October 2017 by Southern Oregon Business Journal

October 2017

WILDFIRE IMPACT ... TOURISM TAKES A HIT Inside This Issue Export Trade Hurricanes Forest Fires

Oregon Shakespeare Festival cancels nine performances due to wildfire smoke, will refund $400,000 as a result.

Southern Oregon Business Journal

Counting Rings by Greg Henderson

The slow, tedious counting of rings was reserved for the largest stumps. Rain splashed on the maple and dogwood leaves, with their loud October colors, and made its way onto a little boy and his dad walking through the woods on the first day of hunting season. Chatter and a cascade of questions gave fair warning to the deer to stay in hiding. I believe dad was much less interested in filling his deer tag than the walk in the woods and the education of his son. Besides, the ring on the ancient stump marking the year George Washington was elected first president was far more exciting than filling a deer tag would have been. Sixty years later the ring-counting memory remains vivid. Life’s richness is often measured in currency you can’t put in your pocket. Rings I counted years ago were and are a measure of time, measured not in minutes or hours but in years. Events of each year can be read with amazing clarity by reading the footprints of weather and fire. But, we often rely on different sources for definitions. Beliefs and strong arguments are embedded in our souls regardless of new-found knowledge. Giving up what was once common knowledge is akin to breaking a life-long habit. We are by our natures, honor-bound to the past. Today the concern over proper management of Oregon’s forests has elevated to a broader audience extending to professional timbermen, hikers, hunters, environmentalists - and those who only dream of a walk in the woods. Decades of debates and idea sharing is a frustrating legacy of mind numbing demands from opposing sides of the argument. We live in a time that is the end-point of critical decision making. The can has been kicked to the end of the road. How forest practice agreements are reached in the near term will likely affect the status of Oregon’s future in very important ways. Forestry brought Oregon to statehood on muscled backs and determination. Economy and lives depended on it for survival. Not only did it help a young state survive, timber made it possible to prosper beyond settler’s imaginations.

As schools were built and communities grew, budgets depended on the continuation of the wealth brought in by the timber industry. Over 150 years later it remains strong and reliable to the state it helped create. Traded sector industries are the energy that assure growth and prosperity to communities, states, and nations with the timber industry remaining among the top five industries serving in that role in Oregon and the Pacific Northwest. Devastating wildfires have spurred strong comments in recent months related to forestry and forest management. They speak to the proper responses to wildfires caused by lightning, matches and firecrackers. It is time we sat down at a quiet table with a resolve to reach and act on balanced, agreeable decisions that future generations will commend. Let them count rings and see that right things were done.

Southern Oregon Business Journal

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

Table of Contents PUBLISHERS NOTE

OTHER BUSINESS

30 Rogue Valley Economic Indicators

Counting Rings

ECONOMICS 5 Oregon Economic Indicators 6

Succession Planning

Back Taxes?

Trade

31 Oregon Exports $21+ Billion 32 Strong Towns—After the Hurricane

39 On Forest Fires 40 Energy 42 Jordan Cove

12 Corporate Citizenship 15 KCC Capital Campaign

BUSINESS, VALUE, AND TAXES 16 What’s My Business Worth 19 Poverty and Progress 21 Business Tax Credits 23 Pension Storm Warning

Cover Photo Courtesy of : 703 Divot Loop Sutherlin, Oregon 97479 www.southernoregonbusiness.com 541-315-6127

Southern Oregon Business Journal

Oregon Shakespeare Festival - Ashland, OR

Southern Oregon Business Journal

Succession Planning VS Exit Planning Many people believe that succession planning and Exit Planning are one within the same and can be used

interchangeably when talking about owners who are in the process of leaving their businesses. However, this misconception can end up leaving you unprepared for one of the biggest financial events of your life. In practice, succession planning and Exit Planning are different concepts, but ones that can work in unison to achieve your overall Exit Objectives. To help clear up any confusion, the remainder of this article will provide

CFO Solutions-NW, LLC cfosolutionsnw.com

a discussion on the differences that exist between these two popular concepts.

Succession Planning: Focus on Transferring Leadership Succession planning is an important concept

leaving their businesses, it typically addresses

for owners who are leaving their businesses,

only one aspect of your successful exit from

but this type of planning primarily focuses on

business. This type of planning predominantly

the transfer of leadership and/or manage-

focuses on the business itself and its continui-

ment from one generation to the next within

ty when one owner leaves and another takes

the business. This one-off approach usually

over.

identifies successors within a business and

livelihood

provides them with an opportunity to develop

planning typically revolves around the needs

their skills and experience in order to replace

and objectives of the

the existing leaders of the business at a

of you, the departing owner.

future date. While succession

Although of

this

your

important

company,

the

succession

business and not those

Succession planning is essentially a Business planning is an important

topic for owners who are in the process of

Southern Oregon Business Journal

Continuity approach, which is one of several critical Components of Exit Planning.

Exit Planning: The Comprehensive Approach Exit Planning, on the other hand, is the

involved in

comprehensive analysis of all of the factors

Plan include:

that impact a business owner. Exit Planning addresses not only the succession aspect of leaving a business, but also a wide variety of other issues that can be important to you, including current and future planning with respect to your personal financial stability,

your

business

(its

value,

its

employees, its position in the market), your family and your community. Exit Planning starts from the perspective of your goals and objectives in each of these critical areas, along with your current and projected

creating a comprehensive Exit

Step 1: Owner Objectives Step 2: Business and Personal Financial Resources Step 3: Maximizing and Protecting Business Value Step 4: Ownership Transfers to Third Parties

Step 5: Ownership Transfers to Insiders Step 6: Business Continuity Step7: Personal Wealth and Estate Planning

Conclusion

resources (business value, personal and

As we have discussed in this article, succes-

business financial resources), to identify the

sion planning and Exit Planning are not

unique combination of strategies and steps

incompatible. Succession planning is an

that are most likely to allow you to reach

important element to the longevity of a

your overall goals.

company, but it is only one piece of an

There are many tools available to help you get into business, but few to help you get out. The Seven Step Exit Planning Processâ&#x201E;˘ practiced by my firm is a customized, comprehensive approach to designing and

overall, comprehensive Exit Plan. It is important for you to work with a trained Exit

Planning

succession

Professional

plan

for

your

that

the

business

fits

neatly into your overall Exit Plan.

implementing your successful exit from your company. Exit Planning uses your unique personal objectives to convert your current

reality into your desired outcome. The Exit Planning Process helps maximize the financial return, minimize tax liability, plan for contingencies and increase the likelihood of a successful transfer of the business. Although each Exit Plan is unique depending on an ownerâ&#x20AC;&#x2122;s specific objectives, a properly crafted plan has several common elements.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

As a reminder, the elements, or steps,

Southern Oregon Business Journal

DOWN TO BUSINESS A look at small business questions from the Southwestern Oregon Community College Small Business Development Center (SBDC).

My small business owes back taxes to the IRS, what should I do? Owing taxes to the Internal Revenue

operation by seizing your

Service (IRS) is not a situation small

accounts, desks, inventory -- and padlocking your

businesses want to find themselves in. Owing back payroll

taxes is much more serious

then owing back income

taxes. Fortunately, the

IRS wants to find ways to get payment without

doors.”

assets -- business

As long as the debt remains unpaid,

penalties and interest will continue to accumulate. The IRS website, www.irs.gov has helpful articles for people who owe back taxes.

closing businesses. The sooner a business owner

Many small business owners find it’s helpful to

starts working with the IRS to resolve the situa-

hire a tax accountant, registered agent or tax

tion, the less costly and stressful it will be.

attorney to help them resolve issues with the IRS.

The IRS has programs to assist business owners who are financially unable to pay all back taxes, penalties and interest immediately including payment plans, offers in compromise or, in dire situations, bankruptcy. Review all the options available and talk to a tax adviser to choose the best solution.

regulations might result in a lower debt to the IRS or a better payment plan. sentative,

visit

and general business legal information, “Congress has given the IRS enormous legal powers to collect past due taxes. The IRS can seize just about anything that you own -- including your bank account, home, and

wages. And the IRS doesn't

need a court order or judgment

before closing

your business and grabbing your property. In most cases, the IRS only has to send you a form before it acts -- and, in special

cases, it isn't compelled to give you any warning

To find a tax

www.aicpa.org

repre-

the

state

registry for accountants or ask for a referral from business

associates.

Beware

scams

that

promise to wipe out your tax debt, these are not legitimate options.

According to Nolo.com, a website with legal forms

“demand letter”

Having a representative with knowledge of tax

A couple questions to ask

before engaging an accountant:

Do you have a

preparer tax identification number and what is your tax background? Be sure to ask about prior experience with the tax situation being addressed. Ignoring tax debt does not make it go away, it

only

makes

expensive

with

penalties and interest. For assistance check into the Taxpayer Advocate Service https:// www.irs.gov/Advocate

contact

your

accountant.

at all. The IRS can effectively close down your The SWOCC Small Business Development Center is part of the Oregon SBDC Network that provides practical information and services for business success. We provide specialty assistance to both rapid growth businesses and start-ups. Our goal is to Strengthen and Support an Entrepreneurial Culture. Many tools and resources are available to assist your business including business planning software, market research, financial analysis and referrals.

