December 2017 by Southern Oregon Business Journal

December 2017

Business Growth in Southern Oregon

My Brother’s Keeper According to Forbes the 400 richest Americans in 2016 were all worth over $2 billion, or nearly so. The one percenters we hear about have these people at the head of their class. Then there are those 400 poorest Americans at the other end of the list. I don’t know their names, maybe no one does. Indifference, according to late Holocaust survivor, author and Nobel Prize winner, Elie Wiesel, is the ultimate cruelty. We humans, above all things, must not be invisible. When I speak, hear me. When you look at me, see me. If you don’t, I simply do not exist. We may not owe one another, but we appreciate the gift. 2017 has delivered unimaginable terror in cities around the world. Mother Nature sent hurricanes and earthquakes. Forest fires have scorched the Western U.S. Public debt is out-of-control and getting worse. World leaders, politicians, heroes and movie stars have bared their uglier sides. Even so, we go on because we must. It’s what we do. The Great Recession of 2007-2009 is in full recovery it seems. The stock market on Wall Street has seen remarkable strength, unemployment numbers are very low, construction is up and there is a general optimism in our daily activities. There is belief in ourselves that all the storms we are weathering will be successfully handled. Somehow we will find a way. As we struggle for agreement in handling equity gaps of ever widening income disparities, societal imbalances in education, opportunity, and health care we need to speak to our better angels. Remembering to “Do unto others as we would have them do unto us” isn’t just a nice thing to do, it may also be the thing that keeps our nation together. At an early age we are taught to make plans for our futures so that they might be bright and stable. We should also make plans for our pasts so that one day our gazing through window panes at those nostalgic times will reveal a consistent effort to maintain a society able to deal with challenges and opportunities with equal enthusiasm. Say hello to a stranger. Merry Christmas,

Greg Henderson

Southern Oregon Business Journal

A JOURNAL FOR THE ECONOMICALLY CURIOUS, PROFESSIONALLY INSPIRED AND ACUTELY MOTIVATED

Table of Contents PUBLISHERS NOTE

OTHER BUSINESS

18 Big Box Stores are Costing More Than Imagined

My Brotherâ&#x20AC;&#x2122;s Keeper

ECONOMICS 4 Economic Indexes 5

Klamath & Lake Counties

SW Oregon Indicators

Snowfall & Tourism Jobs

10 Lane County Unempl Down

20 Edge - Stuff of Science Fiction 22 Fed, Taxes and the DOW 24 Cost of Living in Cties

26 Smart Exit 29 Recovering from Fires 30 Ductless Heat Pumps 32 Communities for Healthy Forests

COMMUNITY & BUSINESS

34 GOP Tax Plan Concerns

11 O&C Counties Timber Payments 13 Generous Stranger

14 AFRC urge Congress 16 Ranch House pricing

Cover Photo Business and Economic Development in SW Oregon

703 Divot Loop Sutherlin, Oregon 97479 www.southernoregonbusiness.com 541-315-6127

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How much Does Snowfall Impact Oregon’s Winter Tourism Employment? by Karla Castillo and Damon Runberg

The winter tourism season in Oregon is fast approaching. Snow is piling up in the mountains with many ski areas already opening across the state. The National Oceanic and Atmospheric Agency (NOAA) recently released a “La Niña ” for this upcoming winter. This phrase may not mean much to you, but most skiers and snowboarders in the Pacific Northwest begin drooling when they hear the words “La Niña.” A La Niña is when the sea surface temperatures of the Pacific Ocean near the equator are colder than average. You may be asking yourself, what does the temperature of the ocean near the equator have to do with winter tourism in Oregon? Although these sea temperatures are just one variable impacting our local weather, a is highly correlated with cooler and slightly wetter conditions here in the Pacific Northwest. Over the past 15 years, average snowpack at a measuring site near Santiam Pass was 12 inches deeper (+23%) during winters. If the current La Niña comes through and provides Oregon with plentiful snowpack for winter recreation, will that translate into employment opportunities in Oregon’s winter tourism industry? When talking about the tourism industry the broad leisure and hospitality sector is often referenced. This sector includes accommodations (hotels), restaurants, and recreation facilitates. However,

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the leisure and hospitality sector isn’t entirely tourism-based. Many of these businesses serve non-tourists; restaurants serve locals, business travelers stay in hotels, and bowling allies aren’t particularly noteworthy tourism attractions. Dean Runyan & Associates, an economic research firm specializing in tourism, estimates that roughly 44 percent of Oregon’s leisure and hospitality sector is tourism-related. If we look at the relationship between Oregon’s winter leisure and hospitality employment and snowpack over the past several years we see no meaningful patterns (see scatterplot). To put it another way, a snowy winter in the mountains doesn’t provide a boost to the broad leisure and hospitality sector. This is fairly surprising as I am sure that many assume that snow sport recreation is a major driver of Oregon’s winter leisure and hospitality sector. This begs the question, what does drive winter leisure and hospitality employment in Oregon? It turns out that most of the variance in winter leisure and hospitality employment can be explained by broad economic trends in Oregon and across the nation. The business cycle is the best predictor, not the weather. If we zoom in on the state’s ski resorts, a meaningful relationship between snowpack and employment emerges. Over the past 15 years, ski resort employment was positively correlated with snowpack; more snow translates into more jobs. This is not surprising as these businesses are directly impacted by snow. A strong snowpack and numerous “powder” days attract skiers and snowboarders both locally and from outside Oregon. Ski resort employment reached a new peak in 2017 with an average employment from January-April of around 2,500 jobs. This was during a relatively cold and snowy winter with snowpack nearly 12 percent higher than the 15-year average in the Central Cascades. During the dismal 2015 winter where the measuring site near Santiam Pass recorded a winter snowpack that was 88 percent below the 15-year average, local ski hills posted some of the lowest employment levels in recent memory. The state’s lower elevation ski resorts either never opened or saw very limited operations. Hoodoo ski area opened for only 12 days, while Willamette Pass ski area and Mt. Ashland never opened to the public that year. The relationship between snowpack and ski resort employment is not linear, meaning that we do not see a consistent rise in ski resort jobs as snowpack increases. Increasing snow depths beyond the average yielded no clear impact on ski resort employment.

