September 6, 2012

Wildly Optimistic Projections

2002 SFID : The black areas in the map are the areas in PUSD that are not in a Mello Roos district. Poway boundaries and RB and PQ designations have been added to the original map.
Click on map to enlarge.

It was the campaign to pass Prop C that first got me blogging back in January, 2008.

It was all so very incredulous. We had passed Prop U just a few years earlier. Prop U was a $198 million measure that was supposed to be sufficient to renovate 24 schools. It wasn't. Five years later, PUSD asked us for $179 million more to finish the job. That's almost twice as much as we were first told would be enough. Then, the district and the Yes on C committee told us that there would be no new taxes to pay off Prop C, it would just extend the tax rate from Prop U for 11 extra years. Wrong again. It is going to cost us almost a billion dollars just to pay off a little over a hundred million of the Prop C bonds.

In 2008, I did not know PUSD intended to use CAB bonds to pay off the debt. Heck, I had not really heard about CAB bonds until last month. Back in 2008,  PUSD said that the expected cost to pay back the entire $179 million of Prop C bonds was expected to be $497 million. They were wrong. It is going to cost about $1.25 billion.

PUSD said that the tax rate won't rise and that Prop C will only take 11-14 extra years to pay off.  Wrong again. The tax rate will rise and Prop C won't be paid off until 2051, 49 years after we first passed Prop U. 

If I were a kind and forgiving, and somewhat gullible soul,  I might shrug it off and say, "How were these highly paid district officials and the myriad of highly paid consultants supposed to be not so far off in their projections?" Ok, so maybe, just maybe, they really didn't know that the cost of building materials would skyrocket as China set out on an expansive building frenzy. And who could imagine that the bond market would collapse when the housing bubble burst? 

The one wild-arsed projection I cannot forgive, is that the assessed valuation in the SFID (school facilities improvement district) would grow between 5-8% per year between 2008 and 2015. These are the projections that PUSD gave to SDCTA(San Diego County Taxpayer's Assoc) who should have known better than to accept them. 
I was concerned enough about these projections to ask Todd Gutschow about them in 2008. Here is my question and Todd's answer (in blue).
There are some issues I still do not understand. According to the graphs on this document, assessed valuation is expected to grow by 7-8% during the next 3 yrs. That seems to me to be an overly optimestic  projection.  
Actually, 7% – 8% is reasonable based on the increases that we have seen the pass two years. According to the County Assessor, the 2007-08 assessed value for San Diego County grew by a little over 9%. I cannot find the growth for PUSD; however, generally, PUSD is a bit higher than the County in general. Even with market values falling, there remains a significant gap between the current assessed value and market value. As homes are sold or remodeled, the assessed value is up dated. I believe this will continue even with the current real estate situation.  
The assessed valuation in the SFID did not grow as expected.  In 2008-2009, the assessed valuation in SFID 2002 grew by less than 3%,  in 2009-2010, it grew by less than 1%, in 2010-2011, the assessed value dropped almost 1%, in 2011-2012, the assessed valuation increased a bit over 1%, but dropped by almost 1/2 % the following year. The assessed valuation for the SFID for 2012-2013 is $20.4 billion for the 2002 SFID and $20.2 billion for the 2007 SFID. PUSD projected that assessed valuation in the SFID would be $25.7 billion this year. The district's projection was off by over $5 billion.

(Note: The boundaries of the 2002 SFID and the 2007 SFID are slightly different. The 2002 SFID pays for Prop U and the 2007 SFID pays for Prop C)

Assessed valuation (AV) will grow under certain conditions. If new construction occurs, the AV will increase to reflect the value of the new buildings or improvements. If a house or business is sold, the AV is based on the purchase price. Homes and businesses that are not sold can increase in value 2% each year, as allowed by Prop 13. Most of the SFID area is in the older parts of RB, PQ and almost all of Poway. How did the district project a 5-8% growth rate in assessed valuation in an area that was pretty much built out?  Were the assessed valuations really increasing by 8-9% previous to 2008? I decided to find out. I got the figures from the county.

Indeed, Todd was correct. The 2 previous years, 2007/08 and 2006/07 showed increases in AV of 7.7% and 10.7% respectively. Here is what it looks like in graph form:

The only problem with looking at the growth in AV for a few years preceding the new bond measure is that the small slice of time may not really be indicative of future growth. It is far better to look at a longer period of time and to take into account events that might skew the data. Here is a graph of assessed valuation from 1991 to 2010 in San Diego County. From the graph we can see that assessed valuation increased from around 1998 until 2008, and then they began to decrease. The rise in assessed valuations in San Diego is similar to the growth in PUSD's SFID. From 2004- 2005, San Diego county's assessed valuation increased 13%.  How were we to know the good times would not last forever?
People should have known. Look at the graph. From 1991 until 1997, there is very little growth in assessed valuation. In the early 90s, we were in a recession. Housing prices dipped and business growth slowed dramatically. If I remember correctly, Poway was in default on some bonds in the business park. I remember then city manager James Bowersox saying, "Who knew we would have a recession?" Well, maybe we don't knew when we will have a recession, but we know we will have them. We've always had them. For PUSD to plan on that housing bubble to grow for 7 or 8 more years was wildly optimistic.

