Hampton Roads: Problems and Prospects. James V. Koch 3 April 2014

Transcription

1 Hampton Roads: Problems and Prospects James V. Koch 3 April 2014

2 The State of the Region report would not appear without the vital backing of the generous private donors whose names appear below. They believe in Hampton Roads and in the power of rational discussion to improve our circumstances. The Aimee and Frank Batten Jr. Foundation R. Bruce Bradley Ramon W. Breeden, Jr. Arthur A. Diamonstein George Dragas, Jr. Hampton Roads Chamber of Commerce Kaufman and Canoles Thomas Lyons Patricia W. and J. Douglas Perry Anne B. Shumadine

3 The views expressed in the report do not represent official positions on the part of Old Dominion University, President John Broderick, the Old Dominion University Board of Visitors, or any of the generous donors.

4 Here s my plan of attack today. First, I am going to provide an update on current economic conditions both national and regional. Second, I ll focus on the Port, tourism, housing, and defense spending, but of course give special attention to housing. Third, I ll address specific issues and challenges such as tolls and transportation.

5 Regional vs. State and National Economic Growth

6 The Great Recession did not affect economic growth in Hampton Roads as much as it did the rest of the U.S. because defense spending cushioned our decline. However, decelerating defense spending and the somewhat sluggish recovery of our tourist industry drove our 2013 economic growth rate below the Commonwealth and national rates.

7 Regional Retail Sales Still Below 2007 Peak

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9 But, things seem to have slowed down recently

10 Slow U.S. Job Recovery: We re Still Below Our Pre-Recession Peaks

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12 Household vs. Establishments Surveys

13 Private vs. Public Sector Jobs

14 In Hampton Roads: VP,

15 I want to highlight two particular problems/situations/challenges/puzzles (choose your preferred terminology) that impact us nationally and regionally. One is the phenomenon of falling unemployment rates and falling labor force participation rates. The other is the apparent uncertainty that appears to continue to afflict firms, banks, and many households. E.g., large corporations such as Google hold record amounts of cash.

16 Worrisome: Lower Labor Force Participation (WSJ, )

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18 Why is falling labor force participation a problem? People who aren t working, or even looking for work, aren t likely to buy houses, new automobiles, or any big ticket items. On the other hand, the evidence shows they are somewhat more likely to get divorced, commit crimes, go to jail, place demands on social services, have mental health problems, etc. (Note: But not everyone! We re talking probabilities here.)

19 So, Why Has Labor Force Participation Been Falling (nationally and in Hampton Roads)? Discouraged workers: Long-term unemployment has discouraged individuals from looking for work Demography: an aging population may reduce the number of people looking for work (but this hasn t been true recently) A surge in the number of individual claiming disability Welfare state benefits make work less attractive for some individuals More students are in college and hence not in the labor force (but head count college enrollment fell in the U.S. in Fall 2013)

20 There Are Large Numbers of Discouraged Workers and Underemployed Workers: WSJ

21 And, the labor force participation of women has stopped increasing

22 Rapidly Rising N of Disability Recipients: Soc. Sec. Admin.

23 Growth in Food Stamp Program Single SNAP recipients receive $189/month; a fourperson family receives $632. These are not get rich amounts, but cobbled together with other benefits, perhaps provide disincentives to work.

24 Monetary Issues, Liquidity, and Uncertainty

25 Since 2008, the FED has increased the U.S. monetary base dramatically. It pumped in liquidity, purchased mortgages, purchased U.S. Govt. securities, etc.

26 Some of the Impacts of FED Actions Very low interest rates (good for those who want to borrow funds; not good for those who own fixed rate savings vehicles) Possible Asset Price Bubbles (U.S. Government bonds and perhaps equities as well---though recent declines have moderated any bubble) Stimulating Resource Rich Foreign Countries (coming to an end?) Fall in the Value of the U.S. dollar Promotion of Risky Behavior Subsidization of Large Financial Institutions Promotion of Economic Inequality

27 QE and Income Inequality

28 Corporations and Banks Continue to Be Rather Cautious It s still wait and see for many businesses Banks are improving their balance sheets rather than making lots of loans

29 Mid-February 2014 Cash Holdings of DJ Average Corporations Microsoft Google Verizon Johnson and Johnson Coca-Cola $83.0 billion $57.5 billion $54.2 billion $25.2 billion $20.5 billion

30 Why? Bad memories from Uncertainty in Washington DC (govt. shutdown, debt limit showdowns, the end of the FED s monetary easing, the Affordable Health Care Act) International problems (choose your country or type of problem---iran, China, Argentina, etc.)

