PHOENIX (By Jon Garrido, The Jon Garrido News Network) October 8, 2008 ― At 3:30 p.m. on Monday afternoon, the Standard & Poor 500-stock index was trading around 1,050. That left it 46 percent below its inflation-adjusted high which it hit in the summer of 2000. If shares keep falling and the index hits 967, it will be a remarkable 50 percent below its peak. That has happened only two other times since 1929 — during the Great Depression and during the 1970s.

Yesterday's headline at the U.S. Times (published by the Jon Garrido Network) is Global Fears of Recession Grows.

When the White House brought out its $700 billion rescue plan two weeks ago, its sheer size was meant to soothe the global financial system restoring trust and confidence. Three days after the plan was approved, it looks like a pebble tossed into a churning sea.

The crisis that began as a made-in-America subprime lending problem and radiated across the world is now circling back home, where it pummeled stock and credit markets on Monday.

It is easy to overlook just how steep the decline in stocks has been in the last eight years. Stock prices and indexes tend to be described in nominal terms, rather than inflation-adjusted terms. But it makes much more sense to adjust share prices for inflation, just as it makes sense to adjust the price of just about anything — food, houses, incomes — for inflation.

On the same day financial markets crumbled around the world, Mayor Phil Gordon and former Vice Mayor and now City Councilman Michael Johnson were oblivious to the crisis as they cut the red ribbon opening the Phoenix Sheraton funded with taxpayer funds.

Gordon and Johnson during the past 8 years of decadence have given away the store putting taxpayers at risk for debt all in the name of "downtown Phoenix."

When no hotel developer willing to take risk in using their own capital, Gordon and Johnson cooked up a scheme to use taxpayer funds obligating the use of City of Phoenix revenue bonds to fund development of the $350 million downtown Phoenix Sheraton Hotel. The $350 million includes $197 million for construction costs with the balance of the money used for early debt interest, design fees, permits and furnishings.

The city bankrolled the hotel project with revenue bonds which will use income if available from the hotel for debt service. The City contributed $13 million to cover some upfront costs including land acquisition. The average annual debt payment will be more than $20 million assuming straight amortization. This means in the first year of operation, $20 million from hotel income and each year thereafter, until the revenue bonds are retired, will be used to amortize the City's revenue bonds used for the project.

In the event, less than $20 million is available from hotel revenue, the City of Phoenix will be responsible for any deficit and will have to use general revenue funds to subsidize debt because failing to service this debt will have an adverse impact on the ability to tap credit markets for future Phoenix projects ― the City's ability to pay will be downgraded by the bond rating companies.

Considering a looming global recession, 2009 and for the next 5 years will be dismal years in attracting visitors to Phoenix. The global recession according to most economists will be as great or greater that the 1929 depression that collapsed global economies around the world and was particularly devastating in the United States.

All of this will have a significant adverse impact on City of Phoenix sales tax revenues. With the Phoenix business community selling less goods and services, revenue from sales taxes will proportionally decrease.

Financial obligations promoted and approved by Gordon and Johnson are paid by debt service locked in for the term of the revenue bonds or other financial instruments used by the City of Phoenix and the City will have these obligations until bonds are retired. Since debt service will always have first position, the only way to achieve a balanced budget as required by state law is to reduce the cost of services and/or reduce city personnel.

It is not only City of Phoenix issued bonds that have an impact on the City of Phoenix budget but the City of Phoenix is already facing a 100 million dollar shortfall brought about by cash outlays including the annual $7 million given to the Phoenix Visitors' Convention Bureau and the $13 million contribution including cost of land for the Phoenix Sheraton Hotel.

Animal Farm

"All animals are equal but some animals are more equal than others." A proclamation by the pigs who control the government in the novel Animal Farm by George Orwell. The sentence is a comment on the hypocrisy of governments that proclaim the absolute equality of their citizens but give power and privileges to a small elite. City services are equal but some services are more equal than others. At the top of the list of sacred cows is the $7 million annual contribution to the Phoenix Visitor Convention Bureau. At the bottom of the list are programs and services provided at Senior Centers placing the budget shortfall on the backs of seniors. The City of Phoenix has now begun charging seniors 25 cents for a cup of coffee with their lunches.

Risk Analysis

Hotel developers are assumed to have expertise in risk analysis and are always analyzing development opportunities. Considering no hotel in downtown Phoenix has been built in 32 years, hotel developers concluded the risk of building a downtown Phoenix hotel was too great. This is a safe assumption because if no risk had been determined, a hotel would have been built using private funds.