We are here to help you make your business a success!

Southern Oregon Business Journal

By: Arlene M. Soto CMA, Southwestern SBDC Director 8

Southern Oregon Business Journal

Cash prizes for bad corporate citizenship, Amazon edition By Joe Cortright

hen we strongly incentivize anti-social behavior by big corporations, we get more of it.

Everyone in the urban space is busy handicapping the Amazon horserace, to see which city will land Amazon’s HQ2, which promises to be the biggest economic development prize of the 21st century. Amazon’s RFP, issued last week, invites metro areas with a million or more population to submit their entries.

hich city will click with Amazon? Prominent among them: Show us your incentive packages:

Capital and Operating Costs – A stable and business-friendly environment and tax structure will be high-priority considerations for the Project. Incentives offered by the state/province and local communities to offset initial capital outlay and ongoing operational costs will be significant factors in the decision-making process.

narrows the list to 20 cities that have the size to accommodate the company. Richard Florida makes a strong case for the top half dozen. The New York Times Upshot has gone so far as to pick a winner (Denver); although their article is actually more helpful for thinking about the winnowing process than handicapping the eventual winner.

Incentives – Identify incentive programs available for the Project at the state/province and local levels. Outline the type of incentive (i.e. land, site preparation, tax credits/ exemptions, relocation grants, workforce grants, utility incentives/grants, permitting, and fee reductions) and the amount. The initial cost and ongoing cost of doing business are critical decision drivers.

There’s actually very little to add to the speculation about which city has the inside edge. Plenty has been written that makes the most obvious points. Brookings’ Joseph Parilla Southern Oregon Business Journal

common refrain is that this beauty contest

is ultimately revealing as to 21st century corporate decision-making factors. While there’s a lot of detail here, the factor that’s going to make the most difference is the availability of talent. When you’re hiring upwards of 50,000 highly trained workers, as we’ve said before, the location decision is going to be made by the HR department. A city has to have a substantial base of talent– especially software engineers–and be a place that can easily attract and accommodate more. Beyond these the availability of talent, 12

it’s likely that analysts are reading too much into the criteria laid out in the RFP. The request for proposals was not drawn up to reveal Amazon’s decision criteria. It was drawn up to solicit the maximum number of credible incentive packages.

you’ve been around the economic development fraternity for long, you’ll know that this is just the latest in a series of similar high profile corporate gambits to generate state and local subsidies. Back in the 1980s, states and cities were throwing themselves at GM’s newly minted Saturn division (remember them?), offering up subsidies for Microelectronics and Computer Technology Corporation (MCC) and submitting bids to be the home of the Super Conducting Super Collider. All three of these supposedly worldchanging enterprises have since expired or been absorbed into other organizations. Amazon–who after all, makes its business knowing the decision preferences of tens or hundreds of millions of customers–is hardly likely to rely on cities for the information to make its decision. In all likelihood the company already has in mind a preferred site, or perhaps two. The whole point of this exercise is to improve the company’s bargaining position for the location it wants.

Consider,

for example, the recent case of General Electric’s relocation to Boston. The after the fact statements of the company’s CFO make it abundantly clear that GE was strongly attracted to Boston by the region’s urban amenities and the culture of innovation –attributes that could hardly be replicated at any price in most alternative locations. Asked by the Wall Street Journal why GE chose an urban location (Boston’s Seaport District), CFO Jeffrey Bornstein emphasized these characteristics. Yes. From the get go we knew we wanted to be in a place that was vibrant and entrepreneurial, where you could walk out your door enriched by your environment and your

Southern Oregon Business Journal

ecosystem. I can walk out my door and visit four startups. In Fairfield, I couldn’t even walk out my door and get a sandwich. We knew we wanted to be in a more urban environment where we could actually participate in the ecosystem and be smarter and more aware as a result.

Even

though the chief financial officer acknowledges that talent and an entrepreneurial environment were critical, GE was handsomely rewarded with $145 million in incentives by going the Kabuki theatre route of pretending to be weighing lots of competing offers. If anything, Amazon is more adept at this game than GE. Greg LeRoy of Good Jobs First has pointed out that Amazon has managed to extract a quarter of a billion dollars incentives to support the construction of distribution centers around the country. The whole point of the HQ2 exercise is to up this game to a new and more lucrative set of subsidies. As Richard Shearer of the Brookings Institution points out, the entire RFP exercise is a red herring: At the end of the day, it’s likely to be reasons largely internal to Amazon’s business plans, corporate structure, and culture that dominate its location choice, not incentives. Amazon will face hard choices about which activities it hives off to headquarters two, and how to clearly demarcate and manage a company with two very large headquarters locations. It’s unlikely to risk the success of its enterprise on the difference between two sets of subsidies.

Corporations

have choices. They could go about their business, and simply choose the best location, the one that makes the greatest business sense, and invest accordingly. Or they can as Amazon, GE, and dozens of others, go through the ritual of pretending to entertain a wide range of proposals, and use the leverage of competing bids to sweat the best possible deal out of their preferred

location. The net result of our current approach is to provide giant cash rewards to those who engage in the most cynical behavior. As a result, while Amazon may turn out to be a winner, it may come at the cost of fiscally impoverishing the city that it chooses to locate in. The other losers will be all the businesses against which Amazon competes, who are too small to have the leverage to insist on a comparable level of public subsidy for their similar operations.

Joe Cortright is President and principal economist of Impresa, a consulting firm specializing in regional economic analysis, innovation and industry clusters. Joeâ&#x20AC;&#x2122;s work casts a light on the role of knowledge-based industries in shaping regional economies, Joe served for 12 years as the Executive Officer of the Oregon Legislatureâ&#x20AC;&#x2122;s Trade and Economic Development Committee.

Southern Oregon Business Journal

KCC Capital Campaign Exceeds Expectation Klamath Community College By: Lacy Jarrell, Public Information Officer

Klamath Community College is thrilled to announce that generous community support has propelled the “Completing the Transformation” campaign past its fundraising goal. KCC launched the campaign in January, with a goal to raise $650,000 to purchase equipment for the college’s new Work Skills Technology Center (WSTC). When the campaign closed Aug. 31, 128 donors had contributed $760,057. “KCC is about providing solutions, and we are grateful that the community is supporting us and our commitment to economic development,” said KCC President Dr. Roberto Gutierrez. “The initiatives that help KCC grow also support our community in developing a more talented and robust workforce.” The WSTC is a $5.6 million project within Phase II of the campus expansion intended to promote local workforce development. The center will house new and current technical programs, and serve more than 500 students each year. The center will be a hub for high-wage, high -demand technical programs directly related to workforce needs in the local community and region. Funds raised in the Completing the Transformation campaign are being used to purchase technology, such as synchronous equipment, computers, conference room equipment, manufacturing program equipment, and wireless network technology that will help students become workforce ready. The extra funds will be used to establish the college’s new Advanced Manufacturing Engineering Technology program. “KCC is a five-star economic development opportunity for the Basin,” said campaign co- chair Steven Harper.

Southern Oregon Business Journal

During the campaign, 19 donors -- including 10 donations of $25,000 or more -- provided contributions that allowed them to name spaces in the WSTC, such as study spaces, offices, and classrooms. “I appreciate everyone who stepped up to support the campaign and economic development and workforce training in our area, as well as those who donated several hours of their own time to work toward reaching our goal,” said campaign co-chair Jim Bellet. “As KCC grows, I hope the county will continue to support the college in its workforce initiatives.” Throughout the campaign, KCC hosted president tours in which community members toured campus to learn about advances KCC has made in developing specialized career-technical programs, such as diesel mechanics, computer science, and nursing. “It was great fun to bring people to campus to show them what a remarkable source we have in KCC,” said Jean Penninger, co-chair of the campaign’s community division. “Our area needs to attract living-wage jobs, and KCC is training a workforce that can fill those positions.” KCC will host its next President’s Tour at 9 a.m., Thursday, Oct. 26. For more information, contact Patti Springer at 541-880-2234. Klamath Community College is an Affirmative Action / Equal Opportunity / Veteran / ADA institution embracing diversity. We encourage and welcome women, minority, veteran, and disabled candidates.

