Thoughts on delaying the water bond

1. Is anyone happier about this news than the folks at the Environmental Defense Fund and Natural Resource Defense Council? I suspect that having "no position" on a major piece of environmental policy was going to become increasingly uncomfortable as the election grew near. The PPIC may be happy for the same reason.

2. Although I am sure that political strategy is probably the primary cause of delay, I have to wonder if some people in the administration, if not the Governor himself, were having some buyer's remorse about an enormous General Obligation bond. It is good that the Governor is putting the budget as a higher priority, because it is. I have no doubt that the more time he (and legislators) spend thinking about solving this budget mess, the GO bond will look worse and worse - and not just for political reasons, but for real human welfare reasons.

3. Lois Wolk had a great line, the bond is "not going to get better with age. It's not fine wine - it's just pork." Although it's a great line and attacking pork is an excellent political tactic, I don't get all that upset about a little bit of pork in the policy making process. My problem with the bond is that it's fundamentally bad policy even if the "pork" is removed.

4. There isn't any guarantee that the legislature will muster a 2/3 vote to get the bond off the ballot. Thus, it is still important to articulate why the water bond is terrible economic and environmental policy:

• The bond subsidizes water supply projects, and will result in artificially low water rates that encourage overuse and discourage conservation of a scarce natural resource.
• The bond substantially increases California’s debt beyond its current record level, and puts further pressure on the nation’s lowest bond rating that increases the cost of all public borrowing.
• Water bond annual debt service will exacerbate California’s long-run structural deficit, and will inevitably lead to higher taxes or cuts to general fund expenditures such as education.
• The most valuable water supply projects will still be constructed if the bond fails. Financially feasible projects will be appropriately paid for by the water users who benefit.

House Votes 409 to 5 to encourage tax fraud

The homebuyer tax credit has always been bad policy, but voting to extend the closing deadline is horrible. 409 - 5! Unbelievable. Those homebuyers who signed contracts before April 30, had a minimum of 60 days to close, and have known it from the beginning.

Nancy Pelosi says (emphasis added).

Up to 180,000 homebuyers will now receive the tax credit they deserve

Reuters also notes.

Critics say the three-month extension is an invitation for fraud, providing prospective home buyers time to back date contracts to a date before April 30 and subsequently closing on those contracts by the new September 30 deadline.

Count me among the critics. The credit has always been bad policy, but this just makes it worse.

Stockton City Council 10-point Action Plan for Employee Costs

I agree with this plan to create more realistic public employee costs, and I commend the City Council for adopting these principles. The document is 8 pages, and can be accessed here, see pages 53-60.

Key provisions are that employees need to make a contribution to their health and retirement benefits, salary levels should not be automatically tied to those paid by other, much richer cities like Huntington Beach, and more. Even if all these changes are made, city employees will still have a very good compensation and benefits package.

Are San Francisco Home Prices Really Up 19%

The Case-Shiller S&P home price index released today says San Francisco home prices are up 19% over the past 12 months. Earlier, Dataquick reported that median home prices were up 20% in San Francisco, but they warned that this was deceptive because it was influenced by the mix of what was selling.

The May median’s 20.1 percent annual gain reflects several factors, including the decline in foreclosure resales, price stability and modest price pressure in some areas, and the shift toward more high-end sales. Activity has picked up in the higher-cost areas in part because distress has increased over the last year and sellers have become more motivated and realistic.

Viewed another way, zip codes in the top one-third of the Bay Area market, based on their historical prices, accounted for 35.3 percent of existing single-family house sales last month – the highest in two years. Last month’s level was up from 31.6 percent in April and 27.2 percent a year ago. Over the past decade, the top third of the market averaged 32.1 percent of total regional sales, while the low point was 17.9 percent of sales in January 2009 and the high point was 43.5 percent in June 2007, just before the credit crisis began.

Case-Shiller is a quality adjusted, repeat sales index so it shouldn't be affected by this change in the neighborhood mix of sales, yet it still shows a huge change that parallels the median.