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34 Let s now drill down into our regional economy in this order: 1) The Port 2) Tourism 3) Housing 4) Defense 5) Transportation (including tolls)

35 The Port

36 Millions of Tons General Cargo Tonnage at the Port General Cargo Tonnage increased by 7.5% in Source: Virginia Port Authority and Old Dominion University Economic Forecasting Project. 36

37 Our Port s Market Share Has Bounced Back 45% 40% After declining four years in a row, the market share of the Port of Hampton Roads reversed course and began to increase in It is now above its previous peak in % 30% 25% 20% 15% 16.75% 16.78% 16.67% 15.87% 15.26% 14.88% 16.12% 16.87% Savannah Hampton Roads Charleston New York/NJ2 10% 5% 0% * 37

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39 Why Has the Port Done Well? We have a deep draft port capable of handling the largest ships Norfolk Southern s Heartland Rail Corridor to the Midwest Streamlined Rail Service to Greensboro CSX s on-dock rail services at the APM Terminal More first-in/first-out ship service Computer problems at NY/NJ diverted cargo to us A Greater Sense of Urgency (But, viewed as a business operation, the Port is losing money.)

40 Tourism and Hotels

41 Estimated Market Shares of Hotel Industry as measured by Hotel Revenue Norf/Port 14.6% Hamp/Nnews 13.7% Va Beach 33.2% Hamp/Nnews 15.4% Norf/Port 13.2% Va Beach 40.8% Ches/Suff 7.0% Wmburg 31.5% Ches/Suff 12.3% Wmburg 18.3% Source: Smith Travel Research Trend Report January 7, 2014 and the Old Dominion University Economic Forecasting Project. 41

42 REVPAR in Selected Markets, 2007 to Percentage Change USA $65.58 $ % Virginia $61.95 $ % Hampton Roads $52.90 $ % Myrtle Beach $54.03 $ % Coastal Carolina $55.83 $ % Ocean City $71.74 $ % Virginia Beach $64.73 $ % Newport News/Hampton $41.49 $ % Norfolk/Portsmouth $54.05 $ % Williamsburg $47.48 $ % Chesapeake/Suffolk $52.90 $ % Source: Smith Travel Research Trend Report January 7, 2014 and the Old Dominion University Economic Forecasting Project 42

43 $60 REVPAR in the City of Norfolk $50 $40 $30 $20

44 Annual Regional Hotel Revenue (millions of $)

45 Millions of Dollars 100 Hotel Revenue in the City of Norfolk Source: Smith Travel Research Trend Report, February 17, 2014 and the Old Dominion University Economic Forecasting Project.

46 2% 1% Percent Change in Occupancy Rates within Hampton Roads 2012 to % 0% -1% -2% -3% -4% -5% -6% -2.6% -3.2% -4.4% -4.7% -5.3% Wmsbg VaBch Nrfk Ports Nnews Hmpt Ches Suff HR Source: Smith Travel Research Trend Report, January 7, 2014 and the Old Dominion University Economic Forecasting Project. 46

47 % Hotel Occupancy Rates in the City of Norfolk % 60% 55% 50% Source: Smith Travel Research Trend Report, February 17, 2014 and the Old Dominion University Economic Forecasting Project.

48 These numbers provide no support for the City of Norfolk s proposed conference center and hotel and parking facility on Main St. The City would invest $90 million in these facilities. Bluntly, unless current federal travel restrictions come to an end, hotel revenues and occupancy rates are not going to look very good in our region for an extended period of time. And, even if they improve a bit, it s not clear that this would justify this development and what it would do to the Marriott and Sheraton.