Labor demand is largely fixed at a ski resort. Once the state’s mountains reach average snowpack, most ski resorts become fully-staffed. Jordan Elliott, Director of Human Resources for Mt. Bachelor, noted that it takes “three people to run a ski lift regardless of whether there are 20 skiers or 2,000.” Rather than hire additional staff during busy periods ski resorts set “mandatory dates of availability” for their staff. This gives them the flexibility to increase staff hours rather than hire additional staff to meet peak demand during holiday periods like

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Christmas, New Year’s, or President’s Day.

Although a major driver of ski resort employment, snowpack isn’t the only factor influencing the employment situation at Oregon’s ski resorts. Even when controlling for snowpack we see a positive correlation with Oregon’s population and economic output. More people moving to the state translate into more people skiing and more ski resort jobs. Although less significant, as Oregon’s economy improves from the recession we also see a rebound in ski resort employment. Skiing is a discretionary expense, a choice. Many folks feel more comfortable spending money on recreation when their financial situation is more stable. This helps to explain why there were more ski resort jobs and more hours worked in 2017 than the recording breaking snow year in 2008 during the depths of the previous recession. Although we are expecting to see a moderate La Niña this winter that will likely bring average or above average snowpack to Oregon’s mountains, don’t expect to see that translate into a significant boost to the state’s leisure and hospitality sector. However, it would be a boost to local ski hills and the communities that support winter snow recreation, such as Bend, Sunriver, Sisters, Sandy, Ashland, Chemult, Baker City, Government Camp, and Rhododendron.

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A Generous Stranger Changes One Life, Then Leaves a Legacy to Her Community In 2007, the Medical Eye Center in Medford received an out-of-the-blue bequest: funding to provide indigent adults and children with necessary eye care. The money came from Mrs. Irma E. Klinghammer,

Eye Center to distribute the funds in communities where the Oregon Lions Sight & Hearing Foundation (OLSHF) has worked to boost the Mobile Health Screening Program (MHSP). “Sometimes children simply need a pair of glasses to see the board or read their homework,” says Nicole Mandarano, OLSHF “No child should begin learning to read and development director. The goal, she says, is write with an undetected vision issue.” that “no child should begin learning to read but exactly who she was and why she left the and write with an undetected vision issue.” money for such a worthy cause was a mystery MHSP fills the gap caused by the lack of school until very recently. When the center nurses in Oregon. To date, schools in Southern announced the creation of the fund, a recep- Oregon have seen notable results from the tionist recalled meeting Mrs. Klinghammer and screenings. “OLSHF screening results have the apparent catalyst for verified known issues with her generosity. While “This is a huge impact that, in part, students,” says Walt Davenport, came from a generous woman who visiting the center one principal of Central Point day, Mrs. Klinghammer overheard a difficult conversation Elementary School. “This adds overheard a mother in a waiting room.” to the level of confidence and telling a staff member validity of the screening that she couldn’t afford the glasses her child process, procedures and technology.” needed. Mrs. Klinghammer then offered to In the 2017–2018 school year, OLSHF predicts purchase the glasses for the child. This first that they’ll screen 24,125 children in Southern action eventually led to thousands of other Oregon for vision issues, potentially referring children having their needs met through her 2,630 for follow-up care. This is a huge impact generous bequest to the Medical Eye Center— that, in part, came from a generous woman Klinghammer Memorial Fund at OCF. who overheard a difficult conversation in a In 2010, OCF began working with the Medical waiting room.

The mission of The Oregon Community Foundation is to improve lives for all Oregonians through the power of philanthropy. We work with individuals, families, businesses and organizations to create charitable funds — more than 2,000 of them — that support the community causes they care about. These funds support the critical work that nonprofits are doing across Oregon. Through these funds, OCF awarded more than $108 million in grants and scholarships in 2016. https://www.oregoncf.org/explore-ocf/about-us

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Sixty-Five Groups Urge Congress to Reform Federal Forest Management and Fix Wildfire Funding Sixty-five groups representing forestry, agriculture, wildlife conservation and local government sent a letter to Congressional leadership urging swift action on federal forest management and wildfire suppression funding reforms.

The groups expressed support for solutions to improve the health of federally-owned forest lands, while ending the practice of “fire borrowing” that forces the U.S. Forest Service to re-direct funds from non-fire programs when the agency exhausts its wildfire suppression budget. This year has seen another record-breaking fire season, with over 8.2 million acres burned across the nation according to the National Interagency Fire Center. The fires cost over $2 billion to fight, requiring the Forest Service to temporarily redirect $400 million from other agency programs, including those that help reduce the size and severity of wildfires on federal land. As fire size and severity has increased, so has the amount of federal forest that has been determined to be at immediate risk of catastrophic wildfire, insects and disease. The Forest Service has estimated that at least 60 million acres of federally-owned land need some form of treatment through active forest management, including timber harvest, thinning and prescribed fire. “Over 8.5 million acres have already burned this year and we may break the record that was set just two years ago. Some of the worst devastation has occurred on over-

