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2011 Silicon Valley Index: Public finance crisis undermining economic recovery

Structural flaws in local government budgets threaten to sabotage the region’s gains

SAN JOSE and MOUNTAIN VIEW, Calif. – February 14, 2011 – A growing crisis in state and local government finance is undermining the economic recovery in Silicon Valley, according to the 2011 Silicon Valley Index released today by Joint Venture: Silicon Valley Network and Silicon Valley Community Foundation.

The comprehensive yearly study on the economic strength and overall health of Silicon Valley shows signs of a slow comeback from the deep recession, but it also reveals a precarious road ahead for cities, towns and counties in the region as public revenue drops while the demand for services climbs.

“Silicon Valley’s economy is making slow but noticeable progress recovering from the major blow delivered by the recession," said Russell Hancock, CEO of Joint Venture, "but unless we address the fundamental structural issues in our local governments we cannot sustain continued growth.”

“The trend in our cities and counties is clear: expenses are rising, revenue is declining and the building blocks that help create strong communities are crumbling,” said Emmett D. Carson, Ph.D., CEO and president of Silicon Valley Community Foundation. “Without new solutions to the public sector financial crisis that is spreading across the country, our region’s quality of life and economic health will continue to erode. We need to begin asking ourselves what kind of government we want, what we can afford and what we must leave behind in favor of a more sustainable future for ourselves and our children.”

The 2011 Index reports the latest data and trends in economic development, workforce, housing, education, public health, land use, environment, governance, arts and culture and other sectors throughout Santa Clara and San Mateo Counties and portions of Alameda and Santa Cruz Counties. An accompanying Special Analysis section of the report each year takes a closer look at a particularly significant topic.

The Index is published in conjunction with the annual “State of the Valley” conference, a town hall-style gathering of regional leaders, elected officials and citizens in a daylong discussion of Silicon Valley’s economic opportunities, challenges and future. The 2011 conference takes place tomorrow, February 18, at the McEnery San Jose Convention Center.

Other highlights of the 2011 Index and Special Analysis include:

Crisis in Local Government – An increasing number of residents are seeking social service assistance from county governments that are literally running out of money. In our cities, expenses – fueled in part by rising pension obligations – are escalating at a time when there is less money available than at the depth of the last economic downturn.

Continuing public sector layoffs are likely to offset the hiring that has begun in Silicon Valley’s private sector. Without a strong economy, public revenue will not recover. More programs and services will be cut and the cycle will continue, eventually threatening the overall economic health of the region.

Typically, local government revenues lag overall economic recovery over the course of a business cycle. A National League of Cities research brief states, “The declines in 2010 represent the largest downturn in revenues and cutbacks in spending in the history of the NCL’s survey, with revenues declining for the fourth year in a row (since 2007).”

Severe declines in housing markets will result in falling property tax revenues as property values are reassessed. The persistence of the financial crisis is hindering businesses’ access to cash needed for growth or bridging current gaps, which in turn slows the pace of rehiring and local income growth and economic activity. Further, the blow to the financial markets has resulted in lost value in public retirement funds, which now have fewer resources to meet growing obligations.

Jobs and Income – Key industries have reported employment gains over the past year and declines are slowing. The region added 12,300 jobs during 2010, bringing employment back up to 2004 levels. Per capita income ended its two-year long fall in 2010, stabilizing at 2005 levels of roughly $62,400. Through the second quarter of 2010, Silicon Valley employment stood at 1.3 million, the lowest level in more than a decade. Participation in food stamp programs increased 59 percent in Silicon Valley and 56 percent in California between 2007 and 2010.

Innovation and Entrepreneurship – With patent registrations and investment on the rise, innovation is picking up its pace again in the region. Patents registered in Silicon Valley climbed nine percent in 2009 over the prior year. Marking its first increase since 2007, venture capital investment in Silicon Valley rose five percent over 2009, approaching $5.9 billion, with the largest shares going to software, industrial/energy, biotechnology and medical devices. IPOs in Silicon Valley increased from one in 2009 to eleven last year.

Talent Flows and Diversity – Silicon Valley’s population growth is slowing, with a one percent increase in 2010. Net migration dropped by half. The number of science and engineering degrees conferred in 2009 increased 2.3 percent in the region. Foreign students represent 35 percent of graduate degrees.

Commercial Space and Land Use – Vacancy rates stabilized in 2010 and dropped in the last quarter as business closings slow and confidence builds. Primarily driven by the decrease in new commercial construction (down 80 percent from 2009) and a four percent increase in gross absorption in the past year, the amount of space available continued to expand in 2010, through October. After rising three percent in each of the preceding years, vacancy rates across all commercial space sectors increased by just 0.5 percent from 2009 through last October. In the most recent year, residential density dropped from 20.6 units per acre to 16.2 units per acre.

Published annually since 1995, the Silicon Valley Index findings are reported in five major sections: People (talent flows, diversity); Economy (innovation, employment, income); Society (preparing for economic success, early education, arts and culture, health, safety); and Place (environment, land use, housing, commercial space).  Governance was not included this year because it is the focus of the Special Analysis.

Joint Venture added the Community Foundation as its partner and lead sponsor on the Index in 2008. The 2011 Silicon Valley Index and Special Analysis may be downloaded from the Joint Venture website at www.jointventure.org and the Community Foundation website at www.siliconvalleycf.org.

ABOUT JOINT VENTURE: SILICON VALLEY NETWORK

Established in 1993, Joint Venture provides analysis and action on issues affecting the Silicon Valley economy and quality of life. The organization brings together established and emerging leaders—from business, government, academia, labor, and the broader community—to spotlight issues, launch projects, and work toward innovative solutions. For more information, visit www.jointventure.org.

 ABOUT SILICON VALLEY COMMUNITY FOUNDATION
Silicon Valley Community Foundation is a catalyst and leader for innovative solutions to our region’s most challenging problems. Serving all of San Mateo and Santa Clara counties, the community foundation has more than $1.8 billion in assets under management and 1,500 philanthropic funds. The community foundation provides grants through donor advised and corporate funds in addition to its own endowment funds. The community foundation serves as a regional center for philanthropy, providing donors simple and effective ways to give locally and around the world. Find out more at www.siliconvalleycf.org

Joint Venture co-publishes the Index with

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