49 In any case, one must consider displaced expenditures and tax revenues. The Marriott in downtown Norfolk opened in October 1991 amid statements about its large economic impact. However, one cannot detect any noticeable change in either total hotel revenues or REVPAR in Norfolk over the next few years. Hotel occupancy rates, however, did fall. It appears that the Marriott took business away from other motels and hotels.

50 On the subject of displacement. Norfolk s proposed Outlet Mall probably will be good for the City of Norfolk, but it is doubtful that it will have much regional economic impact. Where will its customers come from? If from Hampton Roads, then the region is no better off. Indeed, Williamsburg and most Southside cities will probably be worse off. True economic development occurs when we attract resources from the outside, or we act as a magnet that keeps people from spending money elsewhere.

51 A Look at Housing

52 Existing U.S. Home Prices, Calc Risk

53 Percent Housing Affordability: Monthly Payment for a Median Price Resale House as a Percent of Median Household Monthly Income U.S. Hampton Roads Source: The Old Dominion University Economic Forecasting Project. 30 year mortgage rate in 2013 is estimated to be 4.0 Percent. 53

54 Number of Existing and New Construction Homes Sold in Hampton Roads, Year Existing Homes Sold New Construction Homes Sold Percent New Construction ,924 4, % ,869 4, % ,421 4, % ,548 4, % ,755 4, % ,405 4, % ,154 3, % ,046 3, % ,851 2, % ,703 2,265 54% decrease 13.4% From ,818 2, % ,856 2, % ,791 2, % 54

55 Percent Change Percent Change in Existing Homes Sales by City, 2012, % Sales Change 2013 Sales Change 16.4% 19.1% 17.5% % 8.1% 6.6% 12.3% 10.4% 8.6% 11.1% 8.2% 8.7% 5 1.4% 0-2.3% -1.4% -5 CH H NN N P S VB WM

56 Median (50 th Percentile) Sale Prices of Existing Homes

57 Percent Change in Median Sales Prices 10 8 Percent Change in Median Sales Prices of Existing Homes by City, 2012 and Price Change 8.6% % 2013 Price Change 4.9% 3.6% 4.0% 5.4% 2 1.4% 1.9% 1.8% 0 0.0% % -0.6% % -3.5% % -4.7% CH H NN N P S VB WM

58 Median Sales Prices of New Construction Homes

59 Estimated Months of Supply of Existing Homes; H.R. 12 Based on Average Sales in the Trailing 12 Months: January 1996 December Peak: (November 2010) December 2013: Average (Jan November 2013) = 5.58 months Source: Real Estate Information Network and Old Dominion University Economic Forecasting Project. Information deemed reliable but not guaranteed. 59

60 Existing Residential Homes Sold and Average Days on the Market 30,000 24,755 23, , ,924 19,154 18,791 20,000 17,058 15,851 15,818 16, , ,046 14,703 10,000 5, Homes Sold Average Days on Market 60

61 16,000 Estimated Inventory of Existing Residential Homes as Measured by Active Listings Hampton Roads: 2010, 2012 and ,000 12,000 10,000 8,000 6,000 4,000 Average ( Jan through December 2013) = 7,663 2,000 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Real Estate Information Network Inc. and the Old Dominion University Economic Forecasting Project. Information deemed reliable but not guaranteed. 61

62 Let s Summarize What I ve Said Thus Far About Housing Inventories have decreased substantially since Days on Market have also decreased. Sales volume of Homes have increased. Supply of homes currently is at 5.34 months, slightly below the historic average of 5.58 months. But, the median price of homes has increased only slightly: 2.8 percent in 2012 and 2.7 percent in Why nothing better? The explanation is that we still have a very large distressed market for houses---short Sales and Bank-Owned Homes (REOs). Let s examine what s going on there.

63 Why nothing better? Two reasons. (1) Falling median HH incomes. (2) We still have a very large distressed market for houses---short Sales and Bank- Owned Homes (REOs). Let s examine what s going on there.