What’s My Business Worth? by John Anderson MS Management Smart Business Exit Series

All business owners want to know, “What’s my business worth?” But different buyers will put different values on your business:

reputation, or upcoming neighborhood changes that will suddenly make your business busier and better. The strategic buyer may be willing to pay much more

•

Family

•

Employee

•

value. That’s why Facebook, Amazon, Apple, and Google

Ambitious Newcomer

•

pay millions or billions for firms just a few years old that

Competitor

currently lose money but could add dramatic value to

•

Investor

their company in the future. Or they may want to keep

•

Strategic Buyer

that new company’s technology away from a competing

Each want something different. Family, an employee, or a non-employee ambitious newcomer want to operate and build your business over time. Owning and being involved in growing the business appeals to them. The competitor may also want to own

than other types of buyers; well beyond the cash flow

giant. If you have an excellent business, a terrific staff, and experience selling businesses, then strategic or investment buyers could be the best new partners to grow your venture further and then transfer ownership.

and grow your business, continuing in the current

If yours isn’t an extraordinary business, then you should

location. They may instead, close your location and

focus building value to fit one, and probably only one, of

merge your customers into their operation.

the other types of buyers: family, employees, an

Both the investor and strategic buyer have different interests from the others. The investor and strategic buyer are keenly aware of the value of your current and

ambitious newcomer, or a competitor. Each type of

buyer requires a different set of preparations and offers different benefits… and risks.

potential cash flow. The first four possible buyers proba-

The more strategic you are in your business preparation,

bly don’t clearly understand cash flow. The investor

the better the result for both you and the buyer. Making

does. The investor wants steady, incremental growth

your business ideally fit a particular buyer increases the

from profitable operations and an eventual sale.

business value to them, making it more appealing and

The strategic buyer sees some special potential in your

smoother to transfer.

operation that few others could take advantage of, but

Identifying the best candidate, testing that person, and

they believe they can achieve it. Maybe it’s the location,

building the possibility takes time. The first candidate

Southern Oregon Business Journal

may not work out. It’s a delicate dance, exploring

Ambitious Newcomer — You’ve heard about a someone

and testing while keeping your risk low and options open

who’s new in town. She talks a good game, has skills and

should

industry knowledge, and looks like she could develop the

insurmountable

problems

arise

with

one

candidate or another. There are two things you should do next: First, increase

management experience she may or may not yet have; she has potential.

your commitment and dedication to operating the best

Competitor — Distinguish between direct local versus

damn business you can by making sure you: a) please

next-city potential competitors. Are they a strong, single

customers, b) practice delegating responsibility and

venture, or a multi-location chain with horsepower? Like

authority to employees, and c) strive to make the

investors and strategic buyers, they may make a big offer

business clean, organized, and appealing.

to capture your attention and sweep you off your feet

Second, reread Smart Exit™ — The Best Way Out, the

with their promises.

first article in this six-article series. In it, we ask three

Beware of hidden threats in the offering and selling

questions:

process. Here are some possible situations:

1. Do you have something to sell? 2. Can you prove it’s worth buying?

Shoppers and Due Diligence — Tire kickers who take

3. Can you find someone who’s interested?

your time and dig in your mine to discover your gold. High dollar offers typically have a due diligence clause

Start with question 3 and make a list of possible candi-

that, if they discover the value is lower than they

dates for each category: family, employees, ambitious

originally believed, their payment is significantly reduced

newcomers, and competitors. What do you have to sell

until actual sales prove the higher value is valid. You

that’s especially appealing to each category or candidate

receive this smaller payment upon closing, with you as an

(question 1)?

employed manager.

Describe which attributes of your business are of greatest

Initially, you would never have accepted this. However,

importance to each category or candidate. From that list,

after weeks or months of “due diligence” you’re exhaust-

further define those attributes and how you could prove

ed and discouraged. At first, their offer looked so good,

their value. Don’t discount anyone because of some per-

now not so good. Considering what they’ve found in your

ceived shortcoming.

records, it is a decent offer, not a good one, so reluctantly you take it.

Don’t let money or the lack of it write anyone off as a possible candidate. You should be able to find worka-

These sales are structured such that you can earn

rounds for nearly any shortcomings. For example:

the remainder only if they reach certain performance

standards. But now they’re in real command of your Family — A nephew, niece, or best friend’s relative has

business and you’re no longer in control like you had

some technical experience in your industry and his

been.

spouse is a bookkeeper or accountant. Their goal is to end the long commute to the big-company job.

Creating Your Toughest Competitor — you get what appears to be a great offer with a high dollar sale. In

Employee — One or more trusted employee of 5+ years

walks a knowledgeable industry expert (maybe with a

could be trained to operate, manage, and partner with

team of accountants and analysts) to see behind your

you and then buy you out. You know and respect the

curtain and study your customer list, vendor pricing

employee and his or her family.

agreements, inventory, and history.

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They get a complete picture of your operation, taste

Your sales, profits, and these ratios enable you and

your secret sauce, and then invalidate the purchase

others to compare the value of your business to other

agreement because of something they find. Not only

businesses in your industry that sold recently or are

have you invested a great deal of time, you’ve focused

currently on the market.

on them instead of growing your business. Now they have information they can use against you.

There are industry averages and benchmark targets businesses strive to achieve. We recommend a certified

Ultimately, your business value will be largely influenced

valuation every three to ten years and then having your

by financial reports substantiated with income tax

business value measured annually to be sure manage-

returns. You’ll augment these with a list of your tangible

ment is going in the right direction.

assets: equipment with their liquidation and replacement values, and inventory (useable current inventory,

not obsolete or scrap parts). These financial reports convert into ratios, such as current assets divided by current liabilities, accounts receivable divided by accounts payable, cash flow,

Valuation is an ongoing process. Determine what your business is worth and find “the best way out” to achieve your Smart Exit™! Read the next article in the series: Increasing the Value of Business

return on equity, and many others.

Southern Oregon Business Journal

Poverty and Progress, Oregon Update Edition By: Josh Lehner The Census Bureau released the 2016 American Community Survey data. There is a ton to unpack here and even more once the microdata is released later this year. In the coming months our office will update and share some of this work. In order to not bury the lead regarding the 2016 ACS data, Oregon’s household income and poverty numbers look very good. I don’t want to oversell the data, but they are among the best readings in Oregon’s modern history. The underlying, or internal dynamics behind the topline data are even better. This does not mean the economy is perfect, or without issues. We know there remain substantial problems and challenges. It does mean, however, that considerable progress has been made during the current economic expansion following the financial crisis. These gains are not evenly distributed across the state as each regional economy is at a somewhat different point in their local cycle, but taken as a whole, Oregon is finally doing OK again. Oregon is once again close to where it was during the late 1970s, late 1990s, and arguably better than the peak of the housing boom. Importantly, should the expansion last another couple of years, which many economists expect, we are very likely to finally break through many of the stagnant trends of the past 15-20 years. Whether that will be temporary or permanent is not yet known. However the economic trajectory in recent years has been quite good, particularly here in Oregon. In 2016, Oregon’s median household income, after adjusting for inflation, is at or near the highest it has ever been. I only qualify that due to the margin of error surrounding these estimates and depending upon which inflation

Southern Oregon Business Journal

measure one uses. Clearly, however, income for the typical Oregon household is back to where it was, if not a little better than at the peak of the dotcom and housing bubbles. Furthermore, the gap between Oregon’s household income and the U.S. is effectively gone. Oregon has typically been 2 or 3 percentage points lower that the U.S. but in 2016 Oregon is just a hair below. And that gap is not statistically significant, for what it’s worth. See here for more on the different measures of income and how Oregon and the U.S. compare.

In looking at the drivers of median household income in Oregon last year, the underlying dynamics look even better. These gains are all about a strong economy approaching full employment. The number of Oregonians with a job is up about 3%. However the number of Oregonians working full-time is up nearly 5%, and for these fulltime, year round workers their earnings are up over 6%, nominal. Those are increases in median earnings! Inflation-adjusted that is a 4.8% gain; a tremendous improvement.

national average. That said, the poverty rate is still a bit above where it was in 2007, and remains a couple percentage points higher than in 1979 and 1999.

Possibly the most encouraging part of these improvements are the gains seen for households in the middle and bottom part of the income distribution. In 2016, incomes for these households are once again above pre-Great Recession levels after adjusting for inflation. Remember, these households are fully reliant upon a strong economy to generate any sort of income gains. High-income households generally have a high-wage job and other sources of income like capital gains, rental income, and the like. Low-income households only have wages, and in some cases the safety net.

Poverty rates, needs-based caseloads, and demand for other social services are among the last things to turnaround. Oregon is once again squarely in the feel-good part of the business cycle. Further progress remains, however the economy is getting there.

Josh Lehner Senior Economist

Office of Economic Analysis Office of the Chief Operating Officer (COO) Administrative Services, Department of

Finally, the strong economic improvements that are translating into income growth for all households are now also pulling more Oregonians out of poverty. Oregonâ&#x20AC;&#x2122;s poverty rate in 2016 stands at 13.3% and below the

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155 Cottage St NE U20 Salem, OR 97301-3966 Fax: (503) 373-7643 Web site: www.oregon.gov

Governor Has Authority to Grant Business Tax Credits ORS 317.124

•

• • • • •

Financial data/draft materials are not public records. •

• • • •

Southern Oregon Business Journal

Pension Storm Warning By John Mauldin http://www.mauldineconomics.com/frontlinethoughts/ pension-storm-warning

This time is different are the four most dangerous words any economist or money manager can utter. We learn new things and invent new technologies. Players come and go. But in the big picture, this time is usually not fundamentally different, because fallible humans are still in charge. (Ken Rogoff and Carmen Reinhart wrote an important book called This Time Is Different on the 260-odd times that governments have defaulted on their debts; and on each occasion, up until the moment of collapse, investors kept telling themselves “This time is different.” It never was.) Nevertheless, I uttered those four words in last week’s letter. I stand by them, too. In the next 20 years, we’re going to see changes that humanity has never seen before, and in some cases never even imagined, and we’re going to have to change. I truly believe this. We have unleashed economic and technological forces we can observe but not entirely control. I will defend this bold claim at greater length in my forthcoming book, The Age of Transformation. Today we will zero in on one of those forces, which last week I called “the bubble in government promises,” which I think is arguably the biggest bubble in human history. Elected officials at all levels have promised workers they will receive pension benefits without taking the hard steps necessary to deliver on those promises. This situation will end badly and hurt many people. Unfortunately, massive snafus like this rarely hurt the politicians who made those overly optimistic promises, often years ago.

