Austin Letter

Trusted Insights and Perspectives Since 1979

October 13, 2017

Volume 39, Number 28

About a week after you read this, one of the most important deadlines for Austins economic future will have come and gone.  But you wont know the results until next year.  Were talking about the coveted site for Amazons second headquarters location.  Amazon claims it will invest $5 billion in its HQ2, and that it will generate 50,000 new jobs over the next two decades.  The deadline for site selection proposal submissions is October 19, 2017.

Based on multiple reports, more than 100 cities are scrambling to meet this deadline.  Talk about worldclass competition.  Talk about a worldclass prizeIts hard to overestimate the impact on the winning city (or area).  No matter what you read about various cities and their chances, it’s all speculation, some of it even well-reasoned.  (We’ve also been a part of this speculation/analysis.  To understand the process, check our September 22, 2017 edition in the Archives section of this newsletter.)

It’s important to understand that, of all the submissions, none will likely be the perfect location.  I mean, after all, Amazons wish list/criteria is such that no city/area can be a perfect ten on each item.  Add “incentives” that will be unique to each location and it further compounds the selection problem.  And, much of the Amazon HQ2 site selection team will have a gut reaction to intangibles that are not mathematically quantifiable – such as how they “feel” after a city/area visit – and how they like specific sites within a high-ranking city/area.

It goes back to the old adage of “if the solution is not perfect, then select the best of the options.”  Think politics:  “I don’t like this candidate” until an opponent emerges that you perceive to be worse.  Or, deciding which movie to watch.  “This movie doesn’t really appeal to me, but it’s probably going to be better than what’s currently available.”  They won’t flip a coin, but subjectivity will also play a role.

Amazon already knows a lot about the Austin area.  The company bought Whole Foods, and along with other operations, thousands of local employees already receive an Amazon check each pay period.  Heck, a recent Amazon distribution center in San Marcos in just a year of operation has about 3,000 employees, three times as many as promised.  Next step to watch:  whether Austin makes the Amazon HQ2 short list, after the 100 or so presentations are culled.  Amazon hasn’t indicated when the short list will be announced. Read more →

October 6, 2017

Volume 39, Number 27

The City of Austin is investing heavily in wind and solar power as a source for electricity, even though it is generally known to be more expensive than electricity generated by natural gas.  Currently, Austin Energy is also using several other power sources to provide cheaper electricity to its customers.  One of them nuclear power just passed a major test, at the same time it was receiving federal authorization to operate for another 20 years near the Texas coast.

Back in the 1980s, Austin, San Antonio and Houston invested in building the South Texas (Nuclear) Project in Matagorda County, near Bay City.  As a result, Austin owns 16% of the plant with a priority to access its power to generate electricity.  As you well understand, from construction until today, nuclear power has been controversial.  But nuclear power has been a “clean” industry and is relatively reliable and inexpensive.

One of the major concerns about the nuclear plant has always been its location.  The criticism:  the site made it subject to the ravages of a hurricane that could come roaring into the Texas coast.  Well, the monster Hurricane Harvey came and went.  And the 1,200 employees of the South Texas Project kept the plant producing power without missing a beat.

Another important recent development:  the US Nuclear Regulatory Commission has renewed the license for 20 years for the South Texas Projects two units.  The units are now cleared to operate through 2047 and 2048.  This is significant, because the renewal applications were first filed in 2010 (for licenses that were set to expire in 2027 and 2028).

By the way, the South Texas Project is one of the newest and largest nuclear power plants in the US.  Austin’s portion of power to provide electricity to Austin Energy customers is part of the projects 2,700 megawatts of power that is in use in almost 2 million homes.

