 percent to 3.5
percent used to be considered average.)
 Regalia thinks that it could be five years before the U.S.
economy generates enough jobs to overcome those lost and to
employ the new workers entering the labor force.
13
Dennis Lockhart, President of the Atlanta
Fed, describes the new normal:
 The economy that emerges from this recession may not
fully resemble the pre-recession economy.
 It is unlikely that we will see a return of jobs lost in certain
sectors such as manufacturing.
 In a similar vein, the recession has been so deep in
construction that a reallocation of workers is likely to
happen.
 I do not expect quick fixes for the unemployment
challenge ahead.
Remarks by Dennis P. Lockhart, President, Federal Reserve Bank of Atlanta, August 26, 2009.
14
Middle class household incomes have
been flat for years
15
Middle class can no longer borrow to
consume
16
Consumer behavior: confidence & consumption
Source: http://economistsview.typepad.com/timduy/2009/09/quick-note-on-confidence.html
17
 Net worth of households dropped by 20% in 18 months
2007(2) to 2008(4) or $12.9 trillion
 Every $1 lost consumer wealth decreases spending by 5
cents over the next two years ($322.1 billion per year)
 Home equity has fallen 43% ($5.9 trillion) from 2005 to
the end of 2008 (Joint Center for Housing Studies)
 As many as 27% of homeowners with a mortgage owe
more than their house is worth
18
The Mortgage Bankers Association reports:
 Delinquency rate for mortgage loans on 1-4 unit
residential properties rose to 9.24% of all loans
outstanding at the end of 2nd quarter of 2009.
 The delinquency rate breaks the record set last quarter
(records go back to 1972).
 The percent of loans in foreclosure at the end of the 1st
quarter of 2009 was 4.3%
Reported August 20, 2009
19
Paul Krugman, Nobel prize winning economist says:
Even if the big bust is over, that doesn’t mean we’ll
see a rebound; at best, this is the new normal. 2005
isn’t coming back.
New York Times, August 26, 2009, 10:04 am Housing prices
20
Michigan’s Budget problems
 Fiscal year 2009 marks the ninth consecutive year that
state revenues have not been adequate to fund state
services and programs
 Since the first decline in revenues in fiscal year 2001,
Michigan has experienced cumulative deficits well in
excess of $10 billion, has exhausted over $6 billion in
fiscal reserves and has instituted over $4 billion in
spending cuts.
21
Michigan’s Recessionary Experience
22
U.S. & Michigan % Change in Employment
May 2008 to May 2009
U.S.
Michigan
Source: Bureau of Labor Statistics, Michigan Fiscal Agency
23
Michigan Job Growth
Source: Bureau of Labor Statistics, Michigan Fiscal Agency, August 2009
24
Property Value Growth Slowing
State Average
Source: Michigan State Fiscal Agency, August 2009.
25
Realtytrac.com, accessed September 9, 2009
26
The market for new home construction has fallen even faster
in Michigan than in the rest of the nation.
27
Michigan Per Capita Income
Deviation from National Average
Source: Michigan State Fiscal Agency, August 2009. (Last 3 years of data are estimated.)
28
Michigan’s consumers faring poorly compared to most others
Michigan’s ranking
for per capita income
has dropped from 17th
in 2000 to 34th in 2008
Data from American Bankruptcy Institute and American Mortgage Bankers Association, data at Calculated riskblog.com
29
From the Census Bureau
 Median income in Michigan fell 2.5 percent last year, from $49,807 to $48,591,
according to the census. Nationally, it fell 1.2 percent, from $52,673 to $52,029.
 It was the fourth year in a row that income dropped in Michigan.
 And it's likely to get worse, according to fiscal experts, because the census
figures don't reflect this year's travails, which includes a skyrocketing
unemployment rate of 15.2 percent.
 "Michigan is in a world of hurt," said Don Grimes, an economist at the




University of Michigan. "That's no big surprise. It will take awhile to recover."
Before its eight-year recession, Michigan had long bucked an economic truism:
A state's income ranking was directly tied to its residents' education level.
The state's auto factories allowed workers, despite their lack of college degrees,
to make more money than the national average.
But the Big Three are dealing with fiscal calamity, workers have lost their jobs
or seen their paychecks shrink, and the state's income ranking is dropping to a
level in line with its blue-collar work force.
Michigan's education level ranks 35th in the nation, according to the census.
http://detnews.com/article/20090922/METRO/909220383, Sept. 22, 2009
30
Michigan School Aid Fund Estimated Budget Shortfall
Source: Michigan State Fiscal Agency, August 2009.