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Earlier this year I called the pension mess “The Crisis We Can’t Muddle Through.” Reflecting since then, I think I was too optimistic. Simply waiting for the floodwaters to drop down to muddle-through depth won’t be enough. We face an entire new ocean, deeper and wider than we can ever cross unaided. Storms from Nowhere? This year marks the first time on record that two Category 4 hurricanes have struck the US mainland in the same year. Worse, Harvey and Irma landed directly on some of our most valuable and vulnerable coastal areas. So now, in addition to all the problems that existed a month ago, the US economy has to absorb cleanup and rebuilding costs for large parts of Texas and Florida, as well as our Puerto Rico and US Virgin Islands territories. Now then, people who live in coastal areas know full well that hurricanes happen – they know the risk, just not which hurricane season might launch a devastating storm in their direction. In a note to me about Harvey, fellow Rice University graduate Gary Haubold (1980) noted just how flawed the city’s assumptions actually were regarding what constitutes adequate preparedness. He cited this excerpt from a recent Los Angeles Times article: The storm was unprecedented, but the city

has been deceiving itself for decades about its vulnerability to flooding, said Robert Bea, a member of the National Academy of Engineering and UC Berkeley emeritus civil engineering professor who has studied hurricane risks along the Gulf Coast. The city’s flood system is supposed to protect the public from a 100-year storm, but Bea calls that “a 100-year lie” because it is based on a rainfall total of 13 inches in 24 hours. “That has happened more than eight times in the last 27 years,” Bea said. “It is wrong on two member of the National Academy of Engineering and UC Berkeley emeritus civil engineering professor who has studied hurricane risks along the Gulf Coast. The city’s flood system is supposed to protect the public from a 100-year storm, but Bea calls that “a 100-year lie” because it is based on a rainfall total of 13 inches in 24 hours. “That has happened more than eight times in the last 27 years,” Bea said. “It is wrong on two counts. It isn’t accurate about the past risk and it doesn’t reflect what will happen in the next 100 years.” (Source) Anybody who lives in Houston can tell you that 13 inches in 24 hours is not all that unusual. But how do Robert Bea’s points apply to today’s topic, public pensions? Both pension plan shortfalls and hurricanes are known risks for which state and local governments must prepare. And in both instances, too much optimism and too little preparation ultimately have devastating results. Admittedly, public pension liabilities don’t come out of nowhere the way hurricanes seem to – we know exactly where they will strike. In many cases, we know approximately when they’ll strike, too. Yet we still let our elected officials make impossible-to-fulfill promises on our behalf. The rest of us are not so different from those who built beach homes and didn’t buy hurricane or storm surge insurance. We just face a different kind

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of storm.

Worse, we let our government officials use predictions about future returns that are every bit as unrealistic as calling a 13-inch rain in Houston a 100-year event. And while some of us have called pension officials out, they just keep telling lies – and probably will until we reach the breaking point. Puerto Rico is a good example. The Commonwealth was already in deep debt before Irma blew in – $123 billion worth of it. There’s simply no way the island can repay such a massive debt. Creditors can fight in the courts, but in the end you can’t squeeze money out of plantains or pineapples. Not enough money, anyway. Now add Irma damages, and the creditors have even less hope of recovering their principal, let alone interest. Puerto Rico is presently in a new form of bankruptcy that Congress authorized last year. Court proceedings will probably drag on for years, but the final outcome isn’t in doubt. Creditors will get some scraps – at best perhaps $0.30 on the dollar, my sources say – and then move on. We’re going to find out how strong those credit insurance guarantees really are. “That’s just Puerto Rico,” you may say if you’re a US citizen in one of the 50 states. Be very careful. Your state is probably not so much better off. In 10 years, your state may well be in the same place where Puerto Rico is now. I’d say the odds are better than even.

Are your elected leaders doing anything about this huge issue, or even talking about it? Probably not. As it stands now, states can’t declare bankruptcy in federal courts. Letting them do so would raises thorny constitutional issues. So maybe we’ll have to call it something else, but it’s going to end the same way. Your state’s public-sector retirees will not get what they were promised, and they won’t take the outcome kindly.

Blood from Turnips

Public sector bankruptcy, up to and including state-level bankruptcy, is fundamentally different from corporate bankruptcy in ways that many people haven’t considered. The pension crisis will likely expose those differences as deadly to creditors and retirees. Say a corporation goes bankrupt. A court will take all its assets and decide how to divvy them up. The assets are easy to identify: buildings, land, intellectual property, cash, etc. The parties may argue over their value, but everyone knows what the assets are. They won’t walk away. Not so in a public bankruptcy. The primary asset of a city, county, or state is future tax revenue from households and businesses within its boundaries. The taxpayers can walk away. Even without moving, they can bypass sales taxes by shopping elsewhere. If property taxes are too high, they can sell and move. When they take a loss on the sale, the new owner will have established a property value that yields the city far less revenue than it used to receive.

Some homes may fall within 10 or more jurisdictions. What about those thousands of flooded homes in and around Houston; how much are they worth? Right now, I’d say their value is zero in many cases. Maybe they will have some value if it’s possible to rebuild, but at the very least they ought to receive a sharp discount from the tax collector this year. Considering how many destroyed or unlivable properties there are all over South Texas, I suspect cities and counties will lose billions in revenue even as their expenses rise. That’s a small version of what I expect as city and state pension systems all over the US finally face reality. Here in Dallas I pay about 2.7% in property taxes. When I bought my home over four years ago, I checked our local pension and was told we were 100% funded. I even mentioned in my letter that I was rather surprised. Turns out they lied. Now, realistic

Cities and states don’t have the ability to shed their pension liabilities. They are stuck with them, even as population and property values change. We may soon see an example of this in Houston. Here in Texas, our property taxes are very high because we have no income tax. Your tax is a percentage of your home’s taxable value. So people argue to appraisal boards that their homes are falling apart and not worth anything like the appraised value. (Then they argue the opposite when it’s time to sell the home.) About 200 entities in Harris County can charge taxes. That includes governments from Houston to Baytown to Hedwig Village, plus 20 independent school districts. There’s a hospital district, port authority, several college districts, the flood control district, a multitude of utility districts, and the Harris County Department of Education.

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assessments suggest they will have to double the municipal tax rate (yes, I said double) to be able to fund fire and police pension funds. Not a terribly popular thing to do. At some point, look for taxpayers to desert the most-indebted cities and states. Then what? I don’t know. Every solution I can imagine is ugly. Promises from Air Most public pension plans are not fully funded. Earlier this year in “Disappearing Pensions” I shared this chart from my good friend Danielle DiMartino Booth:

Total unfunded liabilities in state and local pensions have roughly quintupled in the last decade. You read that right – not doubled, tripled or quadrupled: quintupled. That’s nice when it happens on a slot machine, not so nice when it’s money you owe. You will also notice in the chart that much of that change happened in 2008. Why was that? That’s when the Fed took interest rates down to nearly zero, meaning it suddenly took more cash to fund future payments. Also, some strapped localities conserved cash by promising public workers more generous pension benefits in lieu of pay raises. According to a 2014 Pew study, only 15 states follow policies that have funded at least 100% of their pension needs. And that estimate is based on the aggressive assumptions of pension funds that they will get their predicted rate of returns (the “discount rate”).

Kentucky, for instance, has unfunded pension liabilities of $40 billion or more. This month the state budget director notified local governments that pension costs could jump 50-60% next year. That’s due to a proposed reduction in the system’s assumed rate of return from 7.5% to 6.25% – a step in the right direction but not nearly enough. Think about this as an investor. Do you know a way to guarantee yourself even 6.25% average annual returns for the next 10–20 years? Of you don’t. Yes, some strategies

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have a good shot at doing it, but there’s no guarantee. And if you believe Jeremy Grantham’s sevenyear forecasts (I do: His 2009 growth forecast was spot on), then those pension funds have very little hope of getting their average 7% predicted rate of return, at least for the next seven years.

