Feedback on Sage Policy Group report “The Coming Storm: How Years of Economic Underperformance are Catching up with Montgomery County”
By: Jacqueline Coolidge
Last month, a group of local businesspeople released a report they had commissioned on the business environment in Montgomery County, Maryland. The Washington Post wrote an article about it, and cited it in their endorsement of David Blair for the Democratic nomination for County Executive in the upcoming primaries in June.
In general, the report contains plenty of useful information and statistics, and manages to describe many of the positive attributes of the county, as well as challenges and drawbacks from the point of view of investors. However, the report paints an alarming picture of a county “on the verge of peril”, but does not bother to employ a consistent methodology for analysis and (as current County Executive Ike Leggett has described it) appears to be cherry-picking its comparators. An unbiased analysis would make consistent comparisons between a particular jurisdiction (in this case, Montgomery County) and a set of comparators (most appropriately, Washington DC and the other counties in the metropolitan area). Instead, Sage compares Montgomery County sometimes with the neighboring counties in the metropolitan area, sometimes with the rest of Maryland, or sometimes just presents scary-looking statistics for Montgomery County (e.g., trends from the peak of the economic bubble in the mid 2000s to 2016) with no comparators whatsoever. It concludes with a number of non-sequiturs and recommendations for policy reforms that would benefit primarily developers.
A statistic that many have fixated on is that “just 6 net new establishments” were added in the county between 2011 and 2016, and Montgomery appears worse than Washington DC, Arlington County and even PG County (Sage pg 9). The report cites the U.S. Bureau of Labor Statistics, which is probably as reputable a source as any, but the problem is that data on numbers of businesses are notoriously “noisy” and unreliable, no matter what source is used. “Establishments” are usually registered businesses, mostly LLCs and other corporate forms, and exclude the majority of sole proprietors (“mom and pop” businesses). The death rate of new small businesses is extremely high everywhere, and even the BLS can only manage to count numbers of businesses as of a particular date every year. If Joe Schmoe starts up Apple Pie Inc., registers it, fails, and then starts up and registers Cherry Pie Inc. without going through the specific process of de-registering Apple Pie Inc., (a common problem for business statistics) then two businesses may be in the statistics where only one is operating in reality. Similarly, shell companies set up by many corporations and law firms may be registered but inactive. Business registries in different jurisdictions may try to clean up and clear out the backlog of dead businesses on the books, but there’s no consistency in when and how they do that. Business statistics therefore usually focus on “new start ups” (which avoids the question of the survival rates of business) or use tax data to count the number of economically active businesses in a given year and location (although that’s generally harder to obtain and work with).
The report asserts that, although Northern Virginia has higher vacancy rates for office space than Montgomery County, that’s “because there is more faith” in the economic prospects and therefore “far more office space” being constructed there (Sage, pg. 10). However, the only data offered shows “Office Space Under Construction as a % of Inventory” and shows that Northern Virginia’s figure is 1.3% and Montgomery County’s is 1.2%. (Sage pg. 11)
The report offers some useful data comparing office inventory in different sub-markets within Montgomery County, ranging from less than 7% in Bethesda/Chevy Chase to 28% in Kensington/Wheaton, but then goes on to report that “from 2006 to 2016, assessed value [of office buildings] climbed only 13.1 percent.” (Sage pg. 12). Of course, this sounds disappointing, but it’s an example of highlighting data comparing the peak of the real estate bubble with the present, and the report offers no comparators.
The report prominently and repeatedly complains about “sky high development impact fees” and then refers to an appendix chart showing selected Maryland counties with some displaying fees per square foot and some (including Montgomery County) showing a fee “per dwelling unit” of various sizes and (as relevant for Montgomery County), offering an average based on the various color zones for schools and transportation fee categories. (Sage Pg. 17 and 37). There is no discussion about the tradeoff between using “impact fees” to attempt to capture the long term marginal costs of the requirements to expand infrastructure for new developments versus trying to include such costs in other property taxes, or other fiscal approaches to solving the problem of expanding infrastructure. Some jurisdictions don’t bother at all, and just allow their infrastructure to deteriorate and become congested, imposing costs on the future population that are conveniently harder to measure.