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stocked, unhealthy federal forestlands, where wildfires have affected millions of Americans living in nearby communities and polluted the air with toxic smoke. We need Congress to reform the federal forest management policies that are a key cause of the worsening wildfire seasons and deteriorating forest health,” the organizations write in their letter. “A tremendous amount of attention is being focused on the need end the practice of “fire borrowing,” where the U.S. Forest Service is forced to raid non-fire accounts when its suppression budget is exhausted. We support reforming this nonsensical system that has an enormously disruptive effect on the agency’s budget and operational certainty. However, fixing fire borrowing alone will not address the underlying forest health crisis that is literally fueling these severe fires or contain the exponential growth in wildfire suppression spending.” Legislation has been introduced in both chambers of Congress to address how federal forest lands are managed and how wildfire suppression is funded. In their letter to Congress, the organizations urge federal lawmakers to pass solutions that enable agencies to increase the pace and scale of forest management activities. “Any effective solution to the forest health and wildfire crisis must also include meaningful policy and legal reforms to increase federal forest management and thinning activities. 60 to 80 million acres of federal forestland is overstocked and facing serious threats from

fires, insects, and disease due to lack of active forest management. The Forest Service estimates that there are over 6 billion dead and dying trees across the West. Growth and mortality rates continue to far outpace fuels reduction and timber removals on our national forests. We also know that many wildlife populations are suffering due to the growing lack of habitat diversity on our federal forests.” “Legislative proposals in both Houses take common sense approaches to expedite needed forest management projects under existing environmental laws, including Categorical Exclusions under the National Environmental Policy Act (NEPA) and streamlined NEPA procedures for larger, collaborative projects through an Environmental Impact Statement (EIS) or Environmental Assessment (EA). Congress also needs to place reasonable limits on the activist litigation that forces federal land managers to “bulletproof” NEPA documents and expend limited agency resources defending projects from the never-ending procedural lawsuits.”

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AFRC is a regional trade association whose purpose is to advocate for sustained yield timber harvests on public timberlands throughout the West to enhance forest health and resistance to fire, insects, and disease. We do this by promoting active management to attain productive public forests, protect adjoining private forests, and assure community stability. We work to improve federal and state laws, regulations, policies and decisions regarding access to and management of public forest lands and protection of all forest lands. The ultimate goal of AFRC’s programs and initiatives is to advance our members’ ability to practice socially and scientifically responsible forestry on both public and private forest lands. 5100 S.W. Macadam, Suite 350 Portland, OR 97239 P: (503) 222-9505 Travis Joseph, President http://amforest.org

Back at the ranch What the ranch house teaches us about house prices and filtering. By Joe Cortright cityobservatory.org Back in the heyday of the post-war housing boom, back when the baby boomers were babies, America was building ranch houses–millions of them. In its prime, the ranch house was the embodiment of the middle-class dream, and newly built suburbs across the nation were full of them. The relative modesty and similarity of the ranch home is a good reflection of the nature of the housing market in those years. And, as we’ll see, what’s happened to the ranch house since then is an important reflect of the way housing markets work–or don’t work–today. Sunset Magazine helped popularize this California style when it published a book full of Cliff May’s ranch home designs in 1946, and the idea spread, with modest regional adaptations, to the entire country and was undoubtedly the dominant housing type of the 1950s. By 1950, the ranch style Accounted for nine out of every ten new homes built in the country. Even Levittown had its own “Rancher” model, a 2-bedroom, one-bath starter home with room for expansion, that sold for as little as $8,900 in 1953. The kind of wide regional variations in housing prices we see today were

The American Dream, circa 1955. (www.midcenturyhometyle.com)

much more muted in the 1950s. Contemporary home price listings show that in the mid to late 1950s ranch homes sold for prices in the

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mid-teens all over the country from Mansfield, Ohio ($17,900 in 1954), to Pittsfield, Massachusetts ($14,300 in 1957) to Appleton, Wisconsin ($16,500 in 1959). Even with the regional variations in materials and finishes, the ranch homes and their close variants shared the same modest proportions: Two or three bedrooms, all constructed on a single level, with one or occasionally two bathrooms, and averaging 1,000 or perhaps 1,200 square feet. They usually had a single car garage or carport. It was the idealized, suburban middle class lifestyle that skid row shop clerk Audrey (Ellen Greene) dreamed of in Little Shop of Horrors.

More than a half century later, the ranch house has fallen out of style. American homebuyers now want bigger houses, with multiple levels, fancier finishes and architectural details that would never fit on the simple ranch house. But while we’re not building any new ones, most of the old ranches are still around, although they now occupy a considerably different place in the housing spectrum than they did when they were new. The median owner-occupied home in the United States was built just before 1980, meaning that almost everywhere, ranch homes are now much older than the average house on the market. If housing were simply about shelter, then you would expect all of these houses that commanded roughly the same price when they were built 60 or more years ago to have experienced roughly the same amount of depreciation over time. But that’s far from the case. To get an idea of how much variation there is across markets in the contemporary 16

value of ranch homes, we combed through Zillow home listings to find some 1950s era smaller homes that are for sale now. (Our selections were haphazard and don’t represent a random or scientific sample, but were chosen to represent how much variation there is across markets). Here’s what we found:

Depending on where you are, today your ranch home could cost anywhere from as little as $25,000, in some neighborhoods in Cleveland and Kansas City, to as much as $1.6 million in one of the tonier suburbs of Silicon Valley (Menlo Park). The reason for the difference has little to do with the houses themselves (though there’s no doubt the Menlo Park model is much more nicely painted and maintained that its low priced cousins). It has everything to do, instead, with the housing markets that they’re situated in, and the way in which those markets are regulated. In markets with weak demand for housing, because of slow economic growth or decline, or simply the hollowing out of first-tier suburbs because of sprawl–Cleveland, Kansas City– the humble ranch home is very cheap. The ranch home is also pretty darn cheap in places with a highly elastic housing supply (Atlanta, Houston), where its relatively easy to build new houses or bigger ones in place of smaller ones. But the higher the demand in a housing market, and the more constraint on building new units, the higher the price the ranch home commands, despite its advanced age, limited adornment, and cramped rooms. With its short commute to Silicon Valley, the tiny old ranch home commands a price that would easily buy a palatial new McMansion in any other part of the country.

