Thursday, July 20, 2017

Sacramento Getting Good Press. Will It Lead to Good Jobs?

Over the past 2 months, Sacramento is trending in the national press with multiple national stories connecting Sacramento and the Bay Area.  The publicity wave caught the eye of Jack Ohman, the Sac Bee's very witty cartoonist.

While most of the stories are about real estate, there have also been positive business press extending into the areas of innovation and tech talent.  See these recent articles in the business press,

Wall Street Journal

Barry Broome and the Greater Sacramento Economic Council are trying to take maximum advantage by dialing up their marketing efforts in the Bay Area, and doing their part to keep the good press coming.  Here is Barry making the case for Sacramento on national Bloomberg radio :

Is it real or hype?  Most of the hard data is about Sacramento's hot residential real estate market sprinkled with some anecdotes about entrepreneurs and people that have migrated to the area.  At this point, there isn't much data beyond anecdotes to support the idea that Sacramento is seeing a migration wave of skilled workers and businesses.  I have a strong sense that there are skilled workers and businesses taking a look and "kicking the tires" on Sacramento as a destination, more than have been seen in decades.  But will they invest?

It's easy to be skeptical.  The business news over the past year or so has featured some large private employers like Aerojet and Verizon pulling out of the area.  Most of the business investment news is still about restaurants and real estate (and cannabis).  

A lengthy article this weekend on Sacramento real estate development includes a few quotes from me, but more interesting to me are the ones from some real estate developers.  They aren't seeing Bay area migrants as young tech talent, but as retirees.  The 55+ "active adult" communities have been the best selling new home product in Sacramento for a while, developers are responding with more 55+ products.  It seems much of the Bay Area demand for Sacramento real estate is from people at the end of their careers, not the beginning or peak.

As I pointed out in our Center's last forecast update, the trends for the past 5 years show workers are migrating to the Bay Areas, while non-workers are migrating out.  Areas like Sacramento, San Joaquin and Solano Counties have seen very slow labor force growth relative to their population growth - while San Francisco has seen its workforce grow faster than its population - suggesting that it is retirees and families that are being pushed inland.

However, all of this data is backwards looking and no trends last forever.  The urban core of Sacramento is also hot and becoming an exciting place to be.  The emerging Northern California megaregion is very real, and there are many people working to build a more resilient and diverse set of Bay Area connections than real estate refugees of commuters and retirees.

The next two years are going to be very telling for Sacramento.  This may be its best chance to develop its private economy and become more than a government town.

Thursday, July 6, 2017

Biological Opinions for the Delta Tunnels include new cuts to water diversions and further increase risk to water agencies that must decide whether to invest billions.

The much anticipated biological opinions (Biops) for the Delta tunnels (aka WaterFix) were said to be the documents that would provide more clarity to water agencies about how much water they would receive, and allow them to make a decision about whether they were willing to pay for the $16 billion tunnels by September.

While the Biops provided tunnel proponents a day to celebrate partial regulatory approval, the documents have done more to confuse than clarify water supply.  There is no updated modeling of water exports from the project, and there are multiple new items that increase uncertainty and could lead to future cuts to water supplies.  Most importantly, the Biops:
  • Postponed approval for building the intakes and operating the tunnels, the parts of the plan that will determine water supply benefits.  
  • Changed the rules for protective pulse flows for salmon in ways that substantially increase uncertainty about water diversion through the tunnels.  
While the "split decision" that postpones approval of the tunnel intakes and operation has received a fair amount of attention, the pulse flows have not - most likely because it is much wonkier and hard to understand.

When it comes to export water supplies, the change to pulse flows rules will have two negative effects, and one positive effect.  The negatives for water exports are that protective pulse flows have been extended to cover threatened spring-run chinook salmon in addition to endangered winter-run, and an annual cap has been removed to allow unlimited protective pulse flows.  On the positive side for water exports, the revised pulse flow rules allow for substantially more diversion of water if the pulse flow events occur when Sacramento river flows are high (35,000 cfs). (If you don't trust my summary, see page 3-121 of this document for the new pulse flows language, and page 3-123 for the old language.)

The water supply impacts of this are potentially very large.  Water diversions through the tunnels could decrease by nearly 18,000 acre feet for every additional day of protective pulse flows, and unlimited pulse flows for winter-run and spring-run salmon could add weeks where operations are constrained in this way each year. However, the rule allowing up to full 9000cfs diversion during a pulse event as long as Sac river flows remain over 35,000 cfs is likely to partially offset this effect and reduce the number of constrained days.  The net effect is probably negative, but very uncertain.

The uncertainty is compounded because the Biops do not define the specific criteria that would actually trigger protective pulse flows.  The idea is for the protection to kick-in when migrating fish are detected, but the Biops do not state the location where fish will be monitored or the number that will need to be observed to trigger protective action.

Confused?  You should be.  The tunnels may be more of a "crapshoot" today as when I heard Jason Peltier of Westlands Water District describe them as such in 2012.   The Biological Opinions do not provide water supply modeling to illustrate the potential effects of their new provisions.  Maybe they are trying to hide some bad news, but it is pretty hard to model the effects of these new pulse rules when so much is left undefined.