64 Median HH Income in Virginia 2008 $65, $63, % 2010 $63, % 2011 $63, % 2012 $61, % -5.60% 2008 to 2012

65 Active Listings of Distressed Homes (REO & Short Sales) as a Percent of Total Existing Residential Home Listings in H.R. 35% 30% December 2013: 22.89% Peak: 29.13% (December 2012) 25% 20% 15% 10% 5% 0% Source: Real Estate Information Network (REIN) and the Old Dominion University Economic Forecasting Project. 65

66 45% Sales of Distressed Homes (REO & Short Sales) As a Percentage of Total Existing Residential Homes Sold in Hampton Roads 40% 35% Peak: 42.8% (March 2011) December 2013: 29.05% 30% 25% 20% 15% 10% 5% 0% Source: Real Estate Information Network (REIN) and the Old Dominion University Economic Forecasting Project. 66

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68 Average Price of Distressed Sales vs. Regular Sales in H.R.,

69 Number of Existing and New Construction Homes Sold Year Chesapeake : New Construction Existing Homes Sold Homes Sold Percent New Construction , % , % , % , % , % ,369 1, % , % , % , % , % , % , % , % , % 69

70 Number of Existing Residential Homes Sold Chesapeake : Year Number Sold Percent Change Year to Year , , % , % , % , % , % , % , % , % , % , % , % , % , % 70

71 Median Sale Price of Existing Residential Homes Chesapeake: Year Median Price Percent Change Year to Year 2000 $115, $124, % 2002 $134, % 2003 $149, % 2004 $180, % 2005 $226, % 2006 $247, % 2007 $250, % 2008 $248, % 2009 $225, % 2010 $230, % 2011 $210, % 2012 $217, % 2013 $215, % % 71

72 Number of New Construction Residential Homes Sold Chesapeake : Year Number Sold Percent Change Year to Year % % % % , % % % % % % % % % 72

73 Median Sale Price of New Construction Residential Homes Chesapeake : Year Median Price Percent Change Year to Year 2000 $163, $201, % 2002 $209, % 2003 $259, % 2004 $326, % 2005 $385, % 2006 $385, % 2007 $361, % 2008 $340, % 2009 $299, % 2010 $303, % 2011 $291, % 2012 $268, % 2013 $313, % % 73

74 Monthly Median Sale Price of Existing Residential Homes Chesapeake : Month Median Price 2011 Median Price 2012 % Change January $220,000 $194, % February $184,000 $215, % March $205,000 $191, % April $208,950 $210, % May $215,000 $219, % June $215,000 $223, % July $225,912 $238, % August $248,450 $228, % September $205,000 $221, % October $190,000 $215, % November $216,000 $215, % December $187,500 $205, % 74

75 Monthly Median Sale Price of New Construction Residential Homes Chesapeake : Month Median Price 2011 Median Price 2012 Percent Change January $318,000 $260, % February $284,950 $284, % March $311,416 $251, % April $278,201 $281, % May $277,000 $239, % June $279,000 $253, % July $290,926 $302, % August $299,950 $268, % September $255,050 $265, % October $297,470 $263, % November $335,000 $287, % December $290,900 $241, % 75

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78 Direct DOD Spending in Hampton Roads ( )

79 Hampton Roads Gross Regional Product Attributable to DOD Spending in Hampton Roads ( )

80 Billions of dollars 700 Sequestration and Discretionary DOD Spending FY 2012 through FY The Discretionary Defense Spending Cap in the new budget agreement increases by about $19 Billion in FY compared to FY but still is about $32 billion below the levels imposed under BCA. FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 BCA 2011 Sequestration BBA

81 DOD Base Budgets, FY 2009 to FY 2021 The bottom line: For the next two fiscal years (federal fiscal years begin on October 1 st ), we re in pretty good shape in terms of defense spending. But, DOD the compensation engine is going to sputter in comparison to the last decade.

82 Fewer Active Duty Personnel, Higher Compensation

83 Congress could invoke another BRAC process designed to close or downgrade military facilities and programs. The number of aircraft carrier groups could be permanently reduced by one or two. (Doubtful in the near future.) One aircraft carrier group is transferred to the Pacific (a 60/40 division in favor of the Pacific suggests this). Naval construction and repair in the region could be delayed or reduced. E.g., BAE Systems. The number of aircraft at Oceana Naval Air Station is reduced.