Not caring if the risk was great, an aerial service operator and former cop (Gordon and Johnson) — neither with private sector development expertise — took it upon themselves to showboat the development of a downtown hotel using someone else's money — namely taxpayer funds they had sworn to protect with fiduciary responsibility.

Gordon and Johnson failed to undertake risk analysis that should have examined projections with assumptions identifying every possible scenario including a downturn in the economy. Without an understanding of risk, Gordon and Johnson promoted and had approved use of City of Phoenix taxpayer money to finance the expenditure of $350 million to build the downtown Phoenix Sheraton Hotel.

The City of Phoenix stepped over the fiduciary responsibility line and undertook to finance a hotel where no hotel developer had determined an economic opportunity existed because of risk in an uncertain market.

Gordon and Johnson to entice a hotel developer to downtown Phoenix gave an astonishing sweetheart deal to the Phoenix Sheraton.  The offer was for the City of Phoenix to finance land acquisition, pay for hotel construction then provide a management contract to include management fee with no risk for the hotel operator. Sheraton jumped at the deal offered by Gordon and Johnson knowing the risk was squarely on the back of City of Phoenix taxpayers.

On the very day the Phoenix Sheraton opened, Wall Street collapsed tumbling world markets into a forecasted global recession that is predicted by economists will be worse than the Great Depression (1929-1939).

Although the United States has experienced several depressions before the stock market crash on October 27, 1929, none had been as severe nor as long lasting before "Black Thursday" struck Wall Street. At first, economists and leaders thought this was a mild bump, perhaps merely a correction of the market, or in any case, no worse than the recession the nation suffered after World War I.

Numbers soon proved the optimists incorrect. The depression steadily worsened. By spring of 1933, when FDR took the oath of office, unemployment had risen from 8 to 15 million, roughly 1/3 of the non-farmer workforce, and the gross national product had decreased from $103.8 billion to $55.7 billion. Forty percent of the farms in Mississippi were on the auction block on FDR's inauguration day. Although the depression was world wide, no other country reached so high a percentage of unemployed. The poor were hit the hardest. By 1932, Harlem had an unemployment rate of 50 percent and property owned or managed by blacks fell from 30 percent to 5 percent in 1935. Farmers in the Midwest were doubly hit by economic downturns and the Dust Bowl. Schools, with budgets shrinking, shortened both the school day and the school year.

Dιjΰ vu to 2008.  Wall Street collapsed only days ago tumbling world markets into a global recession and on the very same day with great fanfare as the red ribbon was being cut opening the downtown Phoenix Sheraton, Gordon and Johnson oblivious to the collapse of Wall Street and reminiscent of Nero playing the fiddle while Rome burned, City Councilman Michael Johnson, a longtime supporter of the project, said the hotel is "gorgeous" and "actually more than what I had expected."

"The more nights people stay, the more money they actually spend," said the councilman, whose district includes the hotel. "It all impacts our economy, which is all really important to us at this time."

A commercial real-estate expert, however, warned the failing economy and the financial nightmare on Wall Street would make it impossible for the Phoenix Sheraton to succeed for a very long time if ever.

The 1987 crash was minimal compared to the present Wall Street crisis but yet, took 11 years to recover.

Hotel Forecast puts Skids on Phoenix Tourism

With downtown hotel occupancy questionable because of declining tourism, hotel occupancy will depend on conventioneers coming to Phoenix to attend a convention. Yet, this market forecast before the 2008 Wall Street collapse was known to be dubious at best.

The weakening economy and crisis on Wall Street are darkening an outlook for hotels and resorts that was already gloomy. Now with a global recession, all of yesterday's forecasts are outdated making for real forecasts of tomorrow a hundred times darker.

An End to the Decades of Decadence on Wall Street (Central in Downtown Phoenix)

“It’s the beginning of the end of the era of infatuation with the free market,” said Steve Fraser, author of “Wall Street: America’s Dream Palace,” and a historian. “It’s the end of the era where Wall Street carries high degrees of power and prestige. And it’s the end of the era of conspicuous displays of wealth. We are entering a new chapter in our history.”

Adoration of riches is hardly new, however. In the mid- to late 19th century, the Gilded Age — a term Mark Twain coined in 1873 — offered equally ostentatious displays of wealth and a broadening gulf between rich and poor.

“In the Gilded Age, they built great, enormous palazzos in Newport that they lived in for six weeks a year,” said the historian John Steele, whose book, “An Empire of Wealth,” chronicles that era. “During the last 25 years, it’s certainly been a gilded age in the sense that enormous fortunes have been built up in an unprecedented way.”