The report considers “net migration” of population into and out of the county, and compares the associated adjusted gross income for that population for 2014-2015, showing a net combined “loss” of over $400 million, again without comparing it to any other location. From this, the report asserts that “Montgomery County is not capturing a sufficient share of Washington area tax base and taxpayers. This is reflected in Exhibit 13, which shows population growth over time” in Montgomery County and some neighboring counties, which is a non-sequitor. Focusing on the best comparator by population and income, which is Fairfax county, the figures are actually very similar, with Montgomery growing 11.3% from 2000-2010 and 8.9% in 2010-2017, and Fairfax growing 11.5% and 6.2% respectively over the same periods. (Sage pg. 15).
The report sounds even more dire when it turns to “Fiscal Implications” and intones “Headed Toward a Bad Place.” Never mind that Montgomery County still has a triple A bond-rating with all three Wall Street ratings agencies, or $500 million in reserves. The deficit and associated debt-service burden increased when tax receipts (mostly property tax revenues) fell in the wake of the real estate bubble, and the report milks the numbers for all they’re worth. Montgomery County’s increase in debt is the “fourth worse” in the state (Sage pg. 17), in percentage terms, never mind that the increase is from a comfortably low base. It then decries the County’s “industry location quotient” which is “5.33, meaning that federal employment is 433 percent more concentrated as a share of overall employment than nationally.” (Sage pg. 18 and 4). Apparently they think everyone will agree this is an alarming state of affairs, and again the report avoids comparing Montgomery County with any of the neighboring counties in the Greater Washington DC region.
The report then turns to demographic data, which is worth looking at, but again fails to prove that Montgomery County is performing worse than relevant comparators. Montgomery’s poverty rate was 3.7% in 1999 and 4.7% in 2016; in Fairfax County it was 3.0% in 1999 and 4.0% in 2016. (Sage pg. 23)
Then, “Has the County Entered a Downward Fiscal Spiral?” The report returns to its focus on the increase in the “Debt Service” line item, which has indeed grown faster than the line items for “County Government”, the public schools, Montgomery College, and the “Montgomery-National Capital [sic] Park and Planning Commission”. Yes, that is indeed what tends to happen when tax revenues fall and a deficit opens up. How does Montgomery County compare to similar jurisdictions? The report doesn’t tell us.
Inevitably we get to the Conclusion. It repeats all the most scary-sounding figures about “virtually no net business establishment formation”, the assertion that the County “is already in the midst of a downward fiscal spiral” and that “the situation stands to become specially dire” (Sage pg 26) and leaps to its recommendations that the county should be nicer to real estate developers. (Sage pg 27). Montgomery “must embrace a business-friendly approach; one that for instance, matches Fairfax County, D.C. and other communities in terms of permitting speed and predictability.” Unfortunately, the report offered zero information about that topic.
Similarly, “this effort would require reducing both the County’s lofty impact fees on new development [as discussed above] and the energy taxes [not discussed in the report] that suppress new business activity.” What else? Increase “incentives for expanding businesses” and “Win Amazon HQ2.” (Sage pg 27). The latter section cites a “separate Sage report” that estimates all the benefits that might be achieved if Amazon does site its second headquarters in Montgomery County (including “surging tax collections” but does not bother to mention any of the relevant costs, such as the need to build additional schools, roads, other infrastructure and other public services.
The report recommendations, if implemented, probably would encourage an increase in real estate development in the county. The report offers no evidence that those would lead to a net improvement in the county’s fiscal balance, nor to net benefits for the population of the county as a whole.
That an organization of business interests might commission a report to justify their own favored policy prescriptions and candidates is nothing unusual. That their “non-profit” would claim to speak on behalf of the entire county has become, sadly, a new norm. That a former leading light of the Fourth Estate would stoop to presenting such a report as worthy of its readers attention (much less use it to justify their endorsement of an unqualified candidate for County Executive) is a profound disappointment, at best. It also begs the question of potential conflict of interest. The Washington Post’s routine incantation that it is owned by Jeff Bezos, the owner of Amazon, begins to sound like a plea by its journalists for forgiveness. A better phrase might be “caveat emptor.”
 Retired economist from World Bank, former Lead Investment Policy Officer
 Sage Policy Group, Inc. Feb. 2018 “Economic Contributions of the Potential Amazon HQ2 in Maryland”