Appendix G does have some modeling that illustrates the effect of this rule in 11 recent years given one possible definition of a pulse event.  Appendix G is mostly about fish survival impacts, but it does have a green line on each of the 11 graphs that shows the flow of water diverted to the tunnels over the course of the year and blue bars that show the estimated frequency of pulse events.  The graphs of daily diversions are not detailed enough to calculate the water supply impacts, but my visual inspection revealed a net negative impact on water diversions in 7 out of 11 years, and 4 out of 11 years where the negative and positive impacts seem to balance out.  The biggest impact on water exports were in 2005, where I estimated about 30 additional days of severely restricted diversions with the potential to cut water exports by about 500,000 acre feet compared to the previous rules.  The fish survival predictions also show the largest positive effects in 2005, so the loss of water exports does generate substantial environmental benefits.  These positive effects on survival in Appendix G show why the increased frequency of pulse protection events was made to the description of "real time operations" in the Biops.

So where does this leave the water agencies who have to make a decision about whether to invest in the tunnels?

It seems clear to me that agencies should be less enthusiastic about investing in the tunnels than before the biological opinions were released.  The changes to protective pulse flows will almost certainly cause further reductions to expected water supply through the tunnels, and the postponement of many key decisions to the future has further increased uncertainty about the benefits of the tunnels.    

Last year, I published an analysis of the benefits and cost of the tunnels based on the draft biological assessments and EIR and found them to be a lousy investment.  If I were to revise this analysis based on the final Biops, it would only get worse as water supply benefits appear lower and environmental effects are adverse (although not expected to cause extinction).  The only potential positives for export water agencies is that they continue to have power in governance rules and political processes that give them hope that all the restrictive operating rules for the massive tunnels could be changed (or left unenforced) after tens of billions are spent on construction.

Last September, John Kirlin and I published an op-ed in the Sacramento Bee that described the Delta Tunnels (aka WaterFix) as a muddled gamble.  The Biops have only reinforced our analysis.  Some excerpts below...
You would think that after a decade and hundreds of millions of dollars spent on planning and analysis, the plan would be clear. Instead, uncertainties regarding the proposed project, environmental impacts, costs, financing and authority over operations loom larger than ever...
 The state could reduce the confusion over the WaterFix if it were to follow its own planning guidelines and prepare a feasibility study that addresses engineering, operations, environmental, economic and finance concerns in a consistent and unified analysis. Instead, the WaterFix proposal advances engineering proposals and environmental analyses that are disconnected from the project’s financial needs, combined with opaque descriptions of governance and authority...
While many water contractors have expressed concern over the tunnels’ cost, no major water agencies have walked away from the proposal despite the plan’s low return on investment.
A closer look at the WaterFix proposed governance and authority suggests how water agencies could believe the proposal may prove a better value than modeling projections show.
After construction, the critical issues for the tunnels will be operation in real time and adjustments to rules over time. The draft “adaptive management” framework is notable for placing... water contractors at the center of processes to establish science priorities and to make recommendations on possible changes in water operations...

Friday, April 7, 2017

WaterFix Economics Flop in Two Recent Federal Consultant Lists of National Infrastructure Priorities.

As the Trump administration gathers lists of national infrastructure projects, federal infrastructure consultants are finding that the California WaterFix project falls short of the state and Governor's claims about its economic performance.  That should come as no surprise to readers of this blog where I have been writing about WaterFix/BDCP/Delta tunnels lousy economics for nearly a decade.

The first report was conducted for the U.S. Treasury department and identifies 40 priority transportation and water infrastructure proposals in the U.S.  The intent of the report is to create "a list of significant transportation and water infrastructure projects that have been proposed but face challenges to completion" and have high economic benefits relative to their costs.  The high-profile tunnels project clearly hits all the screening criteria to have its benefits and costs evaluated for consideration for the list.  The screening criteria are:
  • significant (defined as >$300m)
  • estimates of capital and operating costs, and a basis for estimating benefits
  • completed a portion of environmental review
  • could be at least partially completed within 10 years
  • face a challenge to completion (technical, environmental, funding, etc.)
That is a list of project screening criteria that the WaterFix passes with flying colors.  While the WaterFix must have easily made the list of candidate projects, the Delta Tunnels are conspicuously absent from the final list of recommended projects.  Why?  Take a look a the selection criteria for the final list of 40 projects,

"The study team selected those projects for the final list which had significant net national or regional economic benefits based either on estimates of costs and benefits that had already been calculated using acceptable methods or on interim project outputs that could be converted to estimates of costs and benefits. Projects in the final list were chosen based on their net economic benefits... "

While I may have been the first, it is increasingly clear that I am not the only analyst to conclude that the WaterFix has a lousy benefit-cost ratio.  By the way, three California projects did make the final list of 40 recommended projects: 1) CA High-Speed Rail, 2) MTC managed lanes (HOV, express lanes) throughout the Bay Area freeway network, and 3) Sutter Basin flood control improvements (note, this assessment was done prior to the Oroville crisis).  Yes, it is true that high-speed rail has stronger economic justification than the Delta tunnels, although its financial viability is equally questionable.  Bottom Line: WaterFix failed to make the cut in a list of major infrastructure projects evaluated on their economic merit, while HSR and HOV lanes made it.