84 The DOD might conclude that major floating assets such as aircraft carriers no longer are as useful and defensible as they once were, and this leads it to focus its expenditures elsewhere. (This also does not appear to be a threat for the next several years.)

85 Rapid increases in the prices of significant military assets (ships, airplanes, etc.) continue and simply make it impossible for the DOD to purchase and maintain as many as before. This leads to fewer home ported ships, smaller numbers of airplanes located in Hampton Roads, and reduced construction and repair activity. To some extent, this already is happening. Rising sea levels in Hampton Roads prompt the U.S. Navy to give much stronger consideration to relocating its assets.

86 Per Capita DOD Procurement by State Per Capita, The top four states ranked by total Procurement Funds received were CA, VA, TX, and MD, respectively. Avg procurement in 2012: $1058 per person Avg Procurement Per Capita $0-500 $ $ $ $ Top Ten Bottom Ten VA $4, ID $ CT $3, WV $ AK $2, MT $ MD $2, WY $ MA $1, MN $ AL $1, OR $ AZ $1, DE $ HI $1, AR $ ME $1, NC $ MO $1, IA $ Source: Federal Procurement Data System and Old Dominion University Economic Forecasting Project. 86

87 Let s talk transportation I m going to start with the issue of the tolls, but pose it more generally in terms of regional interdependence. Then, I ll segue to talk about mass transportation.

88 Currituck County, N.C Franklin Gloucester County Isle of Wight County James City County Mathews County Southampton County Surry County York County Chesapeake Hampton Newport News Norfolk Poquoson Portsmouth Suffolk Virginia Beach Williamsburg Outside Hampton Road N of Job Located In Jobs Currituck Cty, NC. 7,482 2, ,856 Franklin 13, , , , ,422 Gloucester County 13, , ,819 Isle of Wight County 14, , , , ,435 James City County 37, , , , ,269 4, ,130 10,532 Mathews County 2, Southampton Cty 3, , ,116 Surry County 3, ,115 York County 28, , , , ,380 5, ,656 Chesapeake 132,806 1, , ,070 3,162 3,288 13, ,498 6,504 30, ,535 Hampton 76, ,130 1,717 1, ,047 3,469 23,816 13,744 3,910 1,634 1,956 2,103 5, ,471 Newport News 134, ,822 4,837 4, ,072 4,819 21,508 40,661 3,973 2,193 3,518 4,659 6, ,537 Norfolk 192,051 1, ,742 1, ,432 27,297 6,484 5,236 50, ,249 6,909 52, ,201 Poquoson 2, Portsmouth 61, , ,722 1,721 1,881 6, ,620 5,065 8, ,027 Suffolk 37, , , ,355 1, ,015 12,107 2, ,193 Virginia Beach 229,365 1, ,329 1, ,082 25,843 3,631 3,724 23, ,925 4, , ,576 Williamsburg 19, , , , ,407 3,437 Outside H.R. - 5,045 2,163 2, , ,314 1,794 11,600 15,274 11,424 15,062 16,090 2, ,026 32,761 2,591-1,008,398 13,027 6,451 19,600 21,293 33,962 5,347 12,652 3,958 42, ,532 78, , ,681 8,765 54,634 62, ,790 7, ,968

89 Summary Matrix for Portsmouth 2011 Downtown and Midtown Only From Port Into Port Chesapeake Norfolk 10,249 6,044 Virginia Beach 6,925 8,466 Currituck County Outside H.R T otals 17,222 15,057 "In and Out" Total is 32,279, which is 52.7% of Portsmouth's job base of 61,237 All Tolled: DTT, MTT, HRBT, MMMBT, RT 17 From Port Into Port Chesapeake Norfolk 10,249 6,044 Virginia Beach 6,925 8,466 Currituck County Gloucester Cty Mathews County 7 34 York County Ham pton 1,956 1,721 Newport News 3,518 1,881 Poquoson William sburg Outside H.R. 95 1,405 T otals 23,641 20,381 "In and Out" Total is 44,023, which is 71.9% of Portsmouth's job base of 61,237

90 So, 32,279 individuals are likely to use the tunnels commute in and out of Portsmouth daily. They will pay the tolls, most of them twice a day. (Of course, some may choose to car pool; some may use mass transit; some may telecommute.) However, 32,279 is 52.7% of Portsmouth s job base. How does this compare to other Southside cities?