“The economic system will shut down and we will go in a deep recession. It probably is the end of an era,” he said. This will have a profound adverse impact and consequence in downtown Phoenix.

In downtown Phoenix, using taxpayer money, Gordon and Johnson built a great, enormous palazzo and called it the Phoenix Sheraton.

The Phoenix Downtown Con: Instant Gratification

To see quality development success, a drive to the corner of 24th Street and Camelback will be a visit to a first class showcase development area. Hard to imagine but all done without public subsidies during the time Gordon and Johnson were freely opening the City of Phoenix coffers to make downtown Phoenix into a showcase built on a house of cards that has begun to crumble out of control.

Instant gratification is no answer to downtown Phoenix development that in the end will bring demise to what was a golden opportunity to make Phoenix one of America's premier cities. Instant gratification makes for headlines and great sound bites but the only way to develop downtown is to look long term at quality destination projects that add synergy to additional development thereby increasing property and sales tax revenue.

The crux of the problem is public officials without development experience are responsible for Phoenix downtown development.

If anyone thinks city staff will provide balance then you do not know how a city functions.

No one on staff is going to go against the grain and voice another direction because no one bites the hand that feeds them. Witness John Chan, Phoenix's downtown development director exceeding stupidity said, "For the first six months of the year, there has been significant interest in developing hotels because of those booking numbers."

This of course assumes city staff has private sector development expertise. No Phoenix staff person has this depth of expertise. No one has "risk" experience for all are too quick to use "public" money when there is considerable risk. The leaders of the "full steam ahead" pack to use taxpayer dollars instead of private funds are Gordon and Johnson. Their cavalier use of taxpayer money will have an adverse impact on the City of Phoenix for twenty years or more.

All private development professionals strive to maximize development opportunities by placing the highest and best use for each property. It is highest and best use that drives development at 24th Street and Camelback. It is the market place that determines highest and best use also known as laissez-faire that the free market is best left to its own devices, and that it will dispense with inefficiencies in a more deliberate and quick manner than Phoenix mayor Phil Gordon and former Vice Mayor and now City Councilman Michael Johnson ever could. Particularly because Gordon and Johnson are clueless about investment risk and lack development experience.

The market drives 24th Street and Camelback; consequently, there is no need for public subsidy. Which begs the question why is public subsidy always a requirement for developers in the downtown Phoenix area? It is only because developers know Gordon and Johnson are an easy touch on downtown development.

It appears public subsidy in downtown Phoenix is the equity contribution of Phoenix Mayor Phil Gordon and former Vice Mayor and now City Councilman Michael Johnson who have no risk development experience. Yet, if no one questions, then all public subsidies freely flow.

It is when private developers know public subsidies are readily available, developers approach the mayor and council for free hand outs for projects that could never get off the ground supposedly unless they receive "gap" financing to make the numbers work. The more public money that is available, the greater need for subsidy that is requested.

The payoff for city officials without development experience -- the public recognition of spearheading less than highest and best use development to win elections.

The recently approved Phoenix CityScape is not a destination. It will provide for those that work in the downtown area and to the few that live in downtown. It is not a San Antonio River Walk. It is not a Boston Faneuil Hall or Baltimore Harbor Place. No one working and living in Scottsdale will ever drive to downtown Phoenix to shop at Phoenix CityScape. Neither will anyone living in Superior or Globe drive to downtown Phoenix to shop at Phoenix CityScape. This should illustrate Phoenix CityScape is not a destination and the premise made in this writing: a destination is absolutely required to take Phoenix into the realm of great cities.

Maybe in the short term, the downtown area will go from empty blighted parcels but eventually, downtown Phoenix instead of high rise office and a destination project that would have attracted housing and then retail is not going to happen.

Greed is Good

Thinking back upon the screenplay "Wall Street," who would have imagined this persona and his battle cry would become part of the public consciousness, and the core message of "Wall Street" — remember, he goes to jail in the end — would be so misunderstood by so many.

At the very least if jail is not an option, the least acceptable option is for Gordon and Johnson to leave the City of Phoenix either by being termed out or loosing the next city election.

In "Wall Street," two investment partners get involved in shady financial dealings. They use  each other and eventually are tailed by a drab prosecutor, like the character in 'Crime and Punishment.'

In developing the character of Gekko, an amalgam of disgraced arbitrageur Ivan Boesky, corporate raider Carl Icahn, and his lesser-known art-collecting compatriot Asher Edelman, add a dash of Michael Ovitz and a heaping portion of, yes, and esteemed Oliver Stone and there you have the rough draft of 'Gekko the Great.' Could this be a model for Gordon?