31
Michigan’s State Budget Estimated Shortfalls
Source: Michigan State Fiscal Agency, August 2009.
32
State’s FY 2008-09 Budget Funding Sources
33
As of yesterday,
 20% state shared revenue cuts proposed for 2010
budget
 Large cuts to the Department of Human Services
budget as well
34
Arizona’s budget problems
 Marshall Vest, Director of the Economic and Business Research
Center at the University of Arizona talks about “stunning” state
revenue declines stunning
 Sales and income tax receipts are way down, so the legislature
has been talking about selling state buildings and leasing them
back, borrowing money, cutting whatever it can.
 Vest says, “I mean you could lay off every state employee and not
even begin to balance the budget. You could defund the
universities, for heaven's sake, and not even begin to balance this
budget. “
 Unemployment insurance for laid off workers is putting an even
bigger strain on Arizona's budget, along with increased need for
Arizona's version of Medicaid, K through 12 education, and
prisons.
Source: Checking In With Three States In Budget Limbo, Rick Pluta, Susan Phillips and Ted Robbins, NPR, Sept 15, 2009
35
Mitch Daniels, Governor of Indiana, says:
 State government finances are a wreck. The drop in tax
revenues is the worst in half a century.
 During the past decade states increased their spending by an
average of 6% a year, gusting to 8% during 2007-08. Much of
the government institutions built up in those years will now
have to be dismantled.
 Unlike the aftermath of past recessions, odds are that
revenues will take a long time to catch back up to their
previous trend lines – if they ever do.
Source: The Coming Reset in State Government, Wall Street Journal, 9-4-2009.
36
Impacts on the Nation’s Cities
37
88% of cities less able to meet financial needs
http://www.nlc.org/ASSETS/E0A769A03B464963A81410F40A0529BF/CityFiscalConditions_09%20(2).pdf
Research Brief on America’s Cities, Chris Hoene and Michael Pagano, NLC, Sept. 2009,
38
Expenditures outpaced revenues in an
unsustainable manner
39
Tax collections show housing bubble impact
40
Increasing fiscal pressures on U.S. cities due to:
 Large state government budget shortfalls in 2010-11
 Employee-related costs for health care coverage and
pensions
 Tightened credit markets resulting in higher debt
costs, particularly for infrastructure
41
 All sources of tax revenue have been affected
negatively
 Property tax
 Sales tax
 Income tax
 All indications are that these sources of tax
revenue will not grow at the rates we’ve grown
accustomed to
42
The lived consequences
 Lower property values  lower property tax revenue
 Foreclosures  lower property taxes
 Foreclosures  more blight
 Lower incomes  lower sales tax revenue
 Higher unemployment  higher crime
 Higher unemployment  foreclosures
 Higher legacy costs  lower operating revenue
 Funds of all public entities have diminished can’t look
to others for $$
43
The lived consequences for
decision-makers
 “the challenges we are facing are so significant it forces us
out of our comfort zone”
 “how do we deal with this? Everyone looks to us to fix it,
but we didn’t cause the problem. But we are the closest
to the people so it is our problem now.”
 “there are a lot of immediate problems and no immediate
answers”
44
Dissonance catalyzes new ways of thinking
 Denial is an obstacle to new thinking
 While other states may be able to deny the problem,
Michigan can’t (and isn’t)
 Opportunity to take advantage of the dissonance and
come out the other end in a position of strength
45
Prospering in the
New Normal Requires a New
Set of Taken-for-Granteds
46
The first step toward developing
new taken-for-granteds is
identifying obsolete ones
Discussion: What taken-for-granteds from the
old normal are getting in the way of moving
productively into the new normal in your
community?
47
Navigating successfully into the
new normal
Discussion: Think about one way in which the
dissonance in your community is creating
opportunities for new ways of thinking and
operating.
48
Taking Action in Your Community
Discussion: How might you take action in your
community to both catalyze new thinking and
capitalize on opportunities?
49
Michigan’s communities emerged from the
Depression in a position of strength.
We can do it again.
“[T]he industrial crisis and economic collapse following the
stock market crash of 1929 were especially severe in
Michigan. With its faltering automobile industry in decline,
Michigan experienced unemployment levels unmatched in
any other state in the early depression years."
(Organizing the Unemployed, by James Lorence. Albany: State University
of New York, 1996, p. 4.)
50