91 Relative Burden of the New Tolls Virginia Beach Norfolk Suffolk Portsmouth

92 Future Tolls I believe you are aware of the current structure of the tolls: Passenger Off-Peak Time $1.59 ($0.75) Passenger Peak Time $1.84 ($1.00) Truck Off-Peak Time $4.77 ($2.25) Truck Peak Time $7.36 ($4.00) These lower tolls will cost the Commonwealth $82.5 million between now and 1/1/2016.

93 ERCO s agreement with the Commonwealth gives it authority to raise its tolls 3.5% annually, or by the CPI for the trailing twelve months, whichever is higher. If the tolls go up 3.5% every year for 54 years, beginning in 2016, then by 2070, they will be: Passenger Non-Peak Time $1.59 $10.19 Passenger Peak Time $1.84 $11.79 Truck Non-Peak Time $4.77 $30.57 Truck Peak Time $7.36 $47.17

94 But, what if the CPI goes up more than 3.5%? (It did in 24 of the past 58 years.) Here s the difference.

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96 The Issue of Ability to Pay Using Passenger Tolls as an Example Let s assume that a Portsmouth resident works 250 days per year and therefore makes 500 tunnel trips He/she pays the peak time toll of $1.84 each time. Further, he/she also uses the tunnel another four times a month for discretionary purposes and pays $1.59 each for those trips. So, he/she will make 250 X 2 = 500 peak time trips plus 48 non-peak time discretionary trips, or 548 total trips. This will cost him/her $ annually. Let s consider the likely effects of this.

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98 Discretionary Drivers: Will They Pay?

99 It is the discretionary travelers who are most likely to be affected by the tolls. These are individuals that might patronize a Portsmouth restaurant or business, visit friends, attend a movie, go to church, etc. Steer, Davies and Gleave in its study talked of a 24% to 48% initial shock effect ---the decline in tunnel usage that will occur when the tolls go into effect.

100 The initial traffic numbers supplied by VDOT suggest that these were high end estimates for all vehicles combined, but not terribly far off for discretionary travelers. But, consider this: If traveling a non-tolled route adds another 30 minutes to a single trip, and the average value of an individual s time is $10/hour, then $5.00 > $1.84, and after an adjustment period, most drivers will use the tunnels. Nevertheless, Portsmouth and Norfolk restaurants and businesses that have regional clienteles could well be hurt by the tolls.

101 Consider a hypothetical restaurant in Downtown Portsmouth or Norfolk with a regional clientele. In effect, the tolls represent a 5% to 10% tax on a typical customer s bill at this restaurant. Restaurants will a local clientele will not face the same tax. Usual estimates of price elasticity of demand (how sensitive consumers are to price increases) suggest that a 10% increase in meal prices will lead to an 8% to 12% decline in patronage. If this is true, then some restaurants and businesses could lose as much as 8%-12% of the revenues they receive from out-of-city customers.

102 But, in the case of Portsmouth, the City also will be injured---lower sales tax collections. A 1% decline in taxable sales will cost the City about $6 million annually. Less profitable businesses and work places eventually translate into lower assessed valuations. A 1% decline in assessed valuations will cost Portsmouth about $900,000 annually.

103 Taking a Long-Run View Let s be clear: There are benefits attached to the DTT/MTT/MLK projects. When completed, they will reduce travel times, increase travel reliability, lower vehicle operation costs, and probably reduce emissions. Several reputable studies have attributed hundreds of millions of dollars of benefits to Hampton Roads as a consequence. However, neither the benefits nor the costs of these projects will be spread evenly over our region. There will be winners and losers.

104 Further, we must think carefully how we will pay for a third crossing. If significant tolls on RT17, the MMMBT, and HRBT are a part of that package, then we court serious danger. We have at least 71,000 individuals who live on one side of the James River and commute to the other side for their work.