The second notable recent assessment was done by consultants for the Trump transition team, and looks at project financing, most notably its revenue potential for private investors, rather than its overall economic benefits and cost.  The WaterFix does make this list of 50 priority projects, but it is notable that the assessment finds that it needs a large taxpayer subsidy.  The consultants estimate that user revenue is only sufficient to pay 50% of project costs, in sharp contrast to a decade of statements by the state and water contractors that they would pay 100% of the projects costs.  As readers of this blog know, the WaterFix/BDCP/Tunnels have never issued a draft financial plan, and they suppressed their own economic consultants assessment that the project required a large taxpayer subsidy

Here is a list of the 5 California projects that made the transition team list, along with their estimated construction cost and the % of these costs that could be paid by facility users.
  1. I-405 Improvements, $1.9 billion, 50%.
  2. Veterans Health Research Institute, $1 billion, 90%.
  3. Cadiz Water, $250 million, 100%.
  4. Huntington Beach Desal, $350mil, 100%.
  5. CA WaterFix (Bay Delta Tunnels), $15 billion, 50%.
As I have mentioned frequently, WaterFix economics are much worse than desalination (frequently criticized for high costs) and it appears the transition consultants agree.  It is also interesting to compare the WaterFix to the other CA project that was assessed to have user revenue equal to 50% of costs, the I-405 project in Orange County.  Unlike the WaterFix, the I-405 project actually has a finance plan.  The I-405 finance plan clearly states that 2/3 of the $1.9 billion construction cost would be paid by taxpayer funds, and yet the transition team consultants give it the same 50% revenue/subsidy rating as the WaterFix.  That is probably because the I-405 finance plan estimates that revenue from the toll lanes will comfortably exceed what is necessary to pay 1/3 of the capital cost, so the transition team consultants evaluated its revenue potential at 50% rather than 33%. 

It amazes me that anyone still believes public officials who say the tunnels can be built without substantial taxpayer funds.  While it has taken a long time, the media and the public are slowly catching on.  And now it appears that infrastructure consulting firms working for the federal government, who have a strong incentive to promote mega-infrastructure projects, recognize that the project can not be financed as claimed by project proponents and that the overall economic justification is lacking.
There is a more general observation about these lists that should be of interest to water wonks and policy makers.  When it comes to water projects, the two lists recommend very different types of projects.

The Treasury list evaluates projects on economic merit, and flood control projects dominate the recommended projects.  It's true around the U.S., not just California.  However, the public good characteristics of flood control and constraints on accessing taxpayer funds makes flood control difficult to finance even when the economic merit is high.

In contrast, the Trump transition list evaluates projects on their revenue potential to attract private investment.  Water supply projects like Desal, Cadiz, and WaterFix rank high on the list of projects with private investor potential even though they can't make the previous list based on overall economic merit.  That's because water utilities have a lot of power to recover their investment costs from ratepayers, no matter how ill-advised those expenses may have been.

[This last section and a few general edits were added on 4/8.]

Wednesday, March 29, 2017

Bay Area Net Domestic Migration Shows Large Drop in 2016, While Stockton and Sacramento Have Relatively Small Gains

Census released metro area population growth data for 2016 a few days ago, and it shows a large increase in out-migration from the Bay Area, but little change in domestic migration for inland parts of the mega-region.  Specifically, Bay Area net domestic migration declined by over 30,000 people in 2016, as shown in the table below.

Net Domestic Migration in Thousands (July 1 previous year to June 30)
2016 2015 2014 2013
San Jose -20.8 -10.1 -7.2 -1.4
San Francisco -12 0.1 -0.3 2.4
Oakland -1.1 8.8 14.1 13
Sacramento 12.3 9.1 8.2 3.3
Stockton 4.2 3.7 3.8 -3.9

Unfortunately, we don't have any data yet for 2016 on how the net domestic migration change breaks down between in-migration versus out-migration.

My guess is that more of the 2016 change for the Bay Area results from a slow-down to in-migration due to slower job growth and high cost of living.  If the net change were mostly due to an increase in out-migration, then I expect we would have seen a larger increase to net migration for Stockton and Sacramento.  Between 2013 and 2015, we saw a smaller decrease in Bay Area domestic migration and a larger increase to Stockton/Sacramento domestic migration.

Monday, February 13, 2017

Does Equality of Opportunity Study Suggest Community College Should Be Free?

An op-ed in today's Sacramento Bee uses the Equality of Opportunity study to argue that the state should make community college and the first two years of CSU tuition free.  I am not sure how the op-ed author derives his conclusion from the analysis in the Equality of Opportunity study.

I had skimmed the study a few weeks ago and did not come to these conclusions.  I thought it raised serious questions about California's higher ed structure with an enormous community college system and strong incentives for students to start in community college.  California has had the cheapest (nearly free tuition) community college education in the U.S. for decades and its educational outcomes are backsliding, especially for those under 40 who were educated in the state.  California still does a great job of attracting highly educated workers to move here from other places.

Prompted by this op-ed, I just gave the study another read to see if I was missing something.  I found no recommendation about free community college or expanding community college.  In fact the study notes that many community colleges don't rank that well on mobility, despite being high-access institutions because their success rates are so low.  It does have positive things to say about outcomes for students who start in the CSU system.  I could see it as an argument for expanding CSU's so more students can start in a 4-year environment, and I also can see it as an argument for continuing to provide financial aid opportunities that allow lower-income students to access private, non-profit institutions.