Now that is certainly not the case with everyone, but if you want to become a master of the universe, bodies and souls must be trampled upon. As rival raider Larry Wildman tells Gekko after he has been duped by him: "Not only would you sell your own mother to make a deal, you'd ship her C.O.D."  — Is this not the motto of downtown Phoenix development?

Phoenix has become a Corporate Socialist City

The economy teeters more every day. Yes, the system is responsible, as is the lack of government oversight. But what about the culprits who devised and sold all the dubious, newfangled collateralized debt to the public? Is the devise and use of taxpayer money any different? The difficulty in distinguishing the delusional and the venal from the dishonest and fraudulent is why prosecutors would be hard-pressed to indict half the investment bankers on Wall Street or pubic officials who knowingly or should have known used a gimmick to sell taxpayers a bill of goods?

Witness: The Phoenix ASU buildings were only built because of the availability to tap into $220 million of Phoenix tax payer money to finance the ASU downtown Phoenix buildings.

And what would Gekko make of all this? He would be shocked. "Utterly shocked." No, of course not. He'd remind everyone how he warned us of this very lack of public accountability years ago and now it has come home to roost. And with the Wall Street bailout pushed through, Gekko is shaking his head in disgust: "We won the Cold War. And now we lost the Cold War. America has become a 'corporate socialist nation' just as Phoenix has become a 'corporate socialist city.'"

Other Hotels?

As early as 2010, CityScape developers had planned to open Palomar, a 250-room boutique hotel that would be run by Kimpton Hotels and Restaurants. The hotel would be built on the same block as the 27-story office building that is rising near Washington and First streets.

The three-block development includes plans for a 150-room hotel operated by Twelve Hotel and Residences, but a construction date hasn't been set and it probably will never happen.

Other projects have been announced, but they probably are not going to be built:

• Copper Pointe 2 Development LLP has plans to put a 107-room boutique hotel on a vacant city lot on the southeastern corner of Central Avenue and Adams Street.

• Hansji Urban, a firm affiliated with an Irvine, Calif., hotel developer, bought the block that includes the 1920s-era Luhrs Tower and the Luhrs Building last year. There are long-term plans to build a hotel on the block, just south of the landmarks.

• There is renewed interest in adding a 700-room hotel near the 23-story Collier Center, according to Opus West Corp., the firm that owns the site near Third and Jefferson streets.

• When the Collier Center went up in the 1990s, the builder included 500 spaces for future hotel parking and support pillars for the high-rise, said Jeff Roberts, vice president of real-estate development for Opus.

Market Troubles

Flagging tourism and a global recession will torpedo all of these plans.

"We must be careful not to start multiple hotel-construction projects," said Anthony Sanders, a finance and real-estate professor at Arizona State University's W.P. Carey School of Business.

The lending crisis already has claimed one high-profile victim. The $100 million Hotel Monroe was supposed to open this week in a refurbished vintage building.

The luxury boutique hotel was forced to shut down after its construction funding became mired in lender Mortgages Ltd.'s collapse.

Hotels Impacted by Rising Airfares

Weeks before the Wall Street crisis, consumers were already cutting back on air travel, whether for business or pleasure. Passenger volume is dwindling even faster than airlines can sideline planes and cut poorly performing routes. At American Airlines, domestic passengers flew 11.7 percent fewer miles in September, while the airline cut 9.4 percent of domestic seats.

Airfare sticker shock is a growing refrain in corporate America, forcing hotels and resorts to rewrite their marketing playbooks amid already weak travel demand. They are courting more regional business, zeroing in on loyal repeat customers and touting a flurry of deals to offset higher travel costs.

The stakes are especially high in Greater Phoenix, where group meetings and conventions account for at least 60 percent of business in the upcoming peak season.

"That's all we hear about now is the cost of travel, the cost of gas," said Rachel Sacco, chief executive officer of the Scottsdale Convention and Visitors Bureau. "It's an important consideration, much more so than it ever was before."

Airline-ticket prices have been on the march all year because of high fuel prices, with business airfares rising 10 percent this spring, to a seven-year high, according to American Express.

Early indications this fall are that prices have headed sharply higher following dramatic flight cutbacks by airlines. Tickets booked from Phoenix on online travel agency Orbitz.com cost 34 percent more than a year ago for October trips.

Fewer flights with higher fares make Phoenix less inviting. Airline flight cuts and higher airfares this fall will bring fewer visitors to Arizona, delivering a punishing one-two punch to the state's limping economy.