105 Anything that reduces or frustrates regional economic flows and interdependence will make us worse off. Significant tolls on the three un-tolled James River crossings fall into that category because they would increase costs, diminish the size of our market, reduce labor mobility, and cause our incomes to stagnate or decline. Viewed from a national perch, significant James River tolls would do much to make our region non-competitive.

106 Table 3 Workers Crossing the James River on a Daily Basis: The Flow of Major City Workers Over the RT17, MMMBT and HRBT Bridges Hampton to Chesapeake 3,162 Chesapeake to Hampton 3,469 Hampton to Norfolk 6,484 Norfolk to Hampton 3,910 Hampton to Portsmouth 1,721 Portsmouth to Hampton 1,956 Hampton to Suffolk 885 Suffolk to Hampton 2,103 Hampton to Virginia Beach 3,631 Virginia Beach to Hampton 5,088 Totals 15,883 16,526 Hampton Total 32,409 Newport News to Chesapeake 3,288 Chesapeake to Newport News 4,819 Newport News to Norfolk 5,236 Norfolk to Newport News 3,973 Newport News to Portsmouth 1,881 Portsmouth to Newport News 3,518 Newport News to Suffolk 1,355 Suffolk to Newport News 4,659 Newport News to Virginia Beach 3,724 Virginia Beach to Newport News 6,376 Totals 15,484 23,345 Newport News Total 38,829 To the Southside Total 31,367 To the Peninsula Total 39,871 Grand Total, to and from : 71,238

107 An obvious alternative to tolls is the gas tax, but higher MPGs on our autos have deflated this revenue source, and at the same time, we re also driving fewer miles.

108 Still other alternatives: (1) Income Tax (it addresses the ability to pay, but ignores usage) (2) Mileage Meters (they accurately measure use, but don t address either the ability to pay, or the spinoff benefits of travel)

109 Over the long-term, we need different revenue sources for transportation. Apart from the politics, the sales tax approach that the Virginia General Assembly took this past year probably was the least bad approach. Income taxes also are a possibility. At the end of the day, however, we want more transportation spending than we can pay for in terms of current revenue. This has caused the Commonwealth to turn to the private sector for help.

110 The Public-Private Transportation Act (1995) empowered the Governor to enter into agreements with private sector firms to build and operate transportation facilities such as highways, bridges, and tunnels. The Act has been used around Richmond (Route 288, the Pocahontas Parkway). However, the most recent such partnership the Commonwealth negotiated concerning the DTT and MTT does not appear to have produced favorable terms for either motorists or citizens (e.g., 13.5% rate of return, 3.5%+ annual increase in tolls, insurance against falling revenues from other facilities).

111 What about mass transportation possibilities? There are four major possibilities to consider: (1) A high speed rail connection to Richmond and thence to Washington DC and NYC (2) Expansion of the Tide (3) Expansion and improvement of the region s bus system (4) A third crossing of the James River estuary that also provides a tube for the Tide

112 With respect to both (1) and (2), we must recognize that such modes of travel will require significant subsidies from taxpayers in general to those who travel on those modes and to the employees of those modes. And, the costs and benefits will be unevenly distributed. One can provide some justification for such subsidies because other forms of transportation typically are subsidized, e.g., highways and automobile travel. ($12/gallon gasoline to incorporate all the costs.)

113 But, let s recognize that fares currently only are paying about 15% of the average cost of each passenger. This is higher than one finds in nearly any other city. The Tide will become more cost effective only when it connects major population centers (certainly Navy Base Norfolk and Old Dominion University). If the Tide is extended to the Oceanfront in Virginia Beach, then some individuals really will benefit, others will pay.

114 While not as sexy, the benefit/cost ratios attached to expanding and improving most bus systems generally are much more attractive. Interestingly, the environmental impact of busses per passenger is very comparable to that of light rail systems.

115 With respect to a third crossing, let me repeat what I said about the new tunnel between Portsmouth and Norfolk: Let s not misunderstand: There are benefits attached to the DTT/MTT/MLK projects. When completed, they will reduce travel times, increase travel reliability, lower vehicle operation costs, and probably reduce emissions. Several reputable studies have attributed hundreds of millions of dollars of benefits to Hampton Roads as a consequence.