I edited some of the tables from the Equality of Opportunity study below.  There are many more community colleges than CSUs, UCs, and private, non-profits in California - so it seems they should dominate these tables.

The first table focuses on the mobility rate, which combines low-income access with success in mobilizing low-income students into the top-tier of earners.  The table shows the top 10 colleges in California (excluding very small institutions) for mobility and the bottom 10.  There is 1 community college in the top 10, but community colleges are 7 out of the bottom 10 for mobility.

The second table looks only at the success rate of low-income students attending a given university, irregardless of the share of students at that institution that are low-income.  Thus, Stanford can top this list despite only having 3.6% of students with low-income parents - since 63% of those students are successful in getting to the top income quintile by their early 30's.

When it comes to success rate, there were no community colleges in the list until 42nd place.  The very bottom of the success rate list are for-profit career colleges, but community colleges make up the rest, 15 of the bottom 20 places.

Community colleges are important, and I know many people who have had good educational experiences with them, and have successfully used them to achieve their educational goals.  The policy question here is at the margin.  Should California be putting more resources and directing more students in their direction, or would there be a better return on investment in expanding the CSU system and low-income access to private non-profits with high success rates?

Mobility Rate Rankings

Institution Name Median Parent Hhold. Income ($) Median Child Indiv. Earnings Ages 32-34 ($) Low-Income Access: % of Parents in Bottom Quintile Success Rate: % of Children in Top Quintile Among Those with Parents in Bottom Quintile Mobility Rate: % of Children who Come From Bottom Quintile and Reach Top Quintile
Top 10 Mobility Rate(>= 300 students per cohort)
California State University, Los Angeles  36,600  43,000 33.1        29.9        9.9       
Glendale Community College  40,100  30,500 32.4        21.9        7.1       
California State Polytechnic University, Pomona  80,200  55,100 14.9        45.8        6.8       
University Of California, Irvine  92,100  60,400 12.2        55.3        6.8       
California State University, Northridge  61,100  44,100 19.8        32.0        6.3       
University Of California, Riverside  75,000  52,800 14.7        41.0        6.0       
California State University, Dominguez Hills  45,600  40,300 26.3        21.3        5.6       
University Of California, Los Angeles 105,500  65,800 10.2        54.6        5.6       
San Jose State University  91,700  56,500 11.7        46.6        5.4       
University Of California, Berkeley 114,700  67,900 8.8        55.2        4.9       
Bottom 10 Mobility Rate (>= 300 students per cohort)
College Of The Redwoods  59,900  20,300 18.8        7.5        1.4       
Point Loma Nazarene University 113,300  45,900 3.3        42.7        1.4       
Lake Tahoe Community College  64,600  22,100 14.2        9.8        1.4       
Mendocino College  51,900  21,400 21.0        6.0        1.3       
Sierra College  85,900  30,900 7.8        15.7        1.2       
California Lutheran University 110,600  50,900 3.2        38.2        1.2       
Saddleback College 100,600  31,100 7.0        16.5        1.2       
Solano Community College  84,300  34,300 7.9        13.7        1.1       
Las Positas College 109,500  37,300 4.9        16.5        0.8       
Marinello School Of Beauty, Xenon International Academy, International School Of Skin And Nailcare And Hair Professionals Academy  44,200  11,400 25.4        2.9        0.7       