In Phoenix, more than 1 of 10 flights are gone from a year ago. Nearly 70 daily departures have disappeared from Sky Harbor International Airport's schedule, the equivalent of losing service from almost every major airline except US Airways and Southwest.

Fewer seats for sale means airlines can charge more. Tickets for Phoenix flights departing in October are up an average 28 percent from a year ago, according to Farecast.live.com. Flights to Boston and Chicago are each up 50 percent.

In a tourism hotbed where the majority of visitors arrive by plane, fewer flights and higher fares mean fewer customers for hotels, restaurants, spas and golf courses.

At risk: A substantial slice of $19 billion in annual visitor spending in Arizona.

This comes after months of reduced numbers in hotel occupancy and airport traffic as people struggle with a plunging stock market, the housing meltdown and other economic woes.

Airport Impact

Sky Harbor traffic, already down each month this year but one, is projected to sink.

By the end of 2009, airport officials see passenger totals down 10 to 15 percent from last year's peak of 21 million round-trip passengers.

PKF Hospitality Research listed Phoenix, Miami, Orlando and Denver among the cities that have seen the most significant relationship between flight cuts and hotel demand.

It's not unlike after 9/11, when Arizona was one of just a dozen states pegged as sustaining a negative blow because of its above-average dependence on tourism.

That dependence has inched up since then, according to Moody's Economy.com.

Tourism matters here, accounting for 4.23 percent of the state's economic output, compared with 3.56 percent for the United States. In Greater Phoenix, the total is even higher: 4.37 percent.

Construction, real estate and high tech may represent larger pieces of the state economy, but drops in tourism will be felt.

That's why the unfolding airline changes are a big concern.

"I think everybody's now just getting their arms around it," said Robert Hayward of Phoenix hospitality consulting firm Warnick & Co. "The industry as a whole is going to be watching that very closely over the next several months as the cuts start to take place."

Already this year, several negative trends have been detected:

• Hotel occupancy in Greater Phoenix is down 9 percent year to date through July, the worst performance of a major market in the country, according to Smith Travel Research. Demand is down 6.3 percent while room supply is up 3.2 percent.

• Taxable sales at hotels and motels in Arizona were down 3 percent from January to July, and car rental revenue is flat, according to the Arizona Department of Revenue.

• Airport traffic has fallen every month this year but February, the month in which Glendale hosted the NFL's Super Bowl. The declines accelerated in June and July, with traffic down 6.2 percent and 6.4 percent, respectively, from the previous year.

Phoenix Looks to Trim General Fund

Two months after its largest cuts in history went into effect, Phoenix is preparing for a new round of cuts that could threaten library hours, bus routes and other city services.

City Manager Frank Fairbanks has asked each department to suggest cuts totaling 30 percent of the $1.2 billion general fund.

Fairbanks won't know for several months how much they need to trim and hopes the number is much lower than 30 percent. What is certain is that Phoenix is poised to make its sixth round of cutbacks in eight years, which have already reduced the general fund by about 15 percent.

The general fund pays for most city services, including police, fire protection, libraries and parks.

In the past year, Phoenix has reduced maintenance at city parks, eliminated city funding for festivals and parades and instituted fees to use community centers.

A continued decline in sales-tax revenues, which make up the largest single source of Phoenix's revenues, has led city officials to begin their budget process more than six months earlier than usual. Combined state and city sales-tax collections were down 7.7 percent in July, or $3.9 million.

"Although it's too early to make predictions, the budget this year could be worse than the budget last year," Fairbanks said. "The early numbers are very dire indeed."

Phoenix's decade of budget cuts began after 9/11, when the collapse of the tourism industry forced the city to trim about $23 million from the general fund. Aside from one flat year, in 2002-03, the city has reduced services every year since.

Phoenix has cut $206 million from the general fund since its peak, including an $89 million cut earlier this year. More than 1,000 positions have been eliminated in the past five years.

As they worked on this year's budget, city officials worked to preserve library hours and keep community pools open. They used $2 million in block-watch funds to pay for park rangers and neighborhood specialists, whose duties include graffiti cleanup.

Those funds will be gone next year, and the pressure on departments to cut up to 30 percent of their budgets will almost certainly mean that those programs and positions go back on the chopping block. Fairbanks said the city will also look at reducing bus service.

Any new cuts wouldn't go into effect until March 2. First, city officials have to decide what to cut.

The departments submitted their proposed cuts this week. The proposals will be unveiled January 6, followed by two weeks of community meetings on the proposals.