Tom Binnings, Senior Partner (as published in the Colorado Real Estate Journal Feb 20 – Mar 5, 2013)
It’s hard to imagine interest rates could go anywhere but up; especially ten to 30 year rates. We’ve been saying that for several years now. The big issue for 2013 is whether the Federal Reserve will continue accommodating bond markets to counter fiscal drag from growing federal austerity. It appears they will. On the other hand failing to address federal austerity will cause higher long-term rates due to growing anxiety in financial markets over sovereign debt in advanced countries around the world with the U.S. simply leading the way.
Cap rates, while at low points historically, reflect high risk premiums relative to treasuries. The question is whether the risk premium is legitimate (commercial real estate is even more risky relative to 90 T-bills) or whether Federal Reserve intervention has created an “artificial” premium. The good news is commercial real estate survived what could have been a blood bath had regulators forced REO liquidation as opposed to the Federal Reserve providing liquidity. This is a sharp contrast to the S&L Crisis 25 years ago when commercial real estate prices in overbuilt markets plummeted by as much as 70%.
Investor interest in commercial real estate remained high in recent years in the A+ major market sector as institutional and large foreign investors sought capital preservation. The second and third tier markets found along the Colorado Front Range encountered rough going. The lack of liquidity in these “lesser” markets created a negative appraisal bias in general despite declining cap rates due to lower debt costs. The perception is changing. While the desire for significant upside among investors will continue to keep downward pressure on prices, the low interest rate environment, which looks to persist for the coming two years, will lower cap rates on quality properties generating upward price pressure. In short, the market for quality second and third tier commercial real estate should open up in 2013 after a prolonged waiting period.
Private sector and state and local government growth look to be as strong as we’ve seen in six years. The 2013 version of recovery will be more broad-based favoring the energy, technology, manufacturing, and housing sectors. Retail will suffer somewhat with the elimination of the temporary payroll tax deduction and job growth should continue being somewhat sluggish due to hiring uncertainty resulting from debates in Washington and the full fledged implementation of the Affordable Health Care Act in 2014. Conversely, rising stock markets and home prices will help the upper half of consumers fell better off in 2013 resulting in higher consumption and riskier investment.
The impacts on the various commercial real estate sectors will be varied — mainly due to longer-term fundamentals than short-term improvements in the economy. Overall we should see net lending increases in commercial real estate. Office, which has performed the worst in the last decade along with anchorless retail, will stay sluggish. Sluggish job growth, more self-employment, and a general trend to fewer square feet per employee do not bode well for less desirable office inventory. Traditional retail space will continue experiencing declines in market share relative to online retail. This may hit the big box retailers the hardest. Neighborhood and community level centers with anchors will perform the best. Improvements in manufacturing and online retailing favor well located industrial and warehouse space. The apartment market may soften a bit in 2013 as more renters qualify for home purchases and for sale inventory increases somewhat, but overall rent growth in the last few years should be sustainable even with more apartments being built. One of the challenges in the housing market will be curtailed new attached and multi-family for-sale product as the cost to the supply chain from construction defect litigation is killing development incentives.
Paul Rochette, Senior Partner
Some new and persistent downside (and a few upside) international risks can affect our economy.
New risks are emerging. These include China’s housing bubble which, in terms of the number of units, makes ours look miniscule. China, to stimulate their economy, built entire cities only to find no one showed up. As a result, the Chinese economy, which has served as a global engine of growth, is slowing. While the latest figures show it not slowing as much as feared, the latest projection of growth in the 7.5% range is still a significant drop from the plus 10% range of the past decade.
In addition there is the potential for currency wars as the world attempts to stimulate their economies and support central government spending by devaluing their currencies – AKA printing money. The new Japanese Prime Minister Abe has stated that the Japanese are specifically trying to stop deflation by increasing the money supply, and that the slide of the yen is a result, not a reason, but few in Europe or the U.S. believe that. Coupled with aggressive money supply policy in the U.S. and continued challenges to the faith in the euro, a currency war may slowly emerge. The Chinese, while moving towards encouraging increased domestic consumption, are still heavily influenced by state owned enterprises (SOE’s) that wish to continue to export, and want the yuan to remain undervalued as well. All of the forces keeping other currencies weak will provide some further softening of U.S. prices, but at the cost of higher U.S. trade deficits, especially if the U.S. recovers sooner than others.
