Tuesday, December 21, 2010

California Population is 37.25 million according to Census 2010

Today's Census 2010 results have enormous implications for policy analysis in California.  Most of the news will focus on redistricting and political implications, but the biggest impact could come through the effect on major policy analysis.

Since the last Census in 2000, a chasm has opened up between the annual population estimates for California issued by the Department of Finance (DOF) and the Census Bureau.  The gap stood at about 1.5 million people, and was driven by differences in how the two demographic projections measure migration.  Wonky types in the state have been debating this for years and have been waiting for today's once per decade enumeration to settle the dispute.  Among researchers in the state, the majority such as Steve Levy's Center for the Continuing Study of the California Economy, state agencies, and the PPIC have projections that follow the Department of Finance; whereas our Center and others have believed annual Census Bureau estimates to be more accurate and have based our projections on these.  (The difference is based on migration rates which Census estimates with addresses on IRS tax returns, whereas DOF primarily uses drivers license