Success Rate Rankings

Institution Name Median Parent Hhold. Income ($) Median Child Indiv. Earnings Ages 32-34 ($) Low-Income Access: % of Parents in Bottom Quintile Success Rate: % of Children in Top Quintile Among Those with Parents in Bottom Quintile Mobility Rate: % of Children who Come From Bottom Quintile and Reach Top Quintile
Top 42 Success Rate (schools >=300 students per cohort)
Stanford University 172,600  84,800 3.6        62.7        2.2       
Santa Clara University 149,900  72,500 3.6        62.0        2.2       
University Of California, Irvine  92,100  60,400 12.2        55.3        6.8       
University Of California, Berkeley 114,700  67,900 8.8        55.2        4.9       
University Of California, San Diego 111,300  65,300 8.8        55.1        4.8       
University Of California, Los Angeles 105,500  65,800 10.2        54.6        5.6       
University Of Southern California 120,100  63,700 7.2        54.6        3.9       
California Polytechnic State University 124,800  65,500 4.2        53.6        2.2       
Pomona College 161,600  62,000 3.7        53.0        2.0       
University Of California, Davis 109,400  61,600 8.6        51.8        4.4       
University Of The Pacific  96,500  59,000 8.6        49.7        4.3       
University Of California, Santa Barbara 124,000  58,800 6.2        49.5        3.1       
Scripps College 126,300  46,400 5.1        49.1        2.5       
University Of San Diego 139,300  61,200 4.9        46.8        2.3       
San Jose State University  91,700  56,500 11.7        46.6        5.4       
University Of San Francisco 106,900  56,900 5.9        46.2        2.7       
Loyola Marymount University 131,800  56,200 5.4        45.9        2.5       
California State Polytechnic University, Pomona  80,200  55,100 14.9        45.8        6.8       
California State University, East Bay  86,000  51,300 9.9        44.0        4.3       
Saint Mary's College Of California 110,500  55,200 6.7        43.7        2.9       
Pepperdine University 124,100  55,800 4.3        43.1        1.9       
Point Loma Nazarene University 113,300  45,900 3.3        42.7        1.4       
University Of California, Riverside  75,000  52,800 14.7        41.0        6.0       
San Diego State University 100,500  51,000 9.0        40.8        3.7       
California State University, Fullerton  83,300  47,800 12.1        39.6        4.8       
Occidental College 122,400  49,000 8.5        39.1        3.3       
California Lutheran University 110,600  50,900 3.2        38.2        1.2       
California State University, Long Beach  85,800  48,800 11.6        38.2        4.4       
University Of California, Santa Cruz 115,400  46,100 7.4        37.6        2.8       
San Francisco State University  87,200  45,800 10.1        34.7        3.5       
Sonoma State University 113,700  46,400 5.0        34.4        1.7       
California State University, Bakersfield  67,700  46,100 14.1        32.8        4.6       
University Of Redlands 108,400  47,700 5.3        32.3        1.7       
California State University, Monterey Bay  93,200  41,100 10.5        32.3        3.4       
California State University, Chico 112,200  48,700 6.1        32.2        2.0       
California State University, Northridge  61,100  44,100 19.8        32.0        6.3       
California State University - Sacramento  88,700  47,900 10.5        31.9        3.3       
Chapman University 109,600  47,900 5.3        31.9        1.7       
California State University, San Bernardino  69,800  43,500 14.1        31.2        4.4       
Azusa Pacific University 103,700  42,100 4.9        30.9        1.5       
California State University, Los Angeles  36,600  43,000 33.1        29.9        9.9       
Ohlone College  91,100  38,500 7.1        29.0        2.1       
Bottom 20 Success Rate (schools >= 300 students per cohort)
Victor Valley Community College  62,600  25,200 17.7        12.1        2.1       
Chaffey Community College  66,300  27,700 14.7        12.0        1.8       
Southwestern Community College District  54,200  28,200 20.2        11.8        2.4       
Antelope Valley College  66,600  25,700 16.4        11.8        1.9       
West Hills Community College District  46,100  25,600 22.5        11.7        2.6       
College Of The Sequoias  51,500  27,500 21.8        11.6        2.5       
Yuba Community College District  48,700  25,400 20.4        11.5        2.4       
Miracosta College  71,200  26,500 13.4        11.5        1.5       
College Of The Siskiyous  57,500  27,900 19.0        10.5        2.0       
Lake Tahoe Community College  64,600  22,100 14.2        9.8        1.4       
Merced Community College  48,400  25,400 24.0        9.5        2.3       
State Center Community College District  47,600  25,200 24.7        9.4        2.3       
San Joaquin Valley College  36,000  21,500 34.8        7.9        2.8       
College Of The Redwoods  59,900  20,300 18.8        7.5        1.4       
Carrington College California  47,900  25,000 24.5        7.0        1.7       
Westwood College - Los Angeles  37,800  26,400 26.9        6.7        1.8       
Mendocino College  51,900  21,400 21.0        6.0        1.3       
United Education Institute  29,600  19,100 42.4        5.3        2.2       
American Career College of Los Angeles, CA  30,400  25,700 41.5        4.8        2.0       
Marinello School Of Beauty, Xenon International Academy, International School Of Skin And Nailcare And Hair Professionals Academy  44,200  11,400 25.4        2.9        0.7       

Thursday, February 2, 2017

Another view of the Northern California Mega-region

Another recent study has analyzed mega-regions in the U.S.  This one is from Dartmouth with some cool graphics.  It imagines what U.S. states would look like if they were defined by economic relationships, and like most studies of its kind, it sees the Northern California mega-region (Bay Area, Sacramento, North San Joaquin Valley, Monterey Bay) as a distinct state.

This image of commuter flows from the Dartmouth study shows the distinct break between the North San Joaquin Valley and Fresno, there is almost no economic linkage at all.  Even though every objective outside look at the economy doesn't place Stockton/Modesto and Fresno/Bakersfield in the same "state," important economic development and planning organizations at the state level (like this and this) continue to lump them together and exclude the North San Joaquin Valley from its true economic region. 

It's up to the North San Joaquin Valley communities to redefine themselves and organize themselves in ways to more effectively engage as a cohesive region with growing linkages to the Bay Area and Sacramento. 

Here is another view from the study.  The data is 2006-10 flows, so the linkages have only grown. 

Wednesday, February 1, 2017

Economic Forecast: Slowdown Not a Downturn

Headline on the front page of today's Stockton Record could cause some confusion and concern.

The forecast is for a slowdown in growth with higher uncertainty, which yes does mean higher recession risk in future years.  Preliminary data suggests slower growth has already arrived in Stockton.  Our forecast for jobs in the area is pictured below.  Not a downturn, but it is a downgrade compared to our previous forecast and a definite slowdown from rapid growth of recent years.

We have also reduced our forecast of housing starts which has been too optimistic in recent years.  It's still solid growth from current levels, but maxes out at about half of 2002-05 housing production.

The full forecast is available here,

Sunday, January 29, 2017

For affordable housing, should we subsidize rent payments or subsidize the construction of rent restricted units?