The European Union continues to be a cause for concern. After beating back the fears of a Greek default, the markets for Spanish, Italian and other southern tier debt stabilized, at least until this past week when Cyprus moved to center stage. For the first time in the euro crisis, depositors are being asked to contribute to the bailout. This is hitting depositors with more than 100,000 euro in Cyprus’s largest two banks, a large percentage of them Russians who have found Cyprus to be both a tax haven and a retirement center. The ramifications of depositors being hit means that now depositors in other southern European nations may no longer be so sanguine about the safety of their deposits, which both contributes to the growing southern European resentment towards Germany and also the growing sense that the crisis is not over. Perhaps depositors in Italy and Spain should be worried should the banking crisis not abate there. We will see if panic disintermediation hits this Thursday (3/28/13) when Cypriot banks reopen.
There are a few positive notes as well. The U.S. has entered trade talks with Japan and other Asian nations under the Trans Pacific Partnership, and is beginning talks with the EU over reducing trade barriers. Many economists agree that lowering trade barriers has net beneficial effects. With agricultural exports being one of the U.S.’s (and Colorado’s) strengths, continued global economic prosperity suggests more U.S. and Colorado exports of foodstuffs.
Canada, the EU and Mexico are Colorado’s three largest export destinations. While the EU is in the doldrums, Canada and Mexico are looking at respectable economic growth rates. Combined with China and Japan as our 4th and 5th largest export destinations, exports look to be a strong contributor to the U.S., the State and the region.
A couple of years ago I laid-off an employee. I sensed at the time this newly unemployed person would not get another job for at least 99 weeks ; and maybe forever. Why? Not because the demand for his skill set was so weak, but because the gentleman being laid off was a retired military pensioner and unemployment compensation would be the perfect supplement to his income totally eliminating the need to work. This is what economists call perverse incentives – incentives the motivate people to pursue the wrong behavior from a societal perspective. As a result of that layoff I continue pay a higher unemployment “tax” on my own unemployment insurance as the sole employee of my corporation. I think someday I’ll get even as I too face a perverse incentive to lay myself off a year before retirement.
As economists we get calls every month by the media to comment on the unemployment rate. It’s somewhat of a shame because the unemployment rate is a really poor measure of where the economy stands and tells us nothing about where it’s going. Last month the unemployment rate dropped below 8% nationally — a sign things are better. But did the rate change because more unemployed people looking for work got jobs or did it improve because they quit looking for work and therefore are no longer officially unemployed as they are not participating in the labor force. Or did they simply find work as a sole proprietor or through a part-time job which in the unemployment formula still counts as employed. What about the chronically unemployed? The devil is always in the details.
Let’s look at some of the details. For starters the average American is clearly not better off that they were four years ago when the sub-prime mortgage crisis exploded and the world recognized we were in a recession. By September, 2008, the U.S had lost 1% of its wage and salary job base. Today, despite additional new jobs being created every month since March, 2010, we are still down 3.4% relative to the number of jobs the economy had at the end of 2007. This means we have about 5.5 million more people unemployed than might normally be the case. In addition, we have 8 million people (approximately 3 million more workers than typically found) working part-time because they cannot find suitable full-time jobs. This totals 8.5 million more people who are either unemployed or sub-employed than would otherwise be the case under the “old normal”. Perhaps even worse than the 8.5 million shortfall is the approximately 15 million Americans who either left the workforce since 2007 or who have not entered the workforce as they come of traditional working age. All of this is occurring as almost 10% of U.S. companies report they cannot find qualified workers.
Who are these people ? Five million Americans who are looking for work have been unemployed for more than half a year. This by by far the largest group of unemployed workers, peaking out at over 4% of the labor force in 2010, when usually the number of longer-term unemployed is substantially below those who are unemployed for less than 14 weeks. This can be seen in the following graph from www.calculatedriskblog.com.