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As a result, to varying degrees, in most parts of the country, these aging ranch homes are a primary source of affordable housing opportunities. If you are a first-time home buyer, or have a limited income, the ranch home may look like a reasonably priced fixer-upper that enables you to enjoy the benefits of homeownership. But in those places where the housing supply is constrained, households that would otherwise be buying big new homes find themselves bidding up the price of little old ranch houses. So instead of “filtering” down market as they age, our ranch home continues to be occupied by upper income households. (It may even move up-market). The lesson here is that houses are not merely bundles of sticks, and that the affordability of housing isn’t determined by the historic sunk costs of the materials that went into building them. Judged by a physical assessment of the bill of materials that went into their construction–so many yards of concrete, bricks, board feet of two-by-fours, square feet of plywood, lengths of pipe and wire, and number of windows–the seven surviving ranch houses here are nearly indistinguishable one from another. What makes some affordable, and others not is the policy decisions over the subsequent decades about how easy or difficult it would be to build additional housing nearby.

Joe Cortright is President and principal economist of Impresa, a consulting firm specializing in regional economic analysis, innovation and industry clusters. Over the past two decades he has specialized in urban economies developing the City Vitals framework with CEOs for Cities, and developing the city dividends concept.

BIG BOX STORES ARE COSTING OUR C I T I E S FA R M O R E THAN WE EVER IMAGINED

BY RACHEL QUEDNAU

Drive a little ways out from the center of any town and you’re likely to find several big box stores—Target, Home Depot, Piggly Wiggly, you name it. They’re everywhere. If you took a helicopter or a drone above these parts of town, you’d likely see a vast amount of land taken up with just a handful of stores and their accompanying parking lots. The houses and small businesses around them would be dwarfed in comparison. Not only do they use up a ton of land, but as a result, big box stores also demand miles of public infrastructure like pipes and roads to serve them. A Walmart and surrounding parking lot near Asheville (Source: Google Maps) But here’s the crazy part: Those enormous stores are paying a negligible amount in taxes. For their size, they are contributing hardly anything while meanwhile demanding new electric lines and frontage roads and signalized intersections (among other things). In most cases, their taxes are not nearly enough to pay for the maintenance of these basic services, let alone the many other functions of our local governments that we expect taxes to pay for, like schools and fire protection. Here’s a textbook example of this, created by our friends at Urban3, a firm that analyzes the relationship between building design and tax production. The illustration below shows the tax value of a big box store near Asheville, North Carolina, compared with a modest downtown building . Pay special attention to the taxes per acre.

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What we can plainly see is that the big box store pays a minuscule amount in taxes when compared with the downtown building, especially when we consider how much land it takes up and how many utilities it uses. If we constructed just one more downtown building next door to the one above, the two structures would offer more tax revenue for our city than the entire Walmart currently provides — all while taking up a tiny fraction of the space that the Walmart uses (around 4/10 of an acre vs. 34 acres). 18

This is not important because we love multistory buildings or density. It doesn’t have anything to do with aesthetics. Rather, it's important because that simple six-story building uses just a few dozen yards of street and sidewalk and pipe while generating tons of revenue for the city. And the Walmart, as we’ve already explained, uses massive amounts of public infrastructure, all to service just one store. What’s more, the Walmart also requires people to drive to access it—which means they each have to own a car and money for gas and insurance—whereas the downtown store could be accessed on foot by the thousands of people whose homes are within half a mile of it for free. For the last seventy years, most cities, suburbs and towns have based their development—whether housing or retail or office— around cars. We’ve built extensive road networks and parking lots in front of every store and house. We’ve built it all brand new, beginning as soon as cars became available to regular consumers. It has its benefits of course, but it is also costing our communities far more than we could ever have imagined. If we zoom out from this small example of the Walmart vs. the downtown store, we can see how these two types of buildings impact entire cities and regions.

the tax value per acre of developments across the county in which Asheville exists. The high peaks of purple, red and orange are buildings that are worth anywhere from $6 to $20 million dollars per acre. And all that vast green land around them? It’s worth less than $200,000 per acre. The concentrated segment of high-value buildings is downtown Asheville. Much of the surrounding area is Walmart-style development. There’s nothing wrong with this type of development on its face. But when we see how much it is contributing in taxes in relation to how much space it's taking up and how much public infrastructure it's using, well, then there’s something wrong indeed. In short, the revenue from downtown businesses and homes is subsidizing everything else. As our communities have shifted focus from downtown to the car-oriented development on the edges, we have given up reliable sources of municipal revenue in exchange for big risks (remember how much space those stores take up) with little gains. Here at Strong Towns, we’re advocating for a return to those traditional models of development. The ones that didn’t require a car to get everywhere, that were built in a manner which produced enough taxes to cover the public goods it utilized (plus the schools, firefighters, and other public features necessary to make a city function). We're advocating for cities built around people like you and me — not outside corporations.

The above illustration from Urban3 shows

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MEET THE NEW BOSS

SAME AS THE OLD BOSS

by Timothy D. Carkin, CAIA, CMT Senior Vice President A normal week sees one or two impactful pieces of news that influence the markets. By all accounts this was no ordinary week on that front, yet the markets have largely shrugged it off. The S&P 500 up 0.15 percent. The Dow Jones Industrial Average (DJIA) set a new high with Apple’s following its blue-chip brethren with a good earning release. That led to Apple’s market capitalization briefly eclipsing the $900 billion mark for the first time. The bond market rallied slightly in response to the Fed minutes and the nomination of a new Fed chairman, the benchmark 10-year down six basis points to 2.34 percent.