Activists have been trying for years to get Austin out of using fossil fuels to provide electricity.  Efforts have been aimed at pulling out of a coalfired power plant in La Grange and the city is not adding another natural gas plant.  Of course, the same activists aim their criticism at nuclear power-generated electricity, as they continue to press for more reliance on solar and wind. Read more →

September 29, 2017

Volume 39, Number 26

Its a long way off January 2019, to be precise but its not too early to predict the next regular session of the Texas Legislature in Austin will be unlike any in recent memory.  You can blame (credit?) a force of natureHurricane Harvey.  “Nearly everything that would have been on the states plate between now and the next scheduled legislative session in 2019 has been marked by the disaster,” noted a longtime legislative chronicler.

That’s a pretty strong claim from Texas Tribune columnist Ross Ramsey.  He backed it up with this quote from Texas House Speaker Joe Straus:  “Harvey has changed everything.”  The issues of the next session, Straus said, “are going to be overtaken by Mother Nature.”  Ramsey added details of what is likely to happen.

School finance is dependent on property taxes.  More to the point, its dependent on taxes on properties that are now worth a lot less than they were four weeks ago,” he noted.

“A 2017 legislative debate over insurance – spurred by wind and water claims after previous storms – is now in high relief as insured property owners make their Harvey claims and dicker with insurance adjusters and lawyers,” Ramsey pointed out.

Prisoners have been moved around.  Social services have been stretched.  Lawmakers who were talking about limiting state spending a few months ago are now scheming about how to tap the states $10.3 billion savings account, known popularly as the Rainy Day Fund,” he further reported.

“The physical damage from the storm is relatively easy to spot, assess and catalog,” he observed.  “But it’s becoming more evident that the storm also seeped into every corner of government policy and politics.  State leaders who were preoccupied with social and cultural standards and ideas about the role of government a month ago are now bound to more tangible things:  roads, prisons, schools and other buildings, hospitals and shelters.”

About the Rainy Day Fund that legislators have been reluctant to touch in previous sessions, the official who oversees the Fund, State Comptroller Glenn Hegar, was asked if the Fund should be use for storm costs:  “Absolutely, what else would you use it for?” Read more →

September 22, 2017

Volume 39, Number 25

Several dozen major metropolitan areas including Austin and at least four other Texas metros have less than a month to get their act together to bid on what may be the biggest ever single economic development prize.  Amazons HQ2, the $5 billion investment that will ultimately create 50,000 new jobs for its second headquarters location, has set an October 19, 2017 deadline for proposals.  Some speculators have written off Austin, while others have said its a slam dunk for Austin to be the chosen HQ2 site.  Whats likely to happen?

Amazon has set a high bar in its qualifications for sites to make the cut.  Unlike most other site selection processes that are secretive for competitive reasons, Amazon has released its criteria for all the world to see.  This has led to rampant predictions about the ultimate site selection decision.  To boil it down, let’s analyze the process Amazon is likely to employ.

Start with the naysayers.  The one that’s getting the widest distribution is The New York Times’ prediction Denver will beat out Austin.  And, while Austin scored high in other criteria, the one factor that led the NYT to eliminate Austin was what you would expect:  traffic congestion and direct access to mass transit.

But, in practically all other categories, Austin ranks at or near the top when you analyze Amazons eight pages of guidance.  Obviously, we can’t list them all here.  But here are a few:  stable business climate for growth … strong job growth able to attract top technical talent … sites to expand to 8 million square feet (the Pentagon, for comparison, has 6.6 million sq.ft) … high quality of life … etc.  Click on our 9.8.17 edition in our Archives for a more complete list.

So how does Austin overcome the traffic/transit deficiency?  Amazon HQ2 will likely use a matrix spreadsheet to compare proposals ranking each of the criteria from 1 to 10.  Sure Austin may fall short (as other metros also will) in the traffic/transit category.  But a top ranking in other categories, when totaled at the end, could inure to Austin’s benefit.