Over 2 million are construction workers. The unemployment rate among those people without a high school education is three times the rate of people with at least a college degree. Many of the sub-employed, part-time workers appear to have made their own jobs by becoming self-employed as the U.S. had 1.4 million more proprietors in 2010 than we had in 2007. In addition to the “chronically” unemployed, the number of people collecting disability social security is rising.
There is some good news. The number of “new hires” slightly exceeds the number of people being laid off or quitting their jobs. And the total number of job openings is steadily climbing. Small business hiring plans are at the highest level since the beginning of the Great Recession and new home construction appears to be gaining solid traction. The front edge of the Baby Boomers are hitting the traditional retirement age making room for the large number of Millennials entering the labor force.
When one flies above the forest and tries to interpret the big picture what appears to be happening is two-fold. First, our least skilled unemployed appear to be the least employable in the modern economy. In addition to competing with cheaper foreign labor for repetitive motion manufacturing jobs, they are also losing out to technology such as cameras and billing systems replacing toll-takers. Even if there were no minimum wage and more jobs were available, this group may have little incentive to work in the legitimate labor market. It appears the economic transition since at least 2008 has created a whole new wave of chronically unemployed even as many firms report being unable to find qualified workers. The labor market’s skill sets do not match the skill sets needed and training of the young Millennials generation could produce great payoffs. On the other end of the labor market we are seeing more jobs being created for people with Associate degrees than Bachelor degrees indicating focused education is critical. One could even argue we may need to focus less on Associate and Bachelor degrees and more on training certificates. This could even become part of high school curriculums.
Second, many semi-skilled jobs were lost with the housing and construction industry collapse. This creates a real challenge for Baby Boomers over 45 who are not readily re-trainable or whose careers have taken a physical toll on them as semi-skilled jobs often involve manual labor. This may be the most problematic group of Americans in the coming decade as they are the most likely to fall out of the middle class and into poverty. While improvements in new home construction are certainly encouraging, we need more effort in this sector of the economy. The notion of investing in infrastructure could take advantage of the skill sets of the aging construction workers before they hit retirement age. Perhaps infrastructure projects should have a training component matching young apprentices with seasoned and aging workers. Such job matching use to be a valuable function of labor unions in the construction trades.
The turnover of the 50-something semi-skilled workers in the next decade does create an opportunity as many under-educated Millennials could easily fill well paying jobs such as automobile repair technicians, plumbers, electricians, carpenters, machine operators, dye makers, and numerous other hands-on trades which are already showing shortages. The need for job training and retraining is as great as it’s ever been as is the need to re-engineer labor market incentives and disincentives to encourage people to work and companies to hire.
By Tom Binnings
At a presentation the day after the first Presidential debate I was asked to comment on the debate from an economic perspective. I did not respond as the answer can be lengthy and I was hypersensitive to remaining non-partisan. It is worth considering a non-partisan perspective on the economy and deficit focusing on what we know and what we know we don’t know.
I think the vast majority of economists would concur with the following regardless of who they support for President or Congress:
- We don’t know what level of national debt is sustainable. Our national debt is close to 70% of GDP exclusive of debt obligations between agencies like the Social Security Trust Fund. After WWII the U.S. debt was 110% of GDP. Japan’s current debt is 212% of GDP and the nation is solvent while stuck in a 20 year economic malaise. Spain is in trouble at 68% of GDP and Greece has imploded at 167%.
- We do know less debt promotes greater flexibility. Having flexibility means having borrowing capacity when opportunities or crises surface. We are hindering our flexibility as a nation. Furthermore, high debt financed with short-term borrowing makes the borrower vulnerable to increasing interest rates.
- We don’t know how long it will take to recover lost jobs and create new jobs sufficient to employ the relatively large Millennial population who are moving into the workforce. If the current rate of job creation continues, the U.S. should recover all the lost jobs in 2015. We also don’t know the degree to which Baby Boomers reaching retirement age will choose to leave the labor force opening up job opportunities for younger people.