Today's Sacramento Bee includes an op-ed touting AB 71, which would end the mortgage interest reduction for second homes and redirect the estimated $300 million towards tax credits that finance construction of rent-restricted affordable housing units.

Of the various funding mechanisms for affordable housing currently proposed in the legislature, I prefer the AB 71 approach to some of the other proposals, such as a transfer tax on real estate transactions.  But given the enormity of California's affordable housing problem, we need to allocate these funds to the most efficient approaches.  I'm not sure tax credits for affordable housing construction are it.

While the op-ed calls this approach "proven," tax credit financed affordable housing actually has a lot of critics in economic and policy research.  The costs of projects financed in this way are high, there is evidence the program "crowds out" other housing invesment and thus does not increase housing units by as much as it appears.  In addition, not all of the benefits are received by low-income households - it creates benefits for high-income households who buy the tax credits and financial professionals who bundle and market them.

Thus, there are many economists who believe subsidizing rent vouchers (section 8) is a more effective approach.  A recent op-ed by Zillow Chief Economist Stan Humphries captures this line of thinking.  He argues that we should eliminate tax credit programs and mortgage interest deductions and redirect those funds to rent vouchers that reach more households and allows them more flexibility about where they live and do not lock them into a specific unit to receive a subsidy.

The summary of the Governor's proposed budget has some interesting data on the cost of building tax-credit subsidized affordable housing in California.  In the housing chapter it states, "Total development costs average $332,000 per unit for the construction of new affordable units, which limits the number of units that can be built with limited resources."

That prompted me to take a quick look at the average cost of providing affordable housing in California's largest county, Los Angeles.  According to the Governor's budget, it cost $372,000 per unit to build affordable housing in LA County between 2011-15.  Typically, the tax credits provide 70% of project financing (the rest private investment), thus $300 million in funding from AB 71 could finance up to $428 mil. in affordable housing construction or about 1,150 units per year at LA Costs.

What are the costs of providing rent vouchers in LA?  Note there are also waiting lists for rent vouchers, just as there are for placement in affordable housing units.   According to the Housing Authority of LA, $465 million in annual funding serves 45,000 families, an annual housing subsidy of about $10,333 per family.  At these costs, directing AB 71's $300 million towards rent subsidies would help 29,000 families per year, about 25 times the number of families that could move into new affordable units each year at the same funding level.  Of course, the tax credit financed units stay in the affordable housing stock year after year and the buildings are required to remain rented as affordable units for 30 years after construction.  So after 25-30 years, there would be a similar amount of low-income families helped each year by the same continuous funding stream - but why wait decades when you can reach more people now with rent subsidies that provide them with more flexibility about where they can live.

Looking at these numbers and the other policy arguments, I would suggest the state look towards increased funding of rent subsidies rather than subsidizing construction of affordable units.  To increase housing supply, we need policies that reduce the cost of constructing all types of housing, both market rate and affordable.

Thursday, January 12, 2017

What Should My Family Do With Our L.L. Bean Gift Cards After Trump's Latest Tweet?

I have a small personal connection to one of President-elect Trump's latest tweets, and it also provides a good discussion topic for my students.
It all started with a consumer boycott advocated by a group called "Grab Your Wallet" because corporate board member Linda Bean has been an active Trump donor and supporter who just got in trouble with the FEC because she didn't properly register the "Make Maine Great Again" PAC she founded as a super-PAC and thus exceeded legal political contribution limits.  L.L. Bean has responded with this statement

I have L.L. Bean gift cards in my wallet right next to my L.L. Bean Visa which has some reward points built up that I could spend.*  My 19-year old college student daughter who has been actively protesting Trump also has gift cards, and I expect I will learn that she has joined the L.L. Bean consumer boycott when I speak to her later tonight.

So what should she do with the gift card?  Burn it?

My suggestion is that she spend it right away on a hat or warm boots she could use for the protest march outside the Chicago Trump tower she will be attending.  Why?

L.L. Bean already has the money.  Thus, the gift cards and our Visa reward points are a liability to the company, so if we cut them up we have given them cash for nothing in return.  Ironically, the most harmful thing she can do to L.L. Bean is to buy something with the gift card right away.  I suggest she buys their most popular products so all the new Trump supporters making their first purchase from L.L. Bean today face a depleted inventory and poor selection.

If you are a holding a L.L. Bean gift card and want to support the company as Trump suggests, it could be the best way to support them is to throw it away.

Of course, there are other more serious issues embedded in this tweet/controversy.

For the most part, I think the company's statement from a few days ago is fine and I certainly see no reason to boycott them.  However, I noticed the end of their statement asks the group "Grab Your Wallet" end its "misguided" boycott.  But today, the President-elect gave them an endorsement for political reasons, and specifically directed his supporters to buy their products.  I have to wonder if L.L. Bean CEO Shawn Gorman also thinks Trump's tweet is misguided and will ask him to withdraw it as well.  I won't hold my breath on that one, especially since they are probably setting January sales records right now thanks to the President-Elect.  I can certainly understand why they would not want to upset or embarrass President-elect Trump by refusing his assistance at this point.