This is where Amazon HQ2’s admonition “to encourage cities to think big and be creative” come in.  Hark back when Austin shocked the world to trigger its tech revolution by beating out 57 cities for MCC.  Because Austin had few non-stop airplane connections to major destinations (unlike today), Austin made a Lear jet available at no cost to MCC.  “Big and creative must be Austins guidance.  Check the next item for other “edges” for Austin. Read more →

September 15, 2017

Volume 39, Number 24

Most Austinites complain about traffic problems, but no one seems to be as vociferous and knowledgeable as civic activist Mike Levy, the founder and former publisher of Texas Monthly.  He minces no words, he names names and he tosses out zingers right and left.  Here are some of Levys rants about problems downtown and on The Drag.

About UTAustin’s Drag:  “The city’s transportation department head Robby Spillar plans to reduce the Drag to one lane each way for cars, dedicating the other lanes for usage only by increasingly empty buses (as per Capital Metros own data) and then for trolley cars, for guaranteed gridlock in the UT campus area in addition to the downtown areas, as promoted by Mayor (Steve) Adler and Council Member (Ann) Kitchen.  In addition to increasing congestion, the impact on small business owners stores and restaurants along The Drag will be devastating because of the elimination of parking.”

Levy also zeroed in on downtown traffic:  “Robby, under his ‘Great Streets’ initiative, has already made Colorado and Brazos into two-way streets with loss of vehicular lanes to allow for wider sidewalks and tree pots for cigarettes and benches for sleeping with similar plans for Guadalupe, Lavaca, Trinity, San Jacinto and all streets from the river to 10th.

At 5 pm East 7th is backed up to Brazos with cars headed to IH35.  Make it two way and it will be backed up to Johnson City.  (A big chunk of East 5th between IH-35 and Brazos was quietly made two-way the weekend of August 26.).  More lane elimination is planned throughout the city using money from the last bond election.

“The mayor talks about reducing congestion.  Help me out here.  Please.  How does taking away vehicular lanes throughout the City, and especially in the downtown and UT areas, reduce congestion as per the mayors promise?”

“Under Robby Spillar’s Grand Plan, with the support of the mayor and the Council, has as a ludicrous goal to create intentionally so much congestion people will get out of their cars to ride buses and trolley cars or bikes or walk to downtown,” concluded Levy.  “Hes letting Robby Spillar create gridlock that will make New York Citys look good.”  Check out the next item for more Levy comments about the mayor, council and CapMetro. Read more →

September 8, 2017

Volume 39, Number 23

The City of Austin leaders didnt need a survey to tell them what anyone with a heartbeat understands:  the most important issue facing Austin is traffic.  The survey they conducted anyway confirmed this fact.  But a deeper dive into the recentlycompleted survey also revealed some interesting observations:  such as how longtime residents feel, compared to relative newcomers.

Take the issue of whether residents feel the city is headed in the right direction or wrong direction.  A majority of those surveyed (53%) feel the city is on the right track.  But, a substantial minority (44%) feel it is going in the wrong direction.  When you break it down by how long residents have lived here, there is a dramatic contrast.

EMC Research reporting to the City on its research had this observation:  “There is a stark division based on how long residents have been in Austin, with those who have lived in the city less than twenty years more positive about its direction and more satisfied with it, and those who have lived in the city for longer than two decades more negative about its direction and less satisfied.”

But, what about the city’s taxing and spending priorities?  It’s a much different picture. “There is near unanimous agreement the City has enough money and just needs to do a better job making sure it is spent on the right priorities (82% agree; 17% disagree),” reported the researchers.  But newer residents were still more open to tax increases than long-time Austinites.

Now, back to that bugaboo – traffic.  Taken together, traffic, transportation and roads/infrastructure were by far the major topofmind concern.  Top-of-mind means unprompted.  The question was open-ended, without listing a series of problems.  This approach is a solid gauge of respondent concerns.

