Galveston Economic Report
David Stanowski Publisher
Is There a Good Reason to Rebuild this City?
by David Stanowski
31 October 2008
Is there a reason more profound than the knee-jerk response that “Galveston always rebuilds”? After we move past this initial bravado, and actually think about it; why should we bother?
The answer is simple. There are many beach towns, but there is only one Galveston. The Victorian City Center that the Founders built is what makes this island city unique; it is what makes it magical. That is why it is worth the effort. However, after we remind ourselves why we love this kooky city so much, we must still face the harsh reality that we have to find a way to build a healthy economy, or how we feel about it won’t matter, because an unsuccessful rebuilding effort could lead many people to financial ruin.
As the full extent of our losses begins to sink in, amid the illusion of normalcy, we also are becoming aware of how much the stress from this experience has changed our lives. To overcome this stress, and gain a new clarity of purpose, we must develop a plan that will gain the confidence of the people who are expected to risk so much to rebuild Galveston.
This City has a mixed record on dealing with adversity. The recovery from the 1900 Storm was its finest hour, but its response to the opening of the Houston Ship Channel, and the competition from the Port of Houston was a misstep that we are still paying for today. How will the City respond to the current crisis?
City workers deserve a lot of credit for their efforts which have ensured the survival of the City, but there is a big difference between survival, recovery and prosperity. Do City leaders have the correct priorities and vision to allow us to move beyond mere survival?
This analysis does not pretend to offer the only solutions to our problems, but it will take the opportunity, presented by this crisis, to begin the process of exploring any and all reasonable ideas, including those that have previously been ruled unacceptable or politically incorrect by various special-interest groups. There can be no sacred cows at this dark hour in our history. Anyone opposed to any suggestions should present well-reasoned arguments to the contrary, or better alternatives, and not just unsupported emotional rants.
The City Center has three major commercial assets that must be the focus of the recovery effort:
The Port was the economic engine that created this magnificent city. By the 1870s, Galveston had one of the highest per capita incomes in the world. However, after the Port of Houston opened, the Port of Galveston went into a decline, so that by 1940, ownership of the Port was surrendered to our local government.
In more recent years, since the Port continued to be owned and operated by an arm of City government, it lacked the entrepreneurial vision and capital to return to its original role as the City’s economic engine. The amount of cargo shipped from the Port peaked in 1984, and over the last 24 years it has lost $4.5 million! The lack of profit from this valuable asset is not the most serious problem; the failure to take advantage of the demand, in recent years, for additional cargo capacity at Galveston Bay ports has been the Port’s most catastrophic blunder!
Any hope of a return to the prosperity once enjoyed by the City must begin with a plan to sell, lease, or find some other way to privatize the Port. Proposals to sell off parts of the Port for real estate development MUST BE REJECTED in favor of a plan to revitalize and expand the Port to perform its intended function!
It is likely that the Port could sell for $100-200 million which would represent a major cash infusion for the City, and a chance for a new owner to bring it up to its full potential which would create high-paying jobs and increased economic activity.
The greatest strength of downtowns is the independence of their small merchants and the unique character that this creates. Their greatest weakness is the difficulty independent businesses have to act collectively for their own benefit. Downtown Galveston should have created a management district many years ago to enforce uniformity in store hours and minimum standards in building codes, as well as providing enhanced cleaning and security, and basic infrastructure like public restrooms. It could also use professional management to create the ideal retail, restaurant and bar/club mix, which could increase sales by as much as three times their current level.
The post-Ike recovery will be incredibly difficult without a management district providing the vision for what downtown Galveston needs to look like in a year or two. This management district could be funded by new high-tech parking meters like the ones being offered by PVT. These meters eliminate all of the problems with the current meters that drive customers away from the downtown shopping district, and generate five times more revenue.
However, the first step before any realistic planning can be done is to raise the capital for many of the current merchants to rebuild. The solution offered by federal, state and local government is for each business owner to apply for an SBA loan. Past experience has shown that many will not be approved, and those who are will not get any money for months. This is a process that will not allow merchants to act quickly and collectively to rebuild.
An alternative approach would be to form an umbrella corporation that would act as both a management district and a vehicle to raise capital. Such a corporation would sell stock that would be used to provide start up capital for those who need it. In return, stockholders would be part owners in and share profits from the businesses that get the infusion of money.
This plan would maximize the value of the downtown economic machine by allowing it to maintain most of the existing businesses, while it recruits new ones. The SBA approach will likely result in the loss of at least half of the current merchants, which will create a much less appealing business district, and a less profitable environment for remaining businesses.
There are experts that could help us work out the details of such a plan quickly, if we can raise about $15,000-$20,000 to cover their initial fees. We must act before any more merchants decide not to reopen. Procrastination could leave us with a downtown area that is a shadow of its former self, or even a place most would rather avoid.