Zillow and Corelogic have other quality-adjusted price indices, and both show San Francisco prices are up about 6% over the past 12 months. That sounds far more realistic, and consistent what Dataquick is saying above.

It makes me wonder about the accuracy of the Case-Shiller index which I had thought was the best, and wished were available in the Valley. Maybe Zillow and CoreLogic are better indices, and they are available in the Valley.

In Sacramento, Zillow says home values are down 4.1% over 12 months, and CoreLogic says a 0.2% decline; but the median price is reported to be up 6% because of similar changes in the mix - more sales in higher priced areas and fewer foreclosure sales.

Finally, a viable principal reduction program.

Today, we got more details on the Treasury's "hardest hit" foreclosure prevention program. There are 4 pieces to the California program (see http://www.keepyourhomecalifornia.com/ for a description of the program and the state's proposal for the program to Treasury for more policy wonk details), but the 3rd piece targeting principal reduction is the key. California is receiving $700 million in funding, and expects to spend about 2/3 of the fund on the principal reduction program. Here is a brief description from the proposal (bold added by me):

The Principal Reduction Program (PRP) – CalHFA will provide capital on a matching basis with participating financial institutions to reduce outstanding principal balances of qualifying borrowers with negative equity to market levels needed to prevent avoidable foreclosures and promote sustainable homeownership. The PRP can also be used in conjunction with a loan modification that generates a positive outcome for the homeowner and lender. Funds would be available up to the benefit cap of $50,000 per household or the program balance remaining if the borrower has utilized either one or both of the UMA and/or MRAP programs. The goal of this program is to have a dollar-for-dollar match by the participating lender. In the event that there is less than a 100% match by the participating lender, the assistance will be structured as an interest-free, subordinate loan that may be forgiven over a three-year period. CalHFA will require that the current first mortgage loan-to-value (LTV), after principal reduction, does not fall below 120%.

I like this basic set-up and have endorsed something similar on many occasions. I hope most lenders will participate with the 100% match. Note, that this will not eliminate "underwater" homeowners, but only bring a mortgage balance down to 120% LTV. At this level, homeowners should be able to see a little light at the end of the tunnel and have their mortgage payment be more competive with renting a similar home. Thus, it ought to be enough to stop preventable foreclosures, although certainly not all foreclosures. Also note that the program won't be operational for several months.

I think there needs to be more money in this program (the proposal estimates it will only reach 46,000 California households, and there are something like 300,000 homes in California in the foreclosure process now, and well over a million who are currently delinquent), and the eligibility guidelines are a little too strict. For example it still requires borrowers to be delinquent, to prove "financial hardship" such as loss of job or income to qualify, and the income limits are a little too low.

It also rules out anyone who did a cash-out refinance of their home. I understand the rationale and sentiment against cash-out refinances, but these folks still have the same foreclosure incentive and create the same neighborhood externalities when they do - and not all cash out refinances were for very large amounts or to buy a Hummer. Why is someone who put 5% down and kept cash in the bank to begin with more worthy of help than someone who made a big initial downpayment and later used a cash-out refinance to access the funds. If we must discriminate against refinancers, I suggest making the program less generous for these folks, perhaps 115% LTV for purchase mortgage and 125% for a cash-out refinance. Remember, the point is not just to help those in need but to help the economy and reduce the negative neighborhood externalities that come with foreclosed homes.

I know this won't be popular, but I firmly believe this is a much better approach than the various home buyer tax credits.

If this is successful, perhaps additional funds and expanded eligibility guidelines could come in the future.

Do more Pacific employees live in Stockton than City employees?

Over the past month, there have a been a series of articles in the Record and a lot of discussion about how many city employees live in the city of Stockton.

According to the Record: 26% of Stockton firefighters and 45% of Stockton police live in the City of Stockton. Among other City employees, 69% live in Stockton.

For a project we are doing for the University that will be released this fall, we received data on the zipcodes of Pacific employees. (We don't have any more detail, so don't ask.)