- We do know the rate of traditional U.S. wage and salary job growth has been rather steady for decades – slowing slightly from 1997 to 2007 and dramatically since 2007. Self-employment has been rising at faster rates than wage and salary job growth and shows accelerating growth rates since 1997. Self-employment typically comes without benefits. It does reduce the cost of employment for companies — both the explicit costs of payroll burden and the contingent liability from labor laws. The higher the non-wage labor burden faced by companies the less they are willing to supply fulltime jobs and the more they seek to contract for labor or outsource labor overseas. Part-time contracting is probably a significant part of the new normal.
- We know investment income and transfer payments or “entitlements” to a diverse group of Americans (more than just the poor or unemployed) have been increasing at faster rates than earnings from employment, whether jobs or self-employment, for decades. We also know that life spans have been increasing, resulting in longer periods in which people receive transfer payments.
- We know technological advancement and free and competitive trade enhances the material welfare of society in the long-term even though in the short-term structural displacement of workers occurs. What we don’t know is how long the labor displacement will persist, especially under the new global paradigm.
The bottom line is our federal government cannot settle the complex challenges we face through brinksmanship and entrenched political stances. No single group’s proposed policies and initiatives are likely to be a panacea. To take the fast route to the bottom and jump off the fiscal cliff is foolish. On the other hand, ignoring the cliff and its implications just makes the cliff taller and steeper. Deficit spending at levels in excess of 3% to 4% of GDP per annum is not sustainable for long when our national debt is already at relatively high levels. The Bowles Simpson plan is an alternative that would reduce the deficit to under 5% of GDP over the coming 10 years. When combined with economic growth which naturally increases revenues and decreases expenses a deficit of less than 3% might be achieved. Unfortunately, the retiring Baby Boomers will add at least 2.5% of GDP over the coming decade to the annual deficit under the current Social Security and Medicare model; hence at the end of the decade we are likely to still be running unsustainable deficits even under Bowles Simpson.
The most reasonable economic solution to our rising debt and economic malaise requires across-the-board American sacrifice. The rich, the poor and the middle class must sacrifice. The private sector and public sector must sacrifice. And older folks must sacrifice more than the younger generation.
There is an alternative solution. Continued failure among our Beltway politicians to make significant progress with our debt, economy, and retirement plans will leave the Federal Reserve and our creditors in control. The way that story ends is well documented by Reinhart and Rogoff in “This Time is Different”. History shows creditors quit lending after they charge higher and higher rates of interest. The process involves severe austerity as there is no choice by the government but to dramatically raise taxes and cut benefits unless the central banks simply prints money and distributes it by lending to the federal government or the private sector. At some point printing money becomes highly inflationary and the currency devalues making foreign goods prohibitively expensive except for the wealthiest and local goods more expensive as well unless wages rise faster than prices. Households whose income cannot keep up with the inflation experience dramatic decreases in their standard of living.
The disruptive nature of high inflation is a perverse form of taxation which also hinders economic growth and development. What’s the old saying – “pay now or pay later?” Unfortunately, economists cannot tell you when “later” will occur – until it’s staring us in the face. If there was ever a time to vote wisely for federal candidates, it’s now. Go beyond the political branding of party affiliation, go beyond the ads, go beyond the one-liners and vote for who you believe is most likely to have us all sacrifice without crashing the economy in the short-term. This is the best approach in uncertain times.
The Association of General Contractors’ Chief Economist, Ken Simonson, recently spoke to economists in Denver. He noted construction will continue improving in:
- Power & Energy
- Manufacturing facilities
- Warehouse & Distribution
The Budget Control Act (the default provision resulting from the “Super” Committiee’s inaction) requires across the board cuts starting January 2013. That could impact construction on military and federal facilities throughout Colorado as Federal and defense accounts must cut back by 5% and 8% respectively. Even with improvements in State and City revenues public sector expenditures on construction will drop after 2012.
Forecasts for other sectors:
- Single-Family – nationally flat. We think locally there will be improvement – in the 10% to 20% range.