Now, here is the truth about pension liabilities. Let’s assume you have $1 billion in funding today. If you assume a 7% compound return – about the average for most pension funds – then that means in 30 years that $1 million will have grown to $8 billion (approximately). Now, what if it’s a 4% return? Using the Rule of 72, the $1 billion grows to around $3.5 billion, or less than half the future assets in 30 years if you assume 7%. Remember that every dollar that is not funded today means that somewhere between four dollars and eight dollars will not be there in 30 years when somebody who is on a pension is expecting to get it. Worse, without proper funding, as the fund starts going negative, the funding ratio actually gets worse, sending it into a death spiral. The only way to bring it out of the spiral is with huge cuts to other needed services or with massive tax cuts to pension benefits. The State of Kentucky’s unusually frank report regarding the state’s public pension liability sums up that state’s plight in one chart: 26

The news for Kentucky retirees is quite dire, especially considering what returns on investments are realistically likely to be. But there’s a make or break point somewhere. What if pension plans must either hit that 6% average annual return for 2018–2028 or declare bankruptcy and lose it all? That’s a much greater problem, and it’s a rough equivalent of what state pension trustees have to do. Failing to generate the target returns doesn’t reduce the liability. It just means taxpayers must make up the difference. But wait, it gets worse. The graph we showed earlier stated that unfunded pension liabilities for state and local governments was $2 trillion. But that assumes an average 7% compound return. What if we assume 4% compound returns? Now the admitted unfunded pension liability is $4 trillion. But what if we have a recession and the stock market goes down by the past average of more than 40%? Now you have an unfunded liability in the range of $7–8 trillion. We throw the words a trillion dollars around, not realizing how much that actually is. Combined state and local revenues for the US total around $2.6 trillion. Following the next recession (whenever that is), the unfunded pension liabilities for state and local governments will be roughly three times the revenue they are collecting today, and that’s before a recession reduces their revenues. Can you see the taxpayer stuck between a rock and a hard place? Two immovable objects meeting? The math just doesn’t work. Pension trustees don’t face personal liability. They’re literally playing with someone else’s money. Some try very hard to be realistic Southern Oregon Business Journal

and cautious. Others don’t. But even the most diligent can’t control when the next recession comes, or when the stock market will crash, leaving a gaping hole in their assets while liabilities keep right on rising. I have had meetings with trustees of various government pensions. Many of them want to assume a more realistic discount rate, but the politicians in their state literally refuse to allow them to assume a reasonable discount rate, because owning up to reality would require them to increase their current pension funding dramatically. So they kick the can down the road. Intentionally or all over the US future officials will be out of due, protected immunity.

not, state and local officials made pension promises that can’t possibly keep. Many office when the bill comes from liability by sovereign We are starting to see cities filing for bankruptcy. That small ripple will be a tsunami within 7–10 years.

But wait, it gets still worse. (Do you see a trend here?) Many state and local governments have actually 100% funded their pension plans. Some states and local governments have even overfunded them – assuming they get their projected returns. What that really means is that the unfunded liabilities are more concentrated, and they show up in unlikely places. You think Texas is doing well? Look at some of our cities and weep. Look, too, at other seemingly semi-prosperous cities all over the country. Do you think the suburbs of Dallas will want to see their taxes increased to help out the city? If you do, I may have a bridge to sell you – unless you would rather have oceanfront properties in Arizona. 27

This issue is going to set neighbor against neighbor and retirees against taxpayers. It will become one of the most heated battles of my lifetime. It will make the Trump-Clinton campaigns look like a school kids’ tiddlywinks smackdown. I was heavily involved in politics at both the national and local levels in the 80s and 90s and much of the 2000s. Trust me, local politics is far nastier and more vicious. And there is nothing more local than police and firefighters and teachers seeing their pensions cut because the money isn’t there. Tax increases of up to 100% are going to become commonplace. But even these new revenues won’t be enough… because we will be acting with too little, too late. This is the core problem. Our political system gives some people incentives to make unrealistic promises while also absolving them of liability for doing so. It also places the costs of those must-break promises on innocent parties, i.e. the retirees who did their jobs and rightly expect the compensation they were told they would receive. So at its heart the pension crisis is really not a financial problem. It’s a moral and ethical problem of making and breaking promises that profoundly impact people’s lives. Our culture puts a high value on integrity: doing what you said you would do. We take a job because the compensation package includes x, y and z. Then someone says no, we can’t give you z, so quit and go elsewhere. The pension problem is going to get worse as more and more retirees get stuck with broken promises, and as taxpayers get handed higher and higher bills. These are irreconcilable demands in many cases. It’s not possible to keep contradictory promises. What’s the endgame? I think much of the US will end up like Puerto Rico. But the hardship map will be more random than you can possibly imagine. Some sort of authority –

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whether bankruptcy courts or something else – will have to seize pension assets and figure out who gets hurt and how much. Some courts in some states will require taxes to go up. But courts don’t have taxing authority, so they can only require cities to pay, but with what money and from whom? In many states we literally don’t have the laws and courts in place with authority to deal with this. And just try passing a law that allows for states or cities to file bankruptcy in order to get out of their pension obligations.

The struggle will get ugly, and innocent people on both sides will be hurt. We hear stories about retired police chiefs and teachers with lifetime six-digit pensions and so on. Those aberrations (if you look at the national salary picture) are a problem, but the more distressing cases are the firefighters, teachers, police officers, or humble civil servants who served the public for decades, never making much money but looking forward to a somewhat comfortable retirement. How do you tell these people that they can’t have a livable pension? We will see many human tragedies. On the other side will be homeowners and small business owners, already struggling in a changing economy and then being told their taxes will double. This may actually happen in Dallas; and if it does, we won’t be alone for long. The website Pension Tsunami posts scores of articles, written all across America, about pension problems. We find out today that in places like New York and Chicago and Cook County, pension funds have more retirees collecting than workers paying into the fund. There are more retired cops in New York and Chicago than there are working cops. And the numbers of retirees just keep growing. On an individual basis, it is smart for the Chicago police officer to retire as early possible, locking in benefits, go on to another job that offers more retirement benefits, and round out a career by working at least three years

at a private job that qualifies the officer for Social Security. Many police and fire pensions are based on the last three years of income; so in the last three years before they retire, these diligent public servants work enormous amounts of overtime, increasing their annual pay and thus their final pension payouts. As I’ve said, this is the crisis we can’t muddle through. While the federal government (and I realize this is economic heresy) can print money if it has to, state and local governments can’t print. They actually have to tax to pay their bills. It’s the law. It’s also an arrangement with real potential to cause political and social upheaval that Americans have not seen in decades. The storm is only beginning. Think Hurricane Harvey on steroids, but all over America. Of all the intractable economic problems I see in the future (and I have a vivid imagination), this is the most daunting.

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Boston was a very intriguing two full days of meetings. There is the potential to expand the services that my firms can offer readers and investors into areas that I never knew might be possible. It is truly exciting, and I hope we can pull it off. I am off to meet with a close friend from out of town and compare notes on the world, one of my favorite things to do. I know we all have times when we wish we were being more productive, when we wonder why are we here and not moving the ball forward. But when I get to spend time with good friends, old or new, I somehow never feel that way. And while our pension systems may be going to hell in a handbasket, friendships will remain forever.

Pension Storm Warning By John Mauldin September 16, 2017

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$21,953,115,984 BIG TRADE NUMBER for 2016 Oregon Exports Business Oregon Believes in Assisting Oregon Businesses Establish Trade Relationships Junction City Caramel Corn Maker Plans to Add 150 New Jobs employees to an estimated 80 within three years. In January 2012, Business Oregon also backed the company with a CEF loan guarantee. In total, Business Oregon has provided loans or loan guarantee worth a total of more than $1.5 million. In less than a decade, Cosmos Creations, a Junction City caramel corn maker, went from a local favorite to a fast growing employer in this small Willamette Valley community.

Then, in mid-2014, it announced plans to more than triple its workforce from 55 employees to more than 200 as it expands into a new, $14 million manufacturing facility by the end of 2014. The latest expansion plans came after Business Oregon backed the food processing company with four different loans or loan guarantees over a two-year period. Just prior to the company's announcement of its latest expansion plans, in June 2014, Business Oregon provided the company a loan guarantee on a working capital loan through the Credit Enhancement Fund (CEF). In addition, in late 2013, Business Oregon provided the company an loan for equipment from the Oregon Business Development Fund (OBDF) in conjunction with a guarantee on a working capital loan to the company through CEF. The financial backing from the state was expected to help the company more than double its workforce from 37 full-time Southern Oregon Business Journal

Cosmos Creations started as Cosmos Caramel Corn in 2004 in the small kitchen of a culinary artist. After it became a local sensation, the company expanded from the kitchen to a 5,000-square-foot facility that produced more than a dozen varieties of the unique caramel treat. Cosmos gained distribution across the state of Oregon and eventually developed a loyal following by attending many home shows and other events, and providing samples to attendees. Cosmos produces and sells a gourmet, ovenbaked corn that has no husks, shells or kernels. It is gluten free, trans-fat free and preservative free. The company makes a wide variety of flavors and sizes that are sold in its retail store and on-line. Business Oregon's OBDF loan to the company was funded with State Small Business Credit Initiative (SSBCI) funds from the U.S. Treasury. Business Oregon received $16.5 million in SSBCI funds in 2011. The funds are disbursed through Business Oregon's existing finance tools. In July 2011, Cosmos was purchased by John Strasheim and DeWayne Tiller, operating as

the 4 Him Food Group. Tiller was introduced to Cosmos in 2006 at a trade show in Las Vegas. At the time, Tiller did not even realize the company was located only five miles from his own home in Oregon. http://www.oregon4biz.com

Other Industries: Advanced Manufacturing

Castparts in Portland. Titanium is an important, highly-valued metal used in aerospace and biomedical products. Machinery manufacturers in Oregon specialize in the production of equipment used for heavy lift, material moving, pumping, metalworking, logging, and construction. Oregon machinery manufacturers are very export-oriented, shipping their advanced equipment all over the world.