Committee releasing its tax reform proposal Thursday, many were hailing it as better-thanfeared. The plan would cut an estimated $1.5 trillion in tax revenue over the next 10 years. Some highlights of the bill are a 20 percent corporate tax rate, immediate capital expenditure deductibility and an increase in the standard deduction. The tax plan’s release is only one step in the passage of the tax reform that the president promised this year. Already, many lobbying and advocacy groups have announced their strong support or opposition, which has many analysts lowering the odds of the final bill being ready for a vote in 2017.

No Shortage of News

If a major overhaul in our tax code wasn’t enough news for Thursday, President Trump nominated Federal Reserve Governor Jerome Powell to replace Janet Yellen as the next Federal Reserve chair. Powell is largely seen as the “status-quo” option who will continue down the path that Janet Yellen blazed. He will take over a U.S. economy with accelerating growth, tame inflation and unemployment at its lowest rate in 16 years. Powell has stated that he would continue gradually raising interest rates from historic lows. There were concerns that the current regime was too academic and model-dependent, so it was anticipated that the president would nominate an outsider. Powell

Economics writers’ keyboards got a workout this week. Thursday had two major announcements that overshadowed what normally would have been enough news for the week. Normally Fed minutes, nonfarm productivity, nonfarm payrolls and a rate rise from the Bank of England would suffice. This week also saw a GOP tax plan and new Fed chair announcement. No doubt the latter two will lead the news cycle as they work their way through Congress in the coming weeks. With the GOP-led House Ways and Means

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appears to thread the needle between the two as he was a partner at The Carlyle Group and Undersecretary of the Treasury for George H.W. Bush prior to his current tenure on the Board of Governors. Wednesday, the Federal Reserve held interest rates unchanged leaving the door open for a December rate hike. After the announcement of Powell’s nomination, the odds of a December hike rose to 92 percent―the highest it’s been during Yellen’s tenure. The Fed noted a solid pace to economic growth and a growing confidence among business. Not to be overshadowed in the rate raising game, the Bank of England voted for their first rate hike in more than 10 years, raising the Official Bank Rate from 0.25 percent to 0.50 percent. It’s not just the U.S.―Europe is showing signs of growth. Lastly, the October jobs report returned to its pre-hurricane-season form with nonfarm payrolls increasing 261,000 and upward revisions for September and August numbers. This was

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lighter than the 315,000 economists estimated, but it brought the jobless rate to a low of 4.1 percent, which has not been seen since 2000. This week was an exception in the quantity of news and it will probably reverberate in the weeks to come. What is worth noting is that most of it still points to economic growth, not excess or exuberance. Takeaways : Fed Governor Jerome Powell is a safe choice for continuing Yellen’s policies  The U.S. and global economies are on a solid trajectory 

888 SW Fifth Avenue, Suite 1200 Portland, Oregon 97204

More evidence of the Dow of cities By Joe Cortright The premium that households pay to live in cities relative to suburbs and rural areas continues to increase. Three years ago, we introduced the term “Dow of cities.” It’s a riff on the Dow Jones Industrial Average (DJIA), which is a broad-based summary measure of stock market valuation. The idea behind the Dow of cities is that the relative prices that people pay for housing in cities compared to suburbs constitutes a powerful indicator of the value attached to urban living. Over the past couple of years, we’ve assembled data from a variety of sources tracking the growth of urban home values relative to suburban ones. Some data has come from Fitch Investment Advisers, other data was compiled by Columbia University economists Lena Edlund, Cecilia Machado, and Michaela Sviatchi. Our latest take on the Dow of cities comes from Zillow. Zillow tracks home prices throughout the nation, and its economists regularly make presentations about the health and outlook for local real estate markets. Zillow principal economist Aaron Terrazas recently made such a presentation to the Virginia Beach Marketing Forum last month. The whole presentation is worth a look, but we were particularly taken by one chart in his slide deck, which we’ve reproduced in part here. It shows the average national price, measured by Zillow’s Home Value Index, of houses in urban areas (green), suburban areas (blue) and rural areas (black). The data clearly show the inflation and collapse of the housing bubble a decade ago, and the recovery in house prices since then. (Nominal house prices have recovered to pre-bubble levels today). The Zillow data also confirm a trend we’ve consistently seen from other sources. Since the late 1990s urban home prices have grown faster than suburban ones. In the late 1990s, according to Zillow, urban and suburban homes commanded about the same price. Over the past 17 years, urban home prices have steadily pulled away from suburban ones, even as the housing bubble grew and deflated. Today, the typical urban home commands more than a $75,000 premium over the typical suburban home. In an important sense, what this shows is that the past Source: Zillow, Aaron Terrazas

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two decades have been a bull market for cities. City home values are now fully one-third higher than suburban ones. In stock market terms, a portfolio of urban housing has outperformed a portfolio of suburban housing. And meanwhile, the value of rural housing has fallen relative to cities, with the typical rural home being worth only a little over half as much as the typical urban home. Underlying these trends is the growth of knowledge-based industries in cities and the growing demand for urban living. Households tend to have better economic prospects in cities because thatâ&#x20AC;&#x2122;s where highly paid professional, technical and service jobs are growing. In addition, the desire for urban amenities, and for dense, interesting, walkable neighborhoods is also fueling the demand for urban living. Finally, as

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weâ&#x20AC;&#x2122;ve noted, there are important constraints to expanding the supply of housing in cities, and in building more great urban neighborhoods. As a result, the demand for urban living has outpaced the supply of housing in urban neighborhoods, producing a shortage of cities. Joe Cortright, President and Principal Economist of Impresa,

By John E. Anderson John is a longtime business consultant and coach who helps business owners evaluate their businesses, adjust their operating practices, build a strategic plan and make a Smart Exit™. The next step in preparing for a Smart Exit™ from your business is by determining and helping enhance your business value.