- Highway – down in 2012-13
- Hospitals and higher education – prospects for raising money has improved nationally. We think pressures for cost control are especially acute in these sectors limiting new facilities while making existing facilities more functional and energy efficient. Denver and Colorado Springs already saw a hospital boom in the last decade and is likely to be in the capacity ramp-up stage.
- Pre K through 12 – lower through 1013
- Retail – Big boxes are shifting strategies for market share – moving into smaller facilities closer to the consumer. This will impact tenant improvements mainly. In Colorado Springs Walmart and convenience store chains going through the planning process for a number of neighborhood stores.
- Office will continue to be flat. We think there will be some early investing in renovations to test the payback on reducing utility costs. Medical and dental offices are beginning to percolate, but nothing substantial.
- Lodging – mainly flat with a small bump. More on the renovation side.
Overall, the Great Recession resulted in a 36% decline in construction employment in Colorado (29% nationally). Workers are leaving the industry which could have longer-term implications on industry wages, although in the short-term employment costs are increasing slower in construction than in any industry. Other construction costs are mainly flat to dropping a bit. This includes copper, steel, concrete and asphalt, as well as most other building materials. With China’s economy cooling down, material costs should stay steady for now. Of course transportation costs will impact delivery costs.
Not only do we anticipate 2012 continuing modest growth, but 2011 was better than originally reported according to the Bureau of Labor Statistics’ updates on the preliminary data releases they issued in 2011. Given we had forecasted a return to growth for 2011 in late 2010, we were surprised with BLS’ originally reported declines in Colorado Springs wage and salary employment. As it turns out our original forecasts for 2011 were reasonably accurate. The two graphs show labor and salary employment as originally reported and then as updated.
Hopefully our 2012 forecast will be accurate as well. Despite rising energy prices, we see continued growth, consistent with 2011 locally and better nationally. Nationally, the growth is being fueled by:
- Optimism of an election year,
- Lack of Federal austerity,
- Low mortgage rates,
- Stabilizing housing markets,
- Growth in U.S. manufacturing,
- Consumers feeling bolder.
On the state and local levels, non-residential construction is strong at military installations, the Southern Delivery System, and data centers. The Multi-family apartment market is robust with construction which will accelerate into 2012-13. The commercial real estate market will see improvement in the Denver metro area, but not much in Southern Colorado
The bottom line is Colorado continues to grow despite slow job growth. It’s all a matter of relativity – Colorado relative to the nation. Peyton Manning’s interest in the Denver Broncos because of the quality of life is indicative of our most fundamental strength.
The real concern is for 2013 and beyond. Federal austerity is a given at some point. The time to focus on economic development in Southern Colorado is now!
The KC Federal Reserve District’s economy is relatively more focused on commodities and national defense. The region encompasses Colorado, Kansas, Nebraska, Oklahoma, Wyoming, and portions of western Missouri and northern New Mexico. Job growth in the region during and after the last eight national recessions is consistent with the nation; however, the region is consistently late to fall into recessions and early to recover from recessions.
FNC Residential Index
One should not assume that just because Denver has done so well (relatively speaking of course) during thr housing bust that the entire state has performed the same way. However, regions do tend to generally move together with economists’ favorite assumption of ceteris paribus.
by Tom Binnings
The coming year looks to be a repeat of 2011, when it comes to oil and gasoline prices. According to an analysis by the U.S. Energy Information Administration this will continue to place a drag on economic growth. While some areas, like Libya should be getting back to normal, there is Iran, as well as potential prolonged strikes among oil workers in Nigeria. The outlook for a softer oil market probably hinges more on the degree of declining demand as the BRIC (Brazil, Russia, India, China) economies cool down. However, even if their economies cool, the demand for autos among the emerging upper income households will probably keep demand for oil high in those nations. These events will keep oil prices volatile at the very least.
Another problem we have in the U.S. is the lack of summer gasoline refining capacity. Our refineries are aging and given the lack of growth in the U.S. market, the incentive for refiners is to invest their limited capital in growing markets like the BRIC nations. The need for additional summer refining capacity in the U.S. is to meet peak demand with different specs due to hot weather. Federal regs probably impact the investment decision as well.