Oh sure, there were a number of other concerns mentioned by respondents.  After all, this is Austin where almost everyone has an opinion.  Unprompted responses related to housing came in second – way back in the pack.  But, when prompted, the numbers jumped way up as they expressed concern about the rising cost of living in Austin.  And, housing was the biggest driver of those responses.  Taken as a whole, the responses were not all that surprising – even the ratio between those who have lived in Austin awhile compared to recent residents. Read more →

September 1, 2017

Volume 39, Number 22

Deadly US train collisions in 1998 and 2002 triggered Congress to pass the Rail Safety Improvement Act of 2008.  It mandated all commuter rail systems, like the one operated by Capital Metropolitan Transportation Authority in the Austin area, install expensive safety equipment by 2015.  Did CapMetro meet this deadline?  Nope.  The deadline was then extended to December 31, 2018.  And CapMetro, finally, this week voted to install a Positive Train Control (PTC) system.  Now what?

First of all, this is a big deal – big, as in big bucks.  CapMetro voted to spend $65.7 million to install a PTC system on its 32mile Red Line.  What is this PTC?  Without diving into the technical aspects of it, here is the way the national railroad association describes it:

A PTC system is advanced technology designed to automatically stop a train before certain incidents caused by human error can occurStopping derailments, collisions and other mishaps is a good thing – especially if it can prevent injuries or death.

It’s a large and complex process.  CapMetros contractor is planning to begin the effort next year, including installation of an elaborate fiber optic network.  How long will it take?  Good question.  CapMetro has already indicated it will request another extension from the feds so its contractor can continue working through 2020.

Financing the installation will take a big bite out of CapMetro’s budget.  The $65.7 million price tag will be offset somewhat if it is successful in applying a $12.8 million federal grant.  Still, the remaining cost is a huge chunk to pay.

There are at least three different options.  CapMetro’s board decided to use a PTC system that is proven in several cities.  It is called Enhanced Automatic Train Control.  It is being used in Portland, OR., Salt Lake City and Denton County here in Texas.  Contracting for a proven system could be the value of waiting until now to take the leap.

The contractor that will begin installing the Enhanced Automatic Train Control system next year is a company known as Modern Railway Systems.  CapMetro is now on the hook to spend a large sum that could have a significant impact on its budget for the next couple of years. Read more →

August 25, 2017

Volume 39, Number 21

Is the Austin area economy at a tipping point?  Impressive current numbers are actually causing problems of a different sort, according to Richard Florida, one of the leading thinkers about cities and their future.  This is significant, because 15 years ago Florida published a book that became a bible for Austins changing economy highlighting what he called the creative class.”  Now he is issuing a mea culpa in his new book, The New Urban Crisis.

Austin was used as a prime example.  Florida’s examples of artists, musicians, tech workers, etc. building a creative economy in an environment that attracted more young people, and subsequent investment led to a new and prosperous urban core.  Sound familiar?

Florida served as an inspiration for mayors, developers, and planners who pedestrianized streets, built bike lanes and courted attractions,” observed Sam Wetherell, a British professor writing in Jacobin magazine.  He compared Austin to London and other major world cities who have followed Florida’s model.

Now what?  Wetherell notes “when the rich, the young and the (mostly) white rediscovered the city, they created rampant property speculation, soaring home prices, and mass displacement.”  In his new book, Florida recognizes some of the impacts of his original thesis – in effect, retreating from his earlier optimism.

Wetherell says Florida now realizes “the rise of the creative class created economic growth only for the already rich, displacing the poor and working classes.  The problems that once plagued inner cities have moved to the suburbs.  The ‘creative class’ were just the rich all along, or at least the college-educated children of the rich.”

This is what’s happening in Austin.  The euphoria accompanying Austin’s meteoric economic rise is now being affected by deep-seated concerns about affordability.  Families, businesses, musicians are moving away from Austin because, as Florida now implies, the rise of creative classes has brought dizzying levels of income inequality into every city theyve inhabited.