116 While I haven t done the required analysis, I suspect that the same thing could be said in favor of a third crossing. Our problem is and continues to be---how to pay for the improvements we want. In the current milieu, I see no way to avoid tolls and/or a much higher regional sales tax.

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120 We re entering a new era in Hampton Roads in terms of our economic growth. For more than a decade, our primary economic engine has been defense spending, which during the past decade increased by an average of almost 7% per year. Unfortunately, it appears that this decade may be more like the 1990s, when defense spending declined and regional economic growth was mediocre.

121 Therefore, we really do face the question What do we do now? There are two major candidates: * Richard Florida s provocative theses about why regions grow * Conventional economic theories that emphasize education, technology, R&D, infrastructure, and tax policy.

122 Richard Florida has sold lots and lots of books in which he argues that the secret to economic growth is to attract and retain members of the creative class which consists of highly mobile artsy, crafty Bohemian individuals with technological savvy, plus recent immigrants. It is enough for me to say that even though lots of individuals are attracted to Florida s hypotheses, and he s a sought after speaker, there isn t very much rigorous empirical evidence in favor of them.

123 The Florida evidence is too complex to present here. Instead, let me provide several examples to demonstrate some of the problems with his approach: * Fargo, ND, Boise, ID, and Salt Lake City are neither artsy, crafty, nor magnets for immigrants. Yet, they are growing rapidly. Why? Excellent education systems, technology, and infrastructure. * New Orleans is famously diverse, but has experienced miserable economic growth because of a wretched education system, an undereducated citizenry, unimpressive technology, and poor infrastructure.

124 Here s the salient point: Bohemians and immigrants can indeed be extremely valuable citizens and immigrants in particular are a well-spring of entrepreneurship and innovations. However, as a group, they are most valuable when they come to the U.S. highly educated, can utilize and extend advanced technologies, and can benefit from valuable infrastructure. If tomorrow the size of Norfolk s somewhat Bohemian Ghent were to double, this would not be of great help to Hampton Roads in terms of economic growth unless the new Bohemians were highly educated, were participants in R&D processes, and they could rely upon up-to-date infrastructure.

125 Here s the Recipe for Success 1) Invest in K-12 education, but more selectively. Except for Chesapeake and Suffolk, all of our regional school districts lost students between and Hence, we now need to close some schools and direct more expenditures into instruction. We also need to focus on young people early enough in their lives to make a difference. 2) Increase support for our community colleges and their job-oriented programs, including much more emphasis upon apprenticeships (think Germany here).

126 3) Improve and rationalize our transportation structure: Extend the Tide to Naval Base Norfolk via ODU, and to Rosemont Road even while we expand our bus system; build a third crossing with a Tide tube; use technology to guide traffic; avoid high tolls that will split our region into two or three parts; and, develop a larger, dedicated non-toll revenue stream to support these developments 4) Stop frittering away funds on projects that subsidize some private businesses at the expense of others, and also falsely advertise job creation and tax collection benefits that actually are displaced from existing businesses.

127 (5) Beware of the Fallacy of Composition in regional economic development. One city s triumph may not benefit the region. (6) Lobby our legislators and the Governor to provide healthy financial support for R&D at the region s primary doctoral institutions (ODU, W&M, EVMS). E.g., An NIH research grant that comes to Hampton Roads is new outside money that does not displace existing expenditures.

128 7) Recognize that in 15 years, it will have become obvious that the correct path for EVMS in this decade was to affiliate significantly with Old Dominion University. The absence of a major league university/medical school research complex is the most obvious way Hampton Roads now falls short of comparable regions. We sorely need this economic engine and over the long-term, ODU/EVMS is the only combination capable of taking us where we need to go.

129 8) Find ways to provide public financial support for Hampton University s Proton Therapy Institute, which has great promise and occupies an important position in a growth industry. 9) Capitalize on our existing strengths such as NASA and the Jefferson Lab and renew our emphasis upon commercialization of their research. Our walk has not matched our talk in this arena.

130 (10) Garden existing firms to see what we can do (short of outright subsidies) to help them grow here in Hampton Roads. (11) Maintain a business-friendly climate that eschews tax rates and regulatory policies that would position us as an outlier.

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