When I first saw PUSD's projection for 8% growth in AV for 2008, I knew I had seen that same 8% figure before, in another wild-arsed, overly optimistic projection. It was another Proposition C campaign. Not PUSD's Prop C, but the City of San Diego's 1998 measure to get the voters support for public financing of a new downtown ballpark. Susan Golding, then mayor of San Diego, promised that the ballpark would be paid for by new TOT (taxes on hotel guests) that were expected to grow by 8% a year. In his report, "Welcome to PETCO Park: Home of Your Enron-by-the-Sea Padres", Mark Hitchcock explains why reasonable people should have been disturbed by Mayor Golding's projection:

The 8% a year projection was based on realized growth in the previous few years, a time when the economy was expanding rapidly. Because a new publicly funded ballpark would tie the City’s hands to the extent that a large portion of the TOT revenue would be committed to paying off the bonds for many years to come, if the TOT did not in fact meet the projected 8% annual increase, cuts would have to be made elsewhere. Apparently, arts and culture representatives failed to consider the fact that tourism and thus TOT revenue drops in recession years, and history shows that recessions are inevitable.
Yes. Recessions are inevitable.

The 8% annual increase in TOT taxes did not materialize. Despite Mayor Golding's promises, arts and cultural groups that had previously been funded with TOT monies lost their funding. And, there was that huge big mess because San Diego tried to hide their financial straights when the ballpark bonds were sold. Nevertheless, the San Diego County Taxpayer's Association supported this Prop C too. Reasonable people should know better, especially reasonable people who purport to be a "watchdog organization".

From Welcome to PETCO Park: Home of Your Enron-by-the-Sea Padres":
Given that San Diego is a Republican town, it may seem surprising that there never was any real pre-Proposition C grass-roots effort to block a ballpark deal that involved such a significant outlay of government funds. The logical leader of any tax-related opposition to the new stadium would have been the San Diego County Taxpayer’s Association (SDCTA), which according to their website is a “non-profit, non-partisan organization, dedicated to promoting accountable, cost-effective and efficient government and opposing unnecessary taxes and fees.” The front page of the SDCTA’s website also notes that the organization “takes a leadership role in fiscal oversight of local government and aggressively resists...ill-advised public expenditures.” In a Republican city like San Diego, a tax group like the SDCTA would have had a receptive audience had it come out strongly in opposition to the use of public funds for a new sports stadium, and it is possible that such a stand could have had a significant effect on the debate. Although the SDCTA disputed claims by the Padres and the City Council that the ballpark plan would be tax-neutral on residents, the SDCTA never seemed to take the position that the cost of the ballpark was a major concern. Before voters went to the ballots to judge the stadium deal, the SDCTA estimated that the deal would cost the City $17.7 million per year even after taking into account expected revenue increases from the TOT tax. Apparently the SDCTA decided that this did not represent the sort of “ill-advised public expenditure” that should be opposed: the SDCTA actually publicly endorsed Proposition C after a vote by its board. According to at least one newspaper report, the SDCTA’s position was hardly surprising given that “[a] large number of the people who pay heavy dues to the group, and serve on its board, were in a position to benefit from the project, directly or indirectly.” According to Peter DiRenza, foreman of the civil grand jury that issues the damning reports about the MOU and the conduct of the City Council, “Some pretty wealthy people keep the organization afloat, and a lot of those people were involved with the ballpark... The board voted knowing it was a subsidy to the private sector.” Thus, it seems possible that the organization that advertises itself as the public watchdog for unnecessary government spending never made a thorough assessment of the stadium deal.
 The next time you find yourself gently jostled by one of the City of San Diego's many potholes, let it serve as a mental reminder, recessions happen. 8% growth just doesn't happen over long periods of time.  Don't let someone trying to convince you to vote for a bond measure tell you otherwise.

Edited to Add: Poway School Board Members have defended their expectations that the AV in the SFID would rise 5-8% from 2008- 2015 based on the data for 2007-2008 in the SFID and the overall data for AV growth in all of PUSD.  Their projections fell short, but it wasn't just because the housing bubble burst and the financial meltdown. From 2000-2008,  some of the increase in AV was due to new construction in the Poway Industrial Park and Old Coach, and Kentfield Estates. By 2008, those projects were, for the most part, complete. There is only one large parcel still undeveloped in the Industrial Park. There are no new housing developments planned in Poway or RB or PQ that I know of. Looking at past data in the SFID, or in the entire district, when new construction was happening, and applying those growth projections to a period when no new construction was expected was a grievous error on the part of the Board and district officials,  who should have known better.