Because a few zipcodes cross city boundaries, we don't have an exact percentage. If you assume everyone that lives in a zipcode that includes both Stockton and unincorporated areas lives in the city limits, then 71% of Pacific employees live in Stockton. Because some of these people undoubtedly live in the unincorporated ares, I would estimate between 60% and 70% of Pacific employees have a Stockton address, about 2 out of 3. About 85% live in San Joaquin County.

Thus, the numbers are similar to non-police and non-fire city employees; and I would suspect that it is similar to hospitals and other big employers in town.

Unemployment Friday

California's unemployment rate ticked down for the second month in a row, now at 12.4%, but I'm not about to change the name of this monthly post.

The state's payroll report was very poor in the private sector. Take away the Census, and we have no change to private payrolls. It's really been about 6 months of moving sideways, there is no sustained positive momentum. I think that will finally change next month, and it better because the Census jobs are temporary and local government cuts will be hitting soon.

San Diego, Orange County, and San Jose are the three regions in the state that have firmly established a trend of positive job growth. San Francisco finally had a solid monthly report, after a disapointing start to the year, and should be poised to join San Jose in a more consistent recovery mode. The East Bay continues to lag in the Bay Area.

Unemployment rates are coming down in the Valley now that the agricultural season has ramped up, but remain depressingly high. Much like the overall statewide picture, the private, non-farm sectors remain very flat. Retail, construction and hospitality are not picking up as much as we normally see in May, similar to the weak holiday season.

Tracy gives $2.75 million in public money to Macy's

The city of Tracy continues to be an economic development "innovator." They started last year by giving $500 publically funded gift cards to people who bought cars in Tracy to protect their local dealerships from the wave of closures. Elk Grove copied the idea, and I believe some other cities did as well.

Now they have taken the concept of subsidizing retail to the next level. Some quotes from the Tracy Press.

The West Valley Mall will soon welcome a Macy’s department store following a unanimous City Council vote earlier tonight.All five council members in a special session approved giving $2.75 million in city money to the department chain so it can renovate a 100,000-square-foot space vacated by Gottschalks in June 2009...

The plan put forward by city staff and approved at tonight’s meeting envisions that sales tax receipts from Macy’s will pay back Tracy’s investment within 20 years...

Council members were unanimous in their enthusiasm as well as their vote, and all praised the deal.“I think this is definitely something that needs to be done,” said Councilman Steve Abercrombie.Mayor Brent Ives said it’s a decision that shows the city is serious about economic development.“If the Central Valley’s going to recover, it’s going to start here in Tracy,” Ives said. “I just didn’t think it would happen during the worst economy in decades.”

Unanimous, enthusiastic support.

The insanity of California local government is that the proposal is rational. After all, city governments can receive sales tax but not income tax and are limited in property tax. Thus, they have a strong incentive to promote sprawling retail development which takes revenue from their neighbors, while encouraging people - described by many in local government as those undesirables who demand government services - to live somewhere else. Thus, in California, subsidizing a retail store could conceivably "pay for itself", whereas investing in the quality of life for residents is just cost. The proposal also seems quite popular with the locals, who consider good shopping options part of "quality of life."

I am increasingly convinced that it would be wise for California to take away the right to sales tax from local governments, perhaps in exchange for for locally generated income and property taxes.

From a regional economic development perspective, these kind of maneuvers are useless and self-destructive. Thus, I disagree with the Mayor's comment that suggests this move is part of the Central Valley's recovery. It does nothing to help the Valley, at best, it just helps Tracy at the expense of the neighbors.

Finally, I should add that I doubt that this will "pay for itself" as claimed. From another article, it looks like they are just applying 1% tax to the stores' expected $20 million in annual sales. That's $200,000 in sales tax per year which will add up to $2.75 million in 20 years if you assume some inflation. And if you assume that none of those sales are diverted from other retailers in town. And if you assume no other retailers (or Macy's) would have ever filled this market void without the subsidy.

Congratulations California Voters

California voters showed good judgement in rejecting Propositions 16 and 17, despite expensive and deceptive campaigns by PG&E and Mercury Insurance, the companies that stood to profit from these initiatives.

I predict California voters will show similar wisdom in the fall and vote down the Water Bond despite what is sure to be an expensive and deceptive campaign by water agencies, much like we have seen from PG&E for Proposition 16.