And that leads to what is the worst part of this entire episode.  The President-Elect is personally using the power of his office to promote products and companies connected to his political supporters.  And this is coming the morning after he had a news conference that was supposed to show his understanding of conflicts of interest, separate business from his public life.  While it is true that Presidents of all parties have rewarded political supporters in various ways, Trump's corporate intervention is taking it to a new and dangerous level.  So much for draining the swamp...  

Finally, I would note that Maine is a critical swing state that has political value to Trump far beyond what its 4 electoral votes would suggest.  It also has a moderate Republican senator in Susan Collins who is seen as one of the Republicans most likely to defect from the Trump agenda on issues like Obamacare and others.  It seems that Trump's corporate interventions have primarily been to the advantage of companies headquartered in these critical locations.  California may be the largest state in the U.S., but I doubt it will receive it's proportional share of President Trump's corporate help.

* Why do we have so much L.L. Bean stuff?  I married into a Freeport Maine family with L.L. Bean roots and loyalties.  My wife's grandparents worked in the Bean shoe factories and later the retail store their entire lives, and lived in a modest house a few blocks away until they passed away about a decade ago.  Her grandfather was the fire chief at the old station a few blocks away from famous L.L. Bean store and warehouse complex.  My mother-in-law grew up working in the store and was childhood friends with some of the family members who have gone on to great wealth running the family-owned company.    My brother-in-law and sister-in-law founded and operated a bed and breakfast walking distance from the Bean's complex catering to their tourist/shoppers until they sold it a few years ago.  Thus, my closets are full of many of their products, and I have eaten Linda Bean's "perfect" lobster rolls at her restaurant, etc.  I haven't talked to any of my immediate or extended family members about this episode yet, but I am sure the next discussion will be more lively than usual.

Monday, January 2, 2017

Final WaterFix EIR/EIS Shifts Incremental Water Supplies from Central Valley Project (Farms) to State Water Project (Cities)

I spent some of my holiday break reviewing the recently released Final EIR/EIS for the California WaterFix.  My goodness, that is a long and boring report even when you are just skimming key chapters and tables.  However, I did find one important change from the 2015 Revised Draft EIR/EIS.
Compared to No Action, building the WaterFix is now projected to increase water supply to the State Water Project by an average of 186,000 acre feet per year, and decrease water supply to Central Valley Project south of Delta users by 14,000 acre feet per year.  While this is a slight decrease from the total exports estimated in the 2015 draft EIR, it is a large change in the distribution between agricultural and urban users.  The numbers in the table below are from Table 5-12 in the Final EIR/EIS and Table B1-3 of the 2015 Revised Draft EIR/EIS.  The Final EIR/EIS only presents one scenario, eliminating the range from earlier drafts.

Change in Annual Average Water Supply From WaterFix Compared to No Action Alternative (acre feet)
Final EIR/EIS  Draft RDEIR/RDEIS High Scenario Draft RDEIR/RDEIS Low Scenario
Total SWP South of Delta 186,000 398,000 -97,000
Total CVP South of Delta -14,000 106,000 66,000
Combined 172,000 504,000 -31,000

I don't have any insight into why the CVP/SWP distribution changed, but these modeling results would seem to set the stage for the what I (and others) have long anticipated.  CVP agricultural contractors will drop out of the tunnels/WaterFix due to the cost and minimal water yield.

The tunnels are more financially feasible if all the incremental water goes to the urban-dominated State Water Project, but they still represent a very poor return on investment for urban water users for the $16+ billion in capital cost: only about 10,000 acre feet of annual water supply per $1 billion in capital investment.

Metropolitan Water District is still telling their board that they won't pay more than 25-30% of the tunnels cost. Realistically, I think the only way the tunnels are built is as an urban project - with MWD probably paying about 90% of the cost.  Maybe now that we have a final EIR/EIS, we can finally see a realistic financial plan and an honest assessment of project feasibility.

1/3 10AM Table corrected:  An observant reader let me know that I reversed CVP and SWP in the table.  They also told me not to put too much stock in these modeling results which depend on many things that remain in flux.

Wednesday, December 7, 2016

Income Growth Very Strong Across all Northern California Metro Areas in 2015, But Large Disparities Between the Metros Remain

The Northern California mega-region ranked extremely high in per-capita income growth in 2015 according to the latest data from the BEA.  As shown in the table below, 10 out of the 11 metro areas ranked in the top 10% of the 382 metropolitan areas in the U.S. for growth in per capita income, and even the lowest ranked area, Merced, was in the top 20% of the U.S.

The table shows huge disparity in per capita income across the region, and if you dig deeper in the data you can also see big changes in the composition.  One thing they all have in common is that at least some of the growth is radiating out of the income-generating engine of Silicon Valley.  Between 2013 and 2015, the net change to the "adjustment for residence" (wages earned in one metro area by a resident of another) in Santa Clara County was -$8.1 billion.  The largest share of that commuter income fell into San Francisco and the East Bay, but these commuter gains are also driving a large share of income growth in places like Modesto.    