Advanced Manufacturing includes innovative manufacturers who develop and utilize advanced materials in their products. The development and use of advanced materials means manufacturers will create more competitive, innovative products marketable globally. Oregon's advanced manufacturers are particularly competitive in the development and use of advanced metals. The metals industry has a long history in Oregon, and it continues to drive innovation of advanced materials in the state.

Aerospace & Defense

Advanced manufacturers increasingly turn to exports for growth. Advanced Manufacturing exports from Oregon have doubled in the past ten years. Export growth is not limited to one sector of Advanced Manufacturing either, Upstream Metals and Machinery, Aerospace and Defense, and Biomedical have all experienced tremendous export growth.

The Aerospace and Defense industry is present throughout Oregon. Boeing has a sizable presence in Portland, Erickson AirCrane is in Southern Oregon, and Central Oregon is home to several small manufacturers. About a quarter of employment in aerospace and defense is in search, detection, and navigation instruments, which includes companies like FLIR Systems and Garmin.

Emerging sectors within Advanced Manufacturing include Aerospace and Defense, and Biomedical. Both industries are growing jobs, increasing their market shares nationally, and have tripled exports over the past ten years.

Upstream Metals & Machinery Oregon has long been an innovator in metals manufacturing. Upstream Metals includes manufacturers of pipes, castings, plates, coils, and metal smelting and refining that are then used in a subsequent end-user product. Oregon is known for its advanced metals manufacturers, including those that work with titanium, like ATI Specialty Alloys & Components in Albany and Precision Southern Oregon Business Journal

Oregon's fastest growing Advanced Manufacturing sector is Aerospace and Defense, with 51% employment growth over the past 10 years. Oregon's Aerospace and Defense industry may not be as large and established as some other states, but it is clearly an expanding manufacturing sector in Oregon based on its outstanding employment growth, competitive market share gain, and industry innovation over the past 10 years.

Unmanned Aerial Vehicles (UAVs) is another emerging sector of Aerospace and Defense in Oregon. Companies like Northwest UAV in McMinnville (the largest manufacturer of UAV propulsion systems in the U.S.), and Insitu in Hood River and Bingen (WA), make Oregon well-positioned to grow its UAV industry. Oregon also boasts three FAA approved UAV test ranges in Pendleton, Tillamook, and Warm Springs that offer a diverse array of testing conditions.

Biomedical Biomedical

emerging

Advanced

Manufacturing industry in Oregon because of its employment and export growth, as well as its growing competitive market share in the U.S. Two sectors form the core of Biomedical in Oregonâ&#x20AC;&#x201D;medical equipment manufacturing and scientific research and development. Together, these account for about three quarters of employment in the industry. Biomedical manufacturers are becoming increasingly reliant on exports for growth. Both medical equipment and pharmaceutical

manufacturing tripled their exports between 2005 and 2015.Service providers in Biomedical have found Oregon to be fertile ground for their research, with a talented and innovative workforce. The industry is supported by the Oregon Translational Research and Development Institute (OTRADI), a Business Oregon-supported Signature Research Center tasked with translating scientific research developed in Oregon's laboratories into commercial ventures.

Industry Snapshot Advanced Manufacturing Firms (2014) Employment (2014) Average Wage (2014) Exports (2014) Sales (2012)

Upstream Metals & Machinery

Aerospace & Defense

Biomedical

Total

392

777

1,316

17,0301

4,2301

9,788

29,5421

$62,0001

90,9551

$67,323

$63,8301

$1,619,454,424

$584,700,478

$326,490,217

$3,371,161,170

$994,654,000 $1,835,406,000

$8,889,540,0002

$6,059,481,0002

1 Employment or wage statstic not available from 2014 BLS QCEW. Actual statistic is confidential. Figures represent estimates by Business Oregon based on one or a combination of the following: 1) percent of nondisclosable employment and wages at that NAICS level, based on distribution of establishments with nondisclosable employment and wages, 2) published employment and wage statistics in Oregon Employment Department's QCEW, 3) past employment and wage data from BLS and/or OED, 4) employment and/or wage information from published articles. 2 Sales statistic not available from 2012 Economic Census. Actual statistic is suppressed. Figures represents estimate by Business Oregon based on one or a combination of the following: 1) percent of nondisclosable sales at that NAICS level, based on distribution of establishments and/or employment with nondisclosable sales, or 2) percent of nondisclosable sales at that NAICS level based on past sales data from the 2007 Economic Census. Source: Business Oregon with data from 1) Bureau of Labor Statistics, Quarterly Census of Employment & Wages, 2) U.S. Census Bureau, Foreign Trade Division and 2012 Economic Census, 3) Oregon Employment Department Quarterly Census of Employment & Wages, and 4) Oregon Department of Forestry, log prices and Oregon timber harvest data.

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AFTER HURRICANE HARV EY, DON'T EMPOWER THE ENGINEERS. PLEASE. BY Charles Marohn

When I hear people talking about an event like Hurricane Harvey and how we were unprepared for it, that Houston filled wetlands and sprawled all over the countryside in a way that only magnified the flooding, I cringe. Not because these analyses are de-facto wrong (I've said they are right in a certain context, just not in the extreme event of Hurricane Harvey) but because they present a limited understanding, one that — if not corrected — I fear will prompt us to divert scarce energy and resources into activities that will be destructive.

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I am immediately skeptical of the notion that more storm water management and/or zoning regulations would have had any significant impact on the extent of the damage from Harvey. This reflective response certainly frames, if not clouds, my analysis of the situation. When it comes to both storm water management and zoning regulations in these kind of extreme events, I am a skeptic in our ability to ever translate intentions into meaningful action, if that were even possible. That's my bias. In my defense, I'll point out that it's the 180-degree opposite bias I had twenty years ago. Back then I would have —

like many of our readers â&#x20AC;&#x201D; looked at a flood and asked, why can we not prevent that? I would have considered projects I have worked on and extrapolated them to the scale of the problem in front of me. My faith in the spirit of American ingenuity (and my own abilities) would have driven me to think that anything is possible and that if I were properly empowered and supported, I could prevent the next disaster and limit the needless suffering. In reflection, my attitude towards my and my profession's abilities was very much like that of Anikan Skywalker, the tragic hero of Star Wars in his pivotal transition to the dark side. I'm going to build a more powerful project than any engineer has ever dreamed of.....and I'm doing it to protect you. Don't you see? We don't have to fear congestion / flooding / ___(insert malady here)___ anymore. We can make things the way we want them to be. That may seem melodramatic in our context, but it's not. Citizen Jane, the documentary that pits Jane Jacobs against the evil Robert Moses did a real service in humanizing Moses. In much the same way (although with less fandom controversy) that the Star Wars prequels gave the evil of Darth Vader a sympathetic back story, Citizen Jane told how Robert Moses was an advocate for parks and fountains and art and beauty and all the things we'd like to associate with a city that Jane Jacobs would have loved. It was only later, when given the power and the mandate, that he began to do things that today we look at as destructive. Do we doubt that Robert Moses truly believed he was working for the greater good? Did he go to the dark side or did he just believe strongly that what he was doing was the right thing, all other considerations being lesser? Now I'm not suggesting that engineers and planners are the equivalent of Darth Vader or Robert Moses, but Star Wars and Citizen Jane both highlight a character flaw that engineers,

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planners and many of us charged with shaping the world around us hold in common: a lack of humility. This problem looks like a big nail. Thank goodness I have this huge hammer and can solve it for you. Just give me the money and get out of my way. There are three real world ramifications of the lack of humility that come into play with Hurricane Harvey. 1. FLOODING IS NOT THE REAL PROBLEM THAT NEEDS SOLVING. I think it is very seductive to look at Houston's flooding as a simple engineering and planning problem. Let's just build a bunch of storm water management systems and increase our development regulations and we'll handle this. Again, when you have a hammer, every problem looks like a nail. So, did the people of Houston's past not also think like this? Were the storm water reservoirs sold as half-measures when they were built? Were the pipes they laid and the retention areas they constructed simply a false front or did they really believe them adequate? Did the people of New Orleans not do this? Were their dikes that failed not constructed in anticipation of the largest storm they felt reasonable? What happened?