Florida, the city guru who singled out Austin as he hailed the rise of the creative class, is now admitting he was wrong about its ultimate impact.  For now, though, Austin’s creative class economy is still humming along when using jobs as a measuring stick.  See the next item. Read more →

August 18, 2017

Volume 39, Number 20

Do you want to pay a tax to drive into downtown Austin?  A tax, not a toll.  Congestioncharging zones (CCZ) are already in place in some important cities, and being planned in others, as a way to reduce roadway crowding in central cities.  CCZs are just one solution being bandied about, that also have the added advantage of generating revenue.  They all have one thing in common changing the way you pay for driving a vehicle.

While congestion is one of the driving forces, dwindling sources of revenue are also a big contributing factor.  The standard taxes you pay at the pump for gasoline are becoming less and less adequate to handle the increasing number of vehicles, according to The Economist.  And, face it, local and Washington legislators have shown no appetite for raising gasoline taxes.

CCZ’s have their champions.  There has been no serious public discussion about a CCZ for downtown Austin.  However, even as we speak, New York’s Gov Andrew Cuomo is pushing a CCZ tax for access to Manhattan.  But, the outcome is far from certain.

Why?  Take a look at London.  A CCZ was put in place there in 2003, but the city is now seeing congestion rising again.  Seems market forces are at play in London.  Uber drivers, taxis and vans figured out they could pay one tax for entry and spend hours driving around picking up riders, increasing congestion.  So the CCZ may go down as a failed experiment.

Still, fuel tax revenues are drying up even as more vehicles crowd roadways.  The problem of reducing revenue is multi-faceted:  better gas mileage (fuel efficiency has roughly doubled in the past 25 years) … more electric/hybrid cars, that are subsidized to increase production, etc.  So, some form of payby-mile is gaining steam.

A variety of ways to charge you for driving a vehicle are in the experimental stage – all bolstered by scary, unbelievable leaps in technological capabilities.  In less than three years, Singapore will use a GPSbased system to vary the amount it charges drivers based on distance, time, location and vehicle.  At the same time, drivers will receive real-time info about the cost and “busyness” of roads, encouraging them to consider other routes.  Closer to home, California and Colorado have received federal grants for trials of various pay-to-drive schemes.  We’ll detail what Oregon is doing with 1,500 drivers in the next item. Read more →

August 11, 2017

Volume 39, Number 19

Is something wrong with Austin home prices?  For that matter, the same question can be asked about home prices in other major Texas cities.  This sobering question is prompted by recent national reports that area home prices are among the most overvalued in the US.  Those reports have pointed to the recent rapidlyrising home prices in the Austin area as examples that the local residential housing market is overvalued.  However, this week, a longtime, respected Texas economic research outfit took issue with this designation.

While not overtly stated, these national reports saying Austin housing is over-valued imply a housing bubble may be on Austins horizon.  And, a housing bubble further implies a bursting of the bubble could have bad economic consequences.  Therefore, their reports should not be taken lightly.

You may remember two weeks ago (see the 7/28/17 newsletter in our Archives section) we told you the TexasA&M Real Estate Center was looking into these “overvalued” reports.  Well, the Center released preliminary results of its research this week.  Saying such comparisons are “not easy,” it did conclude that “Texas shows no current signals of overheating” – a reference to a possible housing bubble like the one that led to a recession many years ago.

TexasA&M research economist Dr. Luis Torres refers to the discrepancy in calculation as a “misalignment” that suggests “recent price changes cannot be explained by supply and demand fundamentals alone.”  He points to 2014 as the year when the “misalignment” started in Austin, Houston and DFW.  And 2015 when it started in San Antonio.

Torres says “there is no sure way of knowing what prices should be,’ even when considering supply and demand determinants, since they change over time.  Even more difficult is determining with certainty the formation of housing bubbles.”

But, the real estate researcher looked back at conditions present during the last bubble, and concluded they “seem not to be present currently in the Texas housing market or in the major Texas MSAswhich includes Austin.  However, he did caution about the lack of housing inventory, and said the TexasA&M Real Estate Center “will continue to monitor and analyze” this significant supply restraint.  We’ll also watch it for you. Read more →