Did you see that two of the top three firms in the state of Massachusetts are Cambridge-based firms? Did you also see that housing prices in Massachusetts are leveling off and that vacancy rates are rising? Have you seen that the proposed Cambridge City budget for Fiscal Year 2007 is $395 million, an increase of over $14.5 million from the previous year's city budget.
What do these different facts mean?
Cambridge's role as a a preeminent location for employers cannot be questioned. With two of the world's top universities framing Massachusetts Avenue a short walk from each other, the fact that a leading internet company (Akamai) and a leading life sciences company (Genzyme) are literally around the corner from each other and from MIT should come as no surprise. Akamai (whose cofounder Daniel Lewin was killed on one of the 9/11 planes) was ranked the very top company in Massachusetts by the Boston Globe in their recent assessment, the Globe 100.
To have neighbors like these is a good thing. Here is the leading edge of the economy, and these are the value-added jobs. Additionally, it almost certainly will continue to be a sector for job growth. Job growth is important because Massachusetts continues to lose population. From 2000 to 2004, Massachusetts was second only to New York in its annual net loss of population according to the U.S. Census.
Because these companies sit at the high end of the economic spectrum, the city will continue to reap the rewards in terms of tax revenues – an important fact because Cambridge will continue to be a magnet for people at the other end of the economic spectrum, especially foreign immigrants, who are projected to continue choosing Cambridge as a destination.
With housing prices leveling off in the state, commercial tax revenue is important. Barry Bluestone, a professor at Northeastern says that tight housing markets produce runaway price increases. This is not surprising to anyone who has taken Econ 101. More interesting, however, is his assertion that sustained high prices eventually drive people and businesses away, which leads to higher vacancy rates in the housing market. If high levels of vacancy persist in the market for a long time, there can be a precipitous drop in home values.
That is why a warm market (perhaps room temperature?) is best – it maintains long-term stability, but does not move catastrophically either upward or downward.
A cooling market spells some tax relief for homeowners in this city. The dramatic increases that City Hall mailed out to property owners last year are not likely to repeat, though the process is still ongoing. City Manager Bob Healy, in his budget message to the City Council, identifies a few areas of concern as he looks forward into this coming fiscal year: rising health insurance and pension costs, energy costs and debt service increases to fund infrastructure improvements "continue to be a major concern". He states further (citing a report) that because the property tax is the largest and most stable form of revenue, cities and towns rely on it more and more as costs go up (especially health care and energy) and state aid shrinks.
With this in mind, City Manager Healy predicts an actual percentage increase "closer to 5% when the City Council votes" in September 2006.
The question that we all have to face is: how does this budget (and this huge budget increase) prepare us for the challenges ahead? Cambridge must seek out and promote its competitive advantage when it comes to the economic pieces of the pie. That, of course is a tall order. Sound strategic investing both in infrastructure and in human capital is critical. At the same time, a continued commitment to affordability in the city cannot be avoided. A statewide cooling of the housing market may help here, but in the words of one developer at a recent conference sponsored by the Federal Reserve Bank, subsidies are key. Boston's ability to bring new units online is a good example of how a city can actually make headway. Finally, there is the endless balance between sound investing and fiscal responsibility. Both are important. The phrase “Penny wise and pound foolish” wasn’t coined without reason. Yet the money does ultimately belong to the people Since Healy has now played his hand, we'll have to watch the City Council to see what the next move is.