Without a sense of history and a proper sense of humility, we just assume that the people of the past were ignorant fools, that those in the intervening years were greedy and selfish, simply unwilling to do the proper things to ensure their own security. Somehow we are different in our enlightenment. Maybe at last society will heed our expert warnings. I think a more difficult challenge â&#x20AC;&#x201D; the real problem â&#x20AC;&#x201D; goes beyond the engineering or

planning and gets into human nature. It's very plausible to me that the dikes in New Orleans were built to handle the worst event anyone could remember, plus a little more. Then complacency set in. Not only were there always more urgent things to do than maintenance, but having *solved* the problem we no longer needed to worry about it. Go ahead and build there, we've got you covered. What's one more? And one more? We've written here about the Oroville Dam and our seemingly-genetic predisposition to de-prioritize maintenance (see "A Dam Mess"). We've also written a number of times about risk compensation, how making things safer and more protected only prompts us to extend the risks we are willing to take (see "Texting in Your Risk Gap" and "More on Risk Compensation"). Much like traffic congestion is a complex problem that cannot be solved by building more lanes, neither can flooding be solved by simply constructing more elaborate, complicated and violent storm water management and regulatory systems. To think otherwise leaves out the human element. It also puts more people at greater risk. 2. FLOODING IS NOT THE WHOLE PROBLEM THAT NEEDS SOLVING. While I have a hard time understanding it, there might be some good reasons why someone chooses to buy a house in a floodplain. Perhaps they got a good deal, don't plan to stay there long, believe it won't happen to them. Lots of these decisions that look terrible in retrospect can be easily rationalized along the way. What's more difficult to understand is how a bank can make a loan on such a house. How can you get a mortgage in a flood prone area without flood insurance? Well, answer this one: Why does your pension fund own mortgage backed securities containing homes in flood zones without flood

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insurance?

Or how about this one: Why does the Federal Reserve swap U.S. Treasuries for mortgages when those treasuries are highly rated and secure but some of the mortgages are in flood prone areas without flood insurance? There is a chain of soft corruption shielding people from the feedback that should come with their decisions, from the way we structure and sell mortgages to the entire system of moving risk from private balance sheets to the public sector. In a world where banks and insurance companies were expected to experience losses, even failures, when they got things wrong, flood insurance would be both mandatory and cost-prohibitive for most people in these kind of flood prone areas. Are we really going to subsidize flood insurance at the national level and then turn around and spend tens of billions — maybe more — constructing storm water management and mitigation systems to protect these same homes? If we insist that the problem here is a lack of engineering and planning, that is exactly how we're going to respond. The actual damage from the flooding in Houston is more about flood insurance, mortgage regulations and bank bailouts than it is about engineering or planning. Failure to grasp that only ensures that future disasters will be greater than those in the past. 3. FLOODING IS NOT THE ONLY PROBLEM THAT NEEDS SOLVING. After 9/11, the only problem we needed to solve was terrorism. We spent trillions — insane sums of money — ensuring that no terrorist action would ever happen again. In a civilized nation where people must be protected, how could we do anything less? We've fought (and are still fighting) wars around the world, armed our local police with military weaponry, created a domestic spying apparatus that would make the Stasi blush,

established a theatrical production at each airport and major public building where we pretend to screen people and, after all is said and done, I can still carry the same exact weapon that the hijackers used on 9/11 (a box cutter) onto a plane.

Source: US. Dept. of Homeland Security

A commonly asked question we like to debate is: Are we any safer? The history of terrorism tactics and the repeated inability of governments to stop terrorist acts using brute force suggests we are not, but whether or not you agree, that debate keeps us from a more important set of questions: • • •

•

Are we more prosperous as a result of this focus? Was this the best way to spend our resources? What things have we not done, what actions have we not taken, because we focused on solving that one problem? What are we incapable of doing now because we've committed to a certain approach, one that we culturally can't back down from?

I was in New Orleans a few years after Katrina and got a tour of the billions of dollars worth of flood prevention and mitigation systems that were built miles away from where anyone lived or would ever live. To me, this was the ultimate case of asking the engineers and planners to solve a one-dimensional problem. See nail, apply hammer.

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And they solved it, or at least we think they did. New Orleans has not been tested since Katrina and, statistically, is unlikely to be tested again until we've long become complacent again about flooding there. Think there will be any pressure in the coming days to divert New Orleans maintenance money to Houston or Florida? Who is going to stand up and oppose that? Yet Katrina is still raw in our minds; what kind of anguish will we experience over a budget cut to maintenance two decades from now?

The last time I was in New Orleans (2012) large parts of the city were abandoned and had not recovered. The population is down and, tragically if you value the unique Cajun culture, has been dramatically altered demographically. If our flood mitigation efforts had been more focused, could we have invested more in an actual recovery? Could we have built greater resiliency in a way that improved the lives of people instead of simply providing them with pipes, concrete and steel over an enormous area they will now struggle to maintain? Organizations like the American Society of Civil Engineers are salivating at the opportunity for Congress to summon the experts to Houston with billions of dollars and a one-dimensional set of solutions. The city of Houston was financially on the brink before Harvey. They had way too many roads, streets, sidewalks, pipes and ditches for their tax base to sustain, let alone create wealth for paying pensions and other obligations. If our solution to this tragedy is to give them even more infrastructure, we have failed. Many of you are angry — to put it mildly — that I've called Hurricane Harvey an extreme event, one that transcends our ability to plan for or mitigate through better engineering and more aggressive planning regulations. I respect your feedback and, while I still believe in everything I've written on the subject, I've taken extra time to examine my

biases. I acknowledge that I'm definitely skeptical of, and hostile towards, those who would narrowly define this event as a nail only to empower — intentionally or not — destructive people to deploy a very large hammer. I see a broader set of forces at play and much more at stake. Many people are so confident they not only understand what happened in Houston but have a clear sense of what now needs to be done. I find these people dangerous. I also find that a lot of people speaking on this subject have little real knowledge of what it would take to do accomplish what they claim they want to see happen. I've found myself questioning the sincerity and motives of experts that I think should know better and I've found myself annoyed with a long list of non-experts who, nonetheless, have expert opinions they (rightly) feel empowered to share, often in a rather derogatory and

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pompous manner.

I'm not proud of my immediate internal reactions to this. I've found myself counting to ten — sometimes a hundred — more often than normal. I don't need (or want) any more fatherly/motherly emails written so as to help this wayward child you believe is suffering a momentary lapse in judgement. If Strong Towns to you is a movement about deploying more planners and engineers to implement a top/down strategy for doing more of what we are doing today, only marginally better, you might want to dig a little deeper. www.Stongtowns.org (Top photo source: Air Force photo by Tech. Sgt. Larry E. Reid Jr.)

SEPTEMBER 8, 2017 BY CHARLES MAROHN

https://www.strongtowns.org/ journal/2017/9/6/dont-empower-theengineers-please

Doug Whitsett On Forest Fires In Rural Oregon Here is Doug’s letter to Oregonians: Rural Oregonians have become all too familiar with the devastating effects of catastrophic wildfires. Those of us in Southern Oregon have witnessed the incredible destruction of the 2002 Biscuit Fire and the 2012 Barry Point Fire, as well as the Bryant Mountain and Oregon Gulch fires in 2014. We often hear rhetoric from environmental groups and others claiming that wildfires are “natural” and can be beneficial to the forest and rangeland environment. Unfortunately, many federal foresters have joined in that chorus. I have a broad depth of personal, firsthand experience that tells me otherwise. The costs of wildfires not presently being reported are significant. They include the value of the timber that is incinerated, killed or otherwise damaged. The value of forage that is incinerated is also not quantified. This is particularly important, because that value is lost not only during the year of the wildfire, but often for at least the next two years as the landscape tries to recover.

Wildlife, birds and fish are killed during and after wildfires. Those creatures are often incinerated along with the forest and rangeland. Many others are burned too severely to survive. Other direct and indirect impacts include the runoff of ash and sediment into streams. The result is both immediate fish kills and longterm habitat and spawning degradation. The erosion caused by fire damages watersheds for decades, if not for generations. The resulting prolonged loss of fish and wildlife habitat is enormous. And despite the implementation of heavyhanded regulations allegedly for the sake of reducing greenhouse gas emissions, our agencies don’t even attempt to estimate the emissions caused by wildfires. The massive emissions from wildfires are actually second only to volcanoes as a global source of greenhouse gases. The best efforts of ODF to provide wildfire protection are complicated by the nearly 25,000 miles of contiguous border in Oregon that the agency shares with lands managed by the federal government. Out-of-control wildfires that start on federal lands often cross those boundaries, resulting in massive damage to ODF protected private lands.

Doug

Real estate values can be dramatically reduced in the aftermath of a wildfire. Oncepristine acreage becomes ghastly reminders of the true tragedy of the holocausts of wildfires. Virtually no one wants to locate their home in a burned-out forest landscape. The value of killed and damaged livestock is not quantified. Those animals often sustain burns that results in their deaths or in significant loss of production. The overall loss of forage, grazing opportunity and overall production to agricultural, farming and ranching operations is immense and ignored.