Uncertainty and the latest Wanger Decision

According to my brief review and the commentary of others, it seems uncertainty was critical in Judge Wanger's recent decision in favor of water exporters and against Delta pumping restrictions from the salmon and smelt biological opinions.

The key uncertainties seem to be related to science. Judge Wanger acknowledged economic losses to both the farming and fishing communities, but he determined that there was uncertainty as to whether increased pumping this month would substantially harm the endangered fish. Following that logic, I think we should also wonder about the certainty of gains to the "human environment" from increased pumping.

As noted by others, the Judge seemed to accept serious accusations of not just economic damage, but social ills such as domestic violance and poor school performance were blamed on the biological opinions with little more than anecdotal evidence to back them up. There is at least as much uncertainty, if not more, about whether - and how much - the biological opinions are responsible for these problems. Most importantly, where is the definitive proof that an injunction against the biops will actually help these long-standing local issues? Consider the following:

1. The west side is the poorest place in California with the highest unemployment, and high rates of social problems even when water deliveries are high. In fact, there is lots of long-run evidence that large supplies of irrigation water are positively correlated with higher unemployment, poverty, etc.

2. There are lots of "other stressors" on the region's economy related to the recession and other factors. Construction in the area is down more than 90%, and food processing plants in the area closed due to planting decisions unrelated to water. In addition, most of the reductions in water deliveries in 2009 were due to drought, not endangered species protections.

3. Although there is no doubt that specific agricultural operations endure financial losses when water is restricted, there is a lot of uncerainty about how much it impacted the regional agriculture industry, other farmers may have profited from Westlands woes. In addition, how much of the income that was lost normally flows out of the community through non-local farm owners and migrant workers. One could argue that the construction and food processing closures may have much higher local impacts per dollar of output. In addition, how much of the local unemployment was driven by unemployed construction and service workers crowding back into the agricultural labor market?

4. What are the hard facts on increased crime and education problems, and how can they be definitively linked to water supplies? As one data point, California Department of Education shows school test scores in Mendota in 2009 are substantially higher than in 2006 under full water deliveries.

There are even more sources of uncertainty, but I'll stop there.

Just as a scientist may not be able to definitively say that reduced pumping in a given period will help fish stocks recover, I am confident that no social scientist could definitively say that increased water pumping will substantially help the serious economic and social woes that have long plagued the area around Westlands and that have increased substantially since the CVP started delivering water to the area.

It will be interesting to see if this decision is appealed.

Disclosure: I submitted a declaration in support of Earth Justice and the Natural Resource Defense Council's defense of the biological opinions, just as I did in May 2009. In 2009, Westlands asked Richard Howitt of UC-Davis to challenge my declaration and Judge Wanger referenced this heavily in his 2009 decision. This year - after much back and forth debate on the economic effects of water shortages - I am told that Westlands did not submit a declaration from Dr. Howitt or challenge my declaration with other experts, and the Judge has now acknowledged off-setting economic harms. Obviously, it wasn't enough to change the outcome of the case, but at least it moves the issue more squarely onto the scientific and legal questions where it should be.

89% of Elk Grove Teachers Approve Concessions

These sort of negotiations between teachers and school districts are on-going around the Valley right now. All of them are unique, so they can't be directly compared.

I was expecting the Elk Grove Teachers vote would be a close one, and was suprised by the 89% approval. Lodi teachers voted down a different set of contract concessions by a 4 to 1 margin in April and my understanding is there will be a much larger level of lay-offs and much larger class sizes in Lodi Schools (which includes much of North Stockton).

From the Sac Bee:

Elk Grove Unified School District teachers gave overwhelming approval Tuesday night to a two-year contract that included a pay cut, nine furlough days, an increase in their medical co-pay and the suspension of an annual bonus from lottery funds.
There was 89 percent approval for the contract, said Tom Gardner, president of the Elk Grove Education Association.
In return, the district agreed to cap class sizes in kindergarten through third grade at 24 and save 210 teacher and librarian jobs.