Looking at recent history of gasoline prices, it looks as though oil price volatility based upon geopolitical events and then soft demand from the Great Recession has a greater impact on oil prices than refining capacity since the summer of 2008. Prior to that, late spring and summer seasonality shows up in the data. Here are the last six years of gasoline prices in Orange County, CA. http://www.OrangeCountyGasPrices.com/retail_price_chart.aspx?city1=OrangeCounty&city2=&city3=&crude=n&tme=72&units=us
by Dave Bamberger
Over the past 30 years I have been involved with local economic development efforts both as a volunteer and as a consultant. During that time I had a chance to make many observations about how the process works. I have concluded that the two factors that are most important are: (1) creating primary jobs and (2) building a high quality living and business environment. Here are my thoughts.
A healthy local economy depends on primary jobs. Primary jobs bring dollars into Colorado Springs from outside the local economy. When those dollars are spent in Colorado Springs, secondary jobs are created. Primary industries in Colorado Springs include the military, visitor industry, aerospace, defense, manufacturing, higher education, national nonprofits, Olympic sports, financial services, information technology, telecommunications, call centers, and others.
Secondary jobs depend on primary jobs. Each primary job supports a little more than one secondary job in Colorado Springs. Take primary jobs away and the local economy slows, secondary jobs are lost and unemployment rises even further. That is what happened in the mid 1970s, the late 1980s, early 2000s and is happening today.
The local economy must create new primary jobs every year just to keep up with a growing labor force. Colorado Springs’s labor force grows every year, even if no new people move to the city. The number of young people entering the workforce is greater than the number of older workers retiring each year. Both primary and secondary jobs must be created each year to meet the needs of a growing workforce, or these new job seekers will have to move to another city to find work.
Creating new primary jobs must be a continuous effort. It’s a fact of modern business. Companies come and go. The local economy must create new primary jobs every year just to keep up with existing primary industry closing or moving jobs out of town. When a company closes or moves out of town, these primary jobs must be replaced, or the city’s economy will rapidly decline.
Creating primary jobs makes for a stronger local tax base. Creating new primary jobs every year means more in property and sales taxes for the city, the county, school districts and other local governments such as the library. Let primary job creation slip and the tax base will decline.
New primary jobs provide opportunities for local workers to move up to higher paying jobs. Most of the primary jobs created in Colorado Springs over the past three decades have paid higher than average wages. Many local workers have taken advantage of these higher paying jobs and have moved up the career ladder. Local income has increased as a result.
Primary job creation is not the cause of population growth. A little more than half of Colorado Springs’s recent population growth is due to natural increase, the difference between births and deaths. Certainly, some job related net in-migration does occur over the long run. However, many people do move to Colorado Springs to be near family and friends. Retirement is also a significant driver of migration to Colorado Springs.
Primary job creation produces a high return on investment to the citizens of Colorado Springs. Growth of primary jobs increases incomes and that means a stronger tax base. A strong local tax base combined with the voter support to use it generates the funding to build schools, provide quality education programs, maintain and improve roads, build parks, fund recreation programs and maintain a high level of public safety.
In the long run the most effective way to create new primary jobs is to build a quality living and business environment. Attracting new primary industry and providing existing primary businesses the opportunity for expansion is much more effective in a community with high quality schools, roads, open space, business climate, recreation opportunities, workforce, public safety and a strong tax base. These are the key factors that provide a foundation for the local economy to continue to renew itself and to thrive.
by Mike Anderson
The Colorado Public Employees’ Retirement association (PERA), like most state and local government pension funds, has become a subject of much media attention and often a source of political debate. Oddly missing from the public discourse, however, has been any discussion of the economic impact and importance to the economy of the benefit payments made by pension funds to their retirees.
PERA retirement benefit payments, like military and other public and private pension plan payments, represent deferred compensation to the retiree. The retiree often spends a large share of that deferred compensation purchasing necessary goods and services in the community in which they reside and thus contribute to local economic activity.