Every day when you go to work, your intent is to get more jobs in, finished, and out the door. At least as often as once a month, business owners typically reconcile their books with the bank’s numbers and review their profit-and-loss statements. That’s good, but to prepare for your Smart Exit™, you need to do more… much more. On any particular day, you could post a For Sale sign and sell As-Is. Or, like selling a car, you could wash it, change the oil, and give it a tune-up, then advertise and sell it for more. You can do a For Sale by Owner or get help from a real estate agent, business broker, or consultant with specialized ownership transfer knowledge. In large organizations, this process is called mergers and acquisitions. Here’s the 4-step method for successful small business transfer I’ve developed:

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Deliver Customer Delight — Grow an efficient venture that delights your customers.

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Teach Staff to Steer — Train and develop your staff to operate and steer the business, based on written policies and procedures. Identify new leader prospects. Support leader candidates: Who wants it most?

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Implement Financial and Management Controls — Monitor company performance, keeping close rein as staff and the new leader(s) practice with less of your direct involvement.

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Make Your Smart Exit — Smoothly and gracefully transfer responsibilities, leadership, and ownership to make a smart exit and go on to your next opportunity, enterprise, or retirement.

My list of the tools and machinery needed to achieve these steps includes:

Reliable Accounting •

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Daily update the sales and purchases in your management and accounting software. If you have a bookkeeper, great, but you need to understand your accounting and be able to operate it to hire, train, evaluate, and know when to terminate bookkeepers. It’s your money and no one will manage it better than you. Get help with finances, but don’t abdicate your responsibility. Compare bank activity to your accounting and reconcile every few days. If you maintain a large cash balance, you can reconcile monthly. It’s a “red flag” if you’re using the bank’s figures to evaluate your cash position and make management decisions. Categorize transactions in your books with a carefully designed chart of accounts. Make major accounts in direct line with tax return categories and subaccounts for management analysis.

and repeat with a new plan A and B. Dig into your business model description, clarifying the value proposition your business offers. Business Valuation •

Itemize your tangible and intangible assets, liabilities, and obligations for an explicit understanding you can share with your spouse, key staff, and new leader candidates about ongoing commitments they need to fulfill to stay in business. These spreadsheets can assist you in estimating the value of your business.

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Ask your accountant or tax preparer what they know about business valuation and tell them the value you estimate. Search for businesses for sale or ones which have recently sold that are similar to yours. Develop trust relationships with experts to assist you.

•

Each year, declare the value of the business and your evidence to support the claim. Every three to 10 years, hire a certified valuation expert.

Strategic Planning •

Set your target Smart Exit™ date and dollar. Then establish milestones from today toward those targets. Depending on your business and personal life, consider defining three to 10 milestone achievements.

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Conduct scenario planning with probable, best, and worst-case projections for this year, and a few future years toward your first milestone.

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List ideas to improve and sustain your business this month, quarter, and year. Use project management methods with these initiatives. Get input from staff, your spouse and possibly support from family or a close friend. Create a strategy for how you’ll achieve that first milestone with dates and actions using text and numbers. Have a plan A and B. Test which works best, then take the next step

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Communications •

In all that your firm says and does, communicate your vision, mission, purpose, culture, brand, and the “why” of what you do.

•

Engage and develop a team of supporters, stakeholders, customers, and employees to build and document your fulfillment process.

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Develop win/win written agreements with vendors, employees, and stockholders to fulfill your promise to customers. Build trust and confidence in all your relationships.

Does this sound like a big project? It is, but you can do as much or as little as time and resources allow. How much are you depend-

ing upon the proceeds from selling your business to augment your savings and Social Security? What would you like in net sale proceeds after taxes? What’s a wise level of risk for you during the next five to 20 years? Read the book Smart Exit: Steer Your Business to Success. Complete the Smart Exit Companion Workbook exercises in the book or using the Smart Exit Online App. We’ll show you how you can learn, practice, and perfect your methods, to improve your business value and transfer leadership for your Smart Exit™.

interest and replace you, but maybe there’ll be more. Regardless, it’ll take the whole team’s dedication to the new operation going forward. I suggest you plan to step away gradually. Be ready to jump in when needed to avert disasters. Watch and help when called upon as the new leader(s) and team learn to navigate in our rapidly evolving economic, cultural, and technological environment. Remember, business value is influenced by both increasing profit (assets) and reducing risk (liabilities). Blueprint your operation for your Smart Exit!

If you make the sale of your business a oneperson project, you’re missing the point! I believe the best way most business owners can convert their many years of effort and tens of thousands of dollars invested is as a team project. There’ll probably only be one or two new leaders who earn an ownership

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John E. Anderson, CEO of Be Cause Business Resources and Author of Smart Exit™ Steer Your Business to Success and Companion Workbook

Businesses, Communities Need Help Recovering from Fires by Mark Hester Lost revenue from forest fires during peak tourism season will have lasting effects on businesses in the Columbia River Gorge and Southwest Oregon, state and local officials told the House Interim Committee on Economic Development & Trade during Legislative Days testimony Tuesday.

Johnson, who was in his fourth term as Representative for House District 52 before resigning earlier this month to join OBI, said road closures continue to handicap Gorge businesses. Interstate 84 was closed for three weeks in September. There's still no projected re-opening date for the historic Columbia River Highway, and other roads continue to have restrictions or lane closures.

No one doubted that the Eagle Creek and Chetco Bar fires this summer were cataclysmic events that will affect Oregon, and especially the areas directed affected, for years. But the testimony Tuesday was a reminder of how many businesses and individuals were affected and how long it will take to recover.

Both Johnson and Brock Smith pointed out that the fires were not the only economic hardships to hit their regions in the past year. In the Gorge, winter storms closed roads for stretches during ski season and slowed winter tourism. On the South Coast, reduced salmon, crab and rockfish seasons have hurt tourism and the fishing and foodprocessing industries.