2015 percap income U.S. rank 2014 % change 2015 % change U.S. rank
U.S. 48,112 -- 4.4 3.7 --
Salinas, CA 49,836 60 3.9 7.3 3
Vallejo-Fairfield, CA 44,504 122 3.3 7.0 5
Napa, CA 61,483 13 6.0 6.9 6
Santa Rosa, CA 53,520 33 4.9 6.7 7
San Jose-Sunnyvale-Santa Clara, CA 81,592 3 7.4 6.6 8
Stockton-Lodi, CA 38,769 252 4.2 6.3 13
San Francisco-Oakland-Hayward, CA 79,206 4 6.1 6.3 15
Yuba City, CA 39,216 241 2.8 6.2 17
Modesto, CA 39,445 237 6.5 5.6 21
Sacramento--Roseville--Arden-Arcade, CA 49,639 63 4.6 5.2 34
Fresno, CA 38,323 264 4.8 5.1 37
Merced, CA 36,185 317 5.2 4.7 68

Another big difference between the inland areas and Silicon Valley was the large importance of government transfer payments (primarily in the form of health insurance subsidies through Obamacare), as well as government and healthcare employment to income growth in the Central Valley.  Since so much healthcare spending growth is related to government programs, I have combined transfer payments, and earnings from government and healthcare employment in the table below.  As shown in the table below, there is a stark contrast between the metro areas. 

Share of 2013-15 income growth from government transfer payments, and wages from government and healthcare jobs.
Merced 58.2%
Stockton-Lodi 54.3%
Sacramento-Roseville 48.7%
Modesto 41.6%
San Francisco-Oakland 19.0%
San Jose 15.7%
Merced and Stockton have particularly high growth because of expansions at UC-Merced, and the new CA Healthcare Facility for corrections in Stockton.  But the common element of all of these is that at least half of the total is due to Obamacare's expansion of Medi-Cal and private insurance subsidies.

While we don't know when or how much healthcare will change as a result of the election, it is clear that the economic impacts will be felt the most in the Central Valley.  

Thursday, November 10, 2016

Thoughts on the Economy and President Trump

Below is what I wrote in the Center's economic forecast about 6 weeks ago.  It still reflects my thoughts.

If Donald Trump is elected, the near term economic effects are highly uncertain. If he were to follow through on promises to impose tariffs on certain imported goods, threaten leaving the World Trade Organization, and restrict immigration, a Trump presidency would have negative effects on both the U.S. and global economy. However, other parts of Donald Trump’s proposals could stimulate the U.S. economy in the near-term and he is likely to want to do what he can to give the economy an immediate boost so that voters can feel the effect of his election. For example, he proposes a large tax cut, an even larger investment in infrastructure than Clinton, increased military spending without any offsetting proposals to significantly reduce government spending in other areas. If Congress were to go along with these elements of the plan, the economy would receive a near-term jolt from increased deficit spending while the federal debt would grow substantially over time. While stimulative in the short-run, the increase to the deficit will create long-run problems for the U.S. economy, especially considering that the current deficit is already very high by historic standards. Overall, the near-term economic effects of a Trump presidency are highly uncertain between the effects of global instability and domestic stimulus. However, the long-term economic effects of his approach are seen as negative in the view of most economists. 
While polls show slightly more voters trust Donald Trump over Hillary Clinton to manage the economy, no modern Presidential candidate has received less support from professional economists than Trump. Leading Republican economists who have consistently served as advisors to Republican Presidents, such as Martin Feldstein and Greg Mankiw, have publicly denounced Trump’s economic platform. Trump placed third behind Clinton and Libertarian Gary Johnson in a poll of the National Association of Business Economists. The Economist magazine lists his potential election as one of the top threats to the global economy. Trump certainly did not win over economists during the first Presidential debate when he criticized highly-respected Fed Chair Janet Yellen for “playing politics” with interest rates, raising concerns that he could try to reduce the independence of the Federal Reserve. 
I should note that the last forecast assumed a Clinton victory, so there will be changes in our January forecast.  By then, we may have a better idea of how great the potential is for domestic stimulus in the near-term.  A large tax cut seems a certainty, but will the Republican Congress go along with a big-spending Trump infrastructure plan?  We may also have a better idea of the speed and extent of unwinding Obamacare; protectionist, anti-trade policies; and foreign relations.  One thing is clear, the uncertainty over the 2017-18 economic outlook is much higher than it was a few days ago.

As for the Valley Economy, there are a few additional issues that loom large.  First, repealing Obamacare has the potential to have some significant negative economic effects in the Valley - you will be hard pressed to find a region that has seen a bigger change in the number of insured individuals and overall dollars flowing into healthcare.  Health has been one of the fastest growing sectors of the Valley economy in regional years, and this could slow substantially.

The agriculture sector could be hurt by a much feared "trade war."  If the U.S. starts implementing tariffs on manufactured goods as Trump has threatened, U.S. agricultural products would be a likely target for retaliation from trading partners.  Immigration changes could also affect agricultural labor markets.  The industry is already facing serious labor cost challenges from rising minimum wages and overtime rules, but a sudden change to immigration policy could hit the agricultural labor markets even sooner.  Some isolated parts of the Valley ag might see some benefits from relaxed environmental protection but the impact of these policies are actually much smaller than the political rhetoric around them suggests.  The larger industry-wide issues of trade and labor will be more impactful.

Finally, will the Valley see any of the much-hyped infrastructure wave.  Perhaps.  Tops on my list would be converting highway 99 to an interstate highway with a series of significant upgrades.