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Senate District 28

USTDA Connects U.S. Energy Industry to Opportunities in India ARLINGTON, Virginia The U.S. Trade and Development Agency awarded a grant to Prabha Energy Private Limited (PEPL), a private company in India specializing in the exploration and production of coalbed methane (CBM). The grant supports a feasibility study assisting PEPL in developing CBM resources in India’s largest coalfield. CBM may represent a new source of clean-burning natural gas to be used as fuel by the local industrial, transportation and power sectors. PEPL has selected the U.S. firm, Advanced Resources International, Inc., (Arlington, VA) to carry out the feasibility study. “USTDA is excited to support Prabha Energy as it looks to develop an untapped energy resource,” said Henry Steingass, Regional Director for South and Southeast Asia at USTDA. “As India develops its CBM resources, U.S. companies can provide the equipment and expertise to help India unlock CBM’s potential.” Work on the feasibility study is expected to begin in 2017. Drilling and services related to CBM exploration and development represent a significant opportunity for U.S. firms that provide drilling rigs, gas compression and processing equipment, and geophysical logging and perforation.

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About USTDA

The U.S. Trade and Development Agency helps companies create U.S. jobs through the export of U.S. goods and services for priority development projects in emerging economies. USTDA links U.S. businesses to export opportunities by funding project planning activities, pilot projects, and reverse trade missions while creating sustainable infrastructure and economic growth in partner countries . https://www.ustda.gov

Veresen Announces Filing of FERC Applications for Jordan Cove Energy Project and Pacific Connector Gas Pipeline CALGARY, Alberta – Veresen Inc. ("Veresen") (TSX: VSN) is pleased to announce Jordan Cove Energy Project (“Jordan Cove”) and Pacific Connector Gas Pipeline (“Pacific Connector”) have filed applications with the United States Federal Energy Regulatory Commission ("FERC") for the construction and operation of a 7.8 million tonne per annum liquefied natural gas (“LNG”) export terminal in Coos Bay, Oregon and the related Pacific Connector that will transport natural gas from the Malin Hub in southern Oregon to the LNG export terminal. "Completing the pre-filing phase and submitting the formal applications to FERC is a major milestone for the projects," said Don Althoff, President and CEO of Veresen. "Our significant efforts to optimize the design to minimize its environmental footprint and accommodate landowner requests, as well as the support of our world-class LNG buyers, should result in the receipt of the positive regulatory decisions required to build Jordan Cove. We look forward to continuing our work with the local community, Tribal leaders and FERC, as well as other federal and state agencies to advance Jordan Cove."

Jordan Cove and Pacific Connector have conducted open houses to present the project to the public. In addition, FERC held a series of public scoping meetings in June to collect further public input. The application includes the elimination of a 420 MW power plant, reflects more than 50 route adjustments of Pacific Connector and the optimization of multiple water crossings to minimize environmental impacts via trenchless drilling techniques. The total engineering, procurement and construction cost of both the LNG export terminal and Pacific Connector is approximately US$10 billion, with approximately 90% of U.S. content. Additionally, the project will generate approximately US$60 million in annual property taxes, including US$20 million from Pacific Connector in the counties through which the pipeline traverses. The project will require approximately 6,000 workers during construction and more than 200 new permanent jobs upon commissioning. Jordan Cove and Pacific Connector are requesting that FERC issue a Draft Environmental Impact Statement in 2018, leading to FERC decisions by the end of 2018. This will position the project for a potential final investment decision in 2019 and an in -service date in 2024. For further information about the Jordan Cove LNG project, please visit www.jordancovelng.com. By: Mark Chyc-Cies Vice-President, Corporate Planning & Investor Relations

About Veresen Inc. Veresen is a publicly-traded dividend paying corporation based in Calgary, Alberta that owns and operates energy infrastructure assets across North America. Veresen is engaged in two principal businesses: a pipeline transportation business comprised of interests in the Alliance Pipeline, the Ruby Pipeline and the Alberta Ethane Gathering System, and a midstream business which includes a partnership interest in Veresen Midstream Limited Partnership which owns assets in western Canada, and an ownership interest in Aux Sable, which owns a world-class natural gas liquids (NGL) extraction facility near Chicago, and other natural gas and NGL processing energy infrastructure. Veresen is also developing Jordan Cove LNG, a 7.8 million tonne per annum natural gas liquefaction facility proposed to be constructed in Coos Bay, Oregon, and the associated Pacific Connector Gas Pipeline.

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Jordan Cove Editorial By: Betsy Spomer, CEO, Jordan Cove LNG

Last week, the Jordan Cove project achieved a major milestone.

On September 21, 2017, we filed new

applications

the

Federal

Energy

Regulatory

Commission (FERC) for the Jordan Cove Energy Project The two

resulting in a net reduction of 33.4 acres impacted by

applications totaled approximately 31,000 pages and

the pipeline. Notably in Klamath County, our pipeline

are the culmination of a tremendous amount of work.

team worked with the Shasta View Irrigation District to

We sought to leverage all of the environmental and

re-route around sensitive areas and find a path that is

engineering work done on the project since inception

more acceptable to all. It is our intention to continue

to create a complete record for FERCâ&#x20AC;&#x2122;s development of

working with water districts, farmers, ranchers and all

an up to date environmental impact statement.

other landowners to address concerns and find reasona-

Electronic copies of our applications can be found at

ble alternatives if they exist.

and Pacific Connector Gas Pipeline.

libraries in the four counties of Coos, Douglas, Jackson and Klamath with a paper copy in the main libraries in Coos Bay, Sutherlin, Medford and Klamath Falls. The applications are also available on our web site: www.jordancovelng.com.

last permitting cycle and ensure there is a clear of our new

to reduce the number of private landowners impacted by the pipeline to 227, excluding commercial timber companies, while reducing the total pipeline length to 229 miles from 235 miles. We are also making progress

I am writing this today to clear the record from the understanding

In addition to specific re-routing, we have also been able

proposal. We have

implemented a number of design optimizations that are, in part, the direct result of comments received from stakeholders. We have heard your concerns and have tried to address them in our new applications. The most material change we have made is to eliminate the power plant and utilize a direct drive gas turbine configuration at the LNG plant. This change reduces the projectâ&#x20AC;&#x2122;s footprint, eliminates the need for 1 million gallons/day of water for cooling and allows us to relocate our workforce housing during construction from North Bend to our South Dunes site. This is a much better solution from a construction perspective and addresses concerns expressed by some of our neighbors in Simpson Heights.

in securing voluntary easement agreements from these private landowners. These owners own approximately 38% of the total right of way required for the pipeline and we have secured voluntary agreements with approximately 40% of them to date with work ongoing. We are particularly excited about our updated economic benefits study and what it means for Klamath County and the rest of Southern Oregon. The pipeline alone will create more than 4,000 new construction jobs and we anticipate that roughly 60 percent (2,400) of those work-

ers will be qualified Oregonians. There will be more than 200 permanent jobs associated with the project, including jobs in Malin to operate and maintain our compressor station. Additionally, as is common with projects of this magnitude, we estimate that there will be more than 8,500 indirect and spin off jobs created during construction, and more than 1,500 indirect and spinoff jobs created during operations in diverse

On the pipeline side, we have made 54 pipeline route

industries, including local retail, healthcare, tourism,

modifications, often at the request of landowners,

finance,

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transportation,

landscaping

and

office 42

administration to name a few. We are also proud to introduce our revised Kentuck mitigation project. We are required to provide mitigation for impacts to wetlands, but we are going far beyond what is required.

Instead of rehabilitating a 30-acre

portion of the Kentuck golf course, we have decided to rehabilitate all 100 acres of the golf course to create habitat for the Coho Salmon and other wildlife. The Kentuck project is being designed with input from state and federal agencies, marine experts and the Kentuck neighbors. Once completed, it will not only create vital

Coho Salmon habitat, but will become an enjoyable environment for neighbors and an environmental and cultural learning experience for the regionâ&#x20AC;&#x2122;s students and tourists. Beyond these local improvements, Jordan Cove is progressing on the commercial front. We have commercial commitments with some of the biggest and most respected LNG importers in the world; we held an â&#x20AC;&#x153;open seasonâ&#x20AC;? for the pipeline and now have 96% of the pipeline capacity subscribed. We are confident that the hard work and significant effort put into this optimized design will be reflected in the approval of our permit applications. As a result of the design optimizations, the project will result in fewer environmental impacts than our previous proposal. From a commercial perspective, we have advanced with heads of agreement with two large Japanese buyers and continue to garner interest from new customers in Asia. From a community perspective, we have received

bi-partisan support at the federal, state and local level and appreciate the support from thousands of Southern Oregonians. There is still much work to do, but we look forward to a vigorous public discussion and to earning your trust as a responsible corporate neighbor. After all, we plan on being a cornerstone company in Southern Oregon for decades to come. Betsy Spomer

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