Many if not most of our tourists come to the Island for the beach. With much of the beach destroyed, in front of the Seawall, the economy is going to suffer until it is rebuilt. Hopefully, beach-front attractions and businesses such as the East Beach Pavilion, the Baja Beach Club, Nash’s Bait Camp, the Stewart Beach Pavilion, the Balinese Room, Murdock’s, Hooters, the Flagship Pier and Hotel, the 61st Street Pier and the 90th Street Pier can be rebuilt, too.
Now is the perfect time to install parking meters on the Seawall. All revenue from the meters should be dedicated to beach improvements. There is a significant cost associated with cleaning, managing, and re-nourishing the beaches, as well as providing a staff of life guards. If the people who use the beaches do not contribute, by paying parking fees, then the people of Galveston pay all the costs. This needs to change!
In addition, a new source of funding for the Seawall beaches will eventually make it possible to begin upgrading them with amenities like public bathrooms.
This is an idea that has been lurking in the background for many years; “if the economy ever gets bad enough, Galveston will be forced to legalize casino gambling to save itself”. Now that the economy is bad enough to put the idea back on the table, it is time to take a serious look at gambling to see if it is really the magic bullet that many believe.
Since this is an issue that will require a vote of the residents, the first step needs to be a series of town hall meetings where proponents and opponents present their cases, based on what has been learned in other states, not merely their beliefs. If supporters rush to the legislature prematurely, it is much more likely that they will create a backlash from the other side, before the case in favor of casino gambling can be properly presented.
Port of Call:
The cruise ship business currently creates very little economic activity for downtown businesses, because as a port of departure, the downtown shopping district is not part of a formal itinerary. In addition, those passengers who might like to go downtown, before their ship sails, are not able to navigate from the cruise-ship terminal into downtown Galveston without great difficultly, because the elevated walkway is closed, and the City does not provide shuttle service. Something must be done to fix this problem!
If Galveston was able to gain Port-of-Call status, a trip to downtown Galveston would be on the official itinerary, when ships arrive, which should increase sales dramatically.
City government provides many essential services to the City, but its cost and regulations are also a big drag on the local economy. In the current economic crisis, it is essential that its inefficiencies and waste be reduced or eliminated. This can only be accomplished by reducing the amount of the budget spent on personnel.
In 1980, there were 61,902 people living in Galveston, and 760 City employees, but by 2005, the population had dropped to 57,400 while the number of City employees rose to 816! If the number of City employees is normalized for today’s population, the City is now overstaffed by 15%! If current City employees are merely working at the same productivity level as their 1980 counterparts, the City would work fine with 110 fewer employees. However, since they should be dramatically more productive, the head count could easily be below 700. If our population continues to decline, further cuts would be in order.
In addition, City pension plans must be changed from defined benefit to defined contribution plans, to reduce costs and future liabilities to the local economy.
The City must also develop a plan to cope with declining sales and property tax collections.
It appears that the City will have to find a way to deal with a smaller UTMB. This will also decrease economic activity in the near future, but state and federal taxpayers should not be forced to subsidize this institution if it can’t stand on its own.
It’s difficult to say how the hurricane will affect the local market in the short term. There is certainly a strong demand for rentals from both displaced residents and workers from out of town, but there are many conflicting forces confronting buyers and sellers. The supply of houses, condos and lofts currently available in move-in condition is relatively low, but what is the demand from buyers given the recent graphic demonstration of the risks of owning Island real estate? It is very likely that both wind and flood insurance rates will be rising, adding to the costs of owning property. In addition, it still isn’t clear how many residents will return to the City. If 5,000-10,000 residents do not return; this will not be good for the local market.
The next 6-18 months are likely to see a mini building boom, as repairs, renovations, and new infill take place, but after this spurt, it is difficult to see how the local market will escape the global forces that are bringing down real estate prices from Dublin to Phoenix to Peking. If this does come to pass, local prices can be expected to decline at least 30% from their peaks, which means that Galveston will be forced to shift its focus away from real estate development and back to economic development. This will be a healthy but painful process.
How does our current challenge compare to what our predecessors faced in the aftermath of the 1900 Storm? Hurricane Ike did not cause the extreme loss of life or the same scale of destruction to the infrastructure, but it may have left us with a much more difficult economic challenge. Today, we face rebuilding a local economy in the middle of an economic and political Perfect Storm.
History’s greatest international credit bubble is in the process of unwinding, which is creating massive losses in stock and real estate markets around the world. The relative level of debt in the U.S. is still more than double what it was in October of 1929, which means that it is unlikely that this process is going to take less than a few years, so we must be prepared for a long and difficult struggle.
At the same time, if the election on 04 November turns out as forecast, we will have to cope with the most anti-business federal government since the New Deal. Combined with what may be the most anti-business local government in the State, no one should minimize what we are up against. The task will be nearly impossible without strong local leadership, and some bold moves.
At the beginning of every major crisis, the leadership then in place faces challenges that they never imagined. A few rise to the occasion, but most do not. We are still waiting to see if any of our local leaders understand what must be done. If not, someone else needs to step up. The current lack of leadership will not continue much longer without disastrous consequences.
The clock is ticking!
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