Jason Lewis-Berry, Director of Regional Solutions, outlined some of the costs in affected areas: • A loss of 600 more jobs in September than usual, as the summer tourism season essentially ended early. • A decline in sales of as much as 60% for businesses, with those in leisure and hospitality hardest hit. • Cancellation of major events, including Cycle Oregon, the Sisters Folk Festival and nine outdoor performances at the Oregon Shakespeare Festival. • Increased transportation costs of $250,000 to $290,000 a day because of road closures. Two Governor-appointed councils are helping oversee recovery efforts. The Eagle Creek Fire Recovery Council is chaired by Oregon Business & Industry (OBI) President & CEO Mark Johnson, a former Legislator. Representative David Brock Smith (R-Port Orford) chairs the Chetco Bar Fire Recovery. Johnson and Brock Smith testified to the Committee.

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In Southwest Oregon, businesses as diverse as the Oregon Shakespeare Festival in Ashland and hotels and restaurants in Brookings continue to cope with lost cash flow from summer cancellations.

The challenge now is to help workers and communities get through this period and to develop economic resiliency to better prepare for future disasters, said Lewis-Berry of Regional Solutions, a state agency. Other state, federal and private organizations are offering loans, advice and other aid to affected businesses. Oregon Small Business Development Centers are serving as a first stop for information. To learn more, contact: Mark Hester | Communications Director Oregon Business & Industry P: 971.718.5045 E: markhester@oregonbusinessindustry.com 1149 Court Street NE | Salem, OR 97301-4030 www.oregonbusinessindustry.com

Ductless Heat Pumps Ductless Heat Pumps, sometimes called mini-split heat pumps, provide energy efficient heating and cooling without ductwork. Ductless heat pumps are an efficient option for homes with baseboard heating. (For homes that do have ductwork, other air-source ducted heat pumps can use the existing infrastructure.)

Certain ductless heat pump systems installed in your Oregon home may be eligible for a Residential Energy Tax Credit. RETC Qualifications An installed ductless heat pump must meet certain qualifications to earn a Residential Energy Tax Credit, valued at 50 percent of the cost of the device, up to $1,300. See the Rate Chart for more information. Complete qualifications and instructions are outlined in the RETC Application. Qualified ductless heat pumps must: •

Have a variable speed compressor, which makes heating and cooling air more efficient.

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Be installed by a technician that has completed factory-sponsored training within the last five years.

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Be listed in the Air-Conditioning, Heating, and Refrigeration Institute (AHRI) Directory of Certified Product Performance, with a Heating Seasonal

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Performance Factor of 10.0 or greater. Ask your installer to verify that your selected heat pump meets these qualifications.

RETC Program Sunset The RETC program is scheduled to sunset on December 31, 2017. To qualify for a tax credit: • • •

RETC devices must be purchased by December 31, 2017; Devices must be operational by April 1, 2018; and ODOE must receive your application no later than June 1, 2018.

If you plan to transfer your tax credit, ODOE must receive the pass-through application on or before June 1, 2018. Please review the RETC Administrative Rules for more information about program eligibility and requirements.

Application Ask your installing technician to complete sections 2 and 3 of the RETC application for ductless heat pumps, and provide you with a copy of the AHRI certificate of product rating. Complete the rest of the application, listing all other incentives you are receiving. Send the application and AHRI certificate to us with a copy of your receipt listing the date, installer’s name, make and model of your equipment, and the price you paid (minus labor and permits).

RETC Application for Premium Efficiency Ductless Heat Pumps (instructions and application) www.oregon.gov/energy/At-Home/Pages/Ductless-HeatPumps.aspx

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Catastrophic Fire and Restoration More and more of our public lands are blackened by catastrophic wildfires every year. And shockingly after the flames are out, most of these burned watersheds see little or no effort to repair the damage. Experts tell us that things will only get worse unless we act to reduce the threat of these mega fires by working to restore the health of the dense, overgrown forests by thinning, removing excessive fuel loads, replanting after catastrophic fire and wisely using good fire to restore the forests.

Sustainable Forests

When we manage our forests sustainably we ensure that we will enjoy an everlasting supply of wood products, clean drinking water, habitat for a multitude of wildlife species, ample recreation opportunities and the capture and storage of carbon. When we manage our forests sustainably we ensure that we will enjoy an everlasting supply of wood products, clean drinking water, habitat for a multitude of wildlife species, ample recreation opportunities and the capture and storage of carbon. Sustainably managed forests are resilient forests, able to withstand the unexpected forces of nature.

Thriving Communities

The balanced approach of sustained yieldâ&#x20AC;&#x201C;never harvesting more than we growâ&#x20AC;&#x201D;is vital to the social and economic fabric of rural America. Federal forests managed sustainably could be a key

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contributor to this stability. For instance, Federal forests in Oregon grow 4 Billion Board Feet each year. For more than 20 years, less than of 10% of the annual growth has harvested while 20% has been lost to fire & insects.

Forest Education For communities to thrive we believe restoration and rehabilitation of todayâ&#x20AC;&#x2122;s forests is critical. As more and more catastrophic fires wipe out forests, threatening wildlife habitat and watersheds the balance of resources and habitat are destroyed. Much effort and discussion revolve around conservation of existing resources and fire management, rightfully so. Little discussion and action are taken regarding the rehabilitation and restoration of the balance needed in the forest which aides in the growth and sustainment of healthy communities.

Facts $9.25 Billion Federal dollars spent fight wildfire in last 5 years

102,000 square miles Area burned in last 10 years, equal to South Carolina, West Virginia, Maryland, Vermont, New Hampshire, Massachusetts, New Jersey, Connecticut, Delaware, Rhode Island & Washington, D. C. combined.