In 2011, there were nearly 9,800 PERA retirees living in El Paso County. PERA retirement benefits paid to those retirees in 2011 totaled $348.9 million, or roughly $35,600 per retiree. It should be noted most PERA members do not participate in Social Security and, therefore, the PERA retirement benefit is designed and funded to provide total retirement monies consistent with the private sector where retirement is based on a combination of a private plan and Social Security. Of the 53 Colorado counties, El Paso County had the second largest number of retirees and benefits paid, being surpassed only by Jefferson County.
A recent study titled, “The Economic and Fiscal Impacts of Colorado PERA”, produced by the Colorado based economic consulting firm Pacey & McNulty, attempts to quantify the relative importance of benefit payments to PERA retirees in Colorado. The report can be found at: http://www.copera.org/pdf/Impact/Impact2011.pdf . It contains an analysis of impacts on the Colorado economy as a whole, and for each of its regions and major metropolitan areas including Colorado Springs (El Paso County).
In their study, Pacey & McNulty utilized an input-output based impact model known as IMPLAN. IMPLAN is a widely recognized model that Summit Economics has also successfully applied in a number of its impact analysis projects. The model is used to measure the multiplier effect of additional dollars introduced into a region’s economy as a result of some type of economic event. As Pacey & McNulty succinctly point out in their report: “when a household receives PERA benefit payments, it represents an infusion of income into the local economy that creates a chain of economic activities whose total impact is greater than the initial benefit payment. That is, these payments have substantial “ripple” or “multiplier” effects where one recipient’s spending becomes someone else’s income…The impact of the PERA benefit payments reaches well beyond those who receive the initial benefit payments as the recipient can fulfill obligations such as purchasing groceries, apparel gasoline, etc.”
Some of the key findings of their study include:
• In 2011, PERA provided benefit payments of $3.03 billion to Colorado residents.
• In Colorado, the $3.03 billion in payments resulted in $4.31 billion in output (all goods and services transactions), $1.87 billion in value-added (State gross domestic product), $1.01 billion in labor income (worker wages), and 23,400 jobs.
• When the statewide results are analyzed on an industry sector basis, there are five industries in which the economic impact is greatest: Finance and Insurance, Health Care, Retail Trade, and Real Estate and Rental and Leasing.
• “PERA payments are a critical source of reliable, predictable income and provide an “automatic stabilizing” effect on state, regional and local economies, especially in economic downturns as these monies provide important stimulus in maintaining market activity.”
Digging deeper into the study, there is also some revealing data for the Colorado Springs area:
• PERA benefit payments to Colorado Springs metro area residents totaled $348.9 million in 2011.
• The $348.9 million amounts to approximately 3.9 percent of total payroll in Colorado Springs.
• PERA benefit payments in Colorado Springs resulted in about $436 million in output, of which $253 million is value-added above the benefit payments.
• Labor income (workers wages ) in Colorado Springs supported by PERA benefit payments were estimated to be $85.1 million in 2011, which sustained a total of 2,204 jobs in the area.
• Since PERA recipients pay a portion of their benefit payments in income taxes and also pay sales, use and property taxes as well as fees for licenses and permits. In addition, there are taxes and fees paid on the additional spending resulting from the multiplier effect. Total State and local tax revenue attributable to PERA benefit payments are estimated at $21.1 million in Colorado Springs. For Colorado as a whole, total tax revenue is estimated at nearly $232 million.
While the participants in the debate over PERA have found it difficult to agree on many points, all should be able to agree that protecting the financial health of PERA and its sustainability to preserve the flow of benefit payments to retirees throughout Colorado is important to the vitality of the state’s economy and and employment base.
No doubt the number of military retirees residing in the Colorado Springs area and the associated retirement benefit payments is many times larger than the number of PERA benefit recipients residing in the area. Imagine what proportion of total economic activity is attributable the expenditures of retirees when one adds to those amounts the retirement benefit payments made to retirees by other local government and private pension plans, and perhaps, social security payments to local residents. That will be a good topic for discussion in the future.