60% Percentage of USFS total annual budget spent fighting forest fires Phone 541-957-9001 Address P. O. Box 400 Roseburg, OR 97470 http://communitysforhealthyforests.net

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Two Bad Choices in Tax Debate BY PATRICK WATSON

Remember when everyone wanted to cut the federal deficit? Fiscal policy was much simpler back then: balanced budget good, deficits bad. Times change. Now the House and Senate are considering tax legislation that, according to their own numbers, will add $1.5 trillion to annual deficits over the next 10 years. This is okay, we’re told, because the tax cuts will stoke economic growth, there by delivering added tax revenue that offsets the rate reductions. Note the bigger point here. Republicans still say they don’t like deficits—but apparently, this particular plan lets them cut taxes without adding more debt. It’s a miracle. Is their claim really true? Will the GOP tax plans boost economic growth? That’s the 1.5-trillion-dollar question. Theory vs. Reality Last week in “The Tax Trade Is Getting Crowded,” we considered the strange ways in which the current proposals “simplify” individual income taxes. Today, we’ll look at the corporate side. The Republican plan’s tion in corporate tax bracket to only 20%. more in line with other

centerpiece is a reducrates from a 35% top That would put the US countries.

What you seldom hear is that most other developed countries also have value-added tax

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(VAT), a kind of consumption tax. The US doesn’t. Our tax system will remain different, and not necessarily better, under the new proposal. Anyway, the theory is that lower tax rates will entice businesses to bring back operations they currently conduct overseas. They will build new factories and hire more US workers. Those workers will spend their higher incomes on consumer goods, and we’ll all be better off. Unfortunately, that thinking has several flaws. For one, as we saw in the NFIB Small Business Economic Trends report that John Mauldin shared last week, business owners say that finding qualified workers is their top challenge right now. Reducing corporate tax rates won’t make new workers magically appear, nor will it improve the skills of those already here. What increasing labor demand might do is spark that inflation the Federal Reserve has wanted for years. There’s also a good chance it could spiral out of control, forcing the Fed to hike interest rates even faster than planned— which could offset any benefit from the tax cuts. Fortunately, such added labor demand will appear only if businesses respond to the lower tax rates by expanding US production capacity.

Will they? Let’s ask. “Why Aren’t the Other Hands Up?”

Here are the results.

Image: Federal Reserve Bank of Atlanta

This month, in one of its regular business surveys, the Atlanta Federal Reserve Bank asked executives, “If passed in its current form, what would be the likely impact of the Tax Cuts and Jobs Act on your capital investment and hiring plans?” Only 8% of the executives surveyed said the bill would make them increase hiring plans “significantly.” Only 11% said they would significantly increase their capital investment plans. A solid majority answered either “no change” or “increase somewhat.” Other surveys reached similar conclusions. White House Economic Advisor Gary Cohn had an awkward moment last Tuesday at a Wall Street Journal CEO Council meeting. Sitting on stage to promote the tax cuts, Cohn watched as the moderator asked the roomful of executives whether their companies would expand more if the tax bill passed.

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When only a few hands rose, Cohn looked surprised and said, “Why aren’t the other hands up?” So maybe they were distracted or needed a minute to think. Fair enough. A few hours later, White House Economist Kevin Hassett appeared at the same event and asked the same audience the same question. He got the same result: only a few raised hands. Pocketing Profits None of this should surprise us. Tax rates are only one factor businesses consider when deciding to expand. The far more important question is whether consumers will buy whatever the new capacity produces. Think about it this way: if you’re a CEO and you

have difficulty selling your products profitably now, why would lower taxes make you produce more? Even a 0% tax rate is no help if you lack customers. Former Brightcove CEO David Mendels explained how big companies view this in a November 10 LinkedIn post. A tax cut for corporations will increase their profitability. Why we should believe that this increase in profitability will lead to wage increases when we have already seen that increases in profitability over the last 10 years did not, but rather went to stock buybacks and dividend increases that benefitted the investors? As a CEO and member of the Board of Directors at a public company, I can tell you that if we had an increase in profitability, we would have been delighted, but it would not lead in and of itself to more hiring or an increase in wages. Again, we would hire more people if we saw growing demand for our products and services. We would raise salaries if that is what it took to hire and retain great people. But if we had a tax cut that led to higher profits absent those factors, we would ‘pocket it’ for our investors.” By “pocket it,” Mendels means executive bonuses, share buybacks, or higher dividends. That’s what 10 years of Federal Reserve stimulus produced. A corporate tax cut would likely have a similar effect. Choose Wisely As I’ve said for months, I don’t think the House and Senate can agree on any significant tax changes. The two chambers have different political incentives they probably can’t reconcile. So I think we’ll be stuck with the current tax system. The economy will limp along like it has been and eventually go into recession. The hope -driven asset bubble will pop, hurting many investors. If I’m wrong and the GOP plan passes in anything like the current form, we will get higher deficits but little additional growth. The tax cuts will flow to asset owners and shareholders, probably blowing the market bubble even

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bigger. That will make the inevitable breakdown even more painful. Clearly, we need a better tax system. Other reform ideas exist. I think John Mauldin’s plan to sharply reduce or even eliminate the income tax, replacing it with a VAT-like consumption tax, would solve many problems. Trump advisors Stephen Moore and Larry Kudlow had another good idea last year: keep all the current deductions and credits but cap them at $150,000 per taxpayer. It would raise revenue and end many unproductive taxavoidance schemes. Those ideas apparently aren’t attractive to Congress, though. So we’re stuck with either the current broken system or a modified one that will… • • •

put the government even deeper in debt blow the market bubble bigger all without helping the economy grow.

Neither scenario is attractive, I know. But those are our choices. You can only pick one. Or rather, Congress will pick one for you. Let’s hope they choose wisely. See you at the top,

Patrick Watson

Before joining Mauldin Economics, Patrick was the managing editor at All Star Fund Trader, an awardwinning advisory service near the top of Hulbert Financial Digest ratings for eight years. For over a decade, he was a contributor to Weiss Research, and he served as an equity portfolio manager for high net worth investors. http://www.mauldineconomics.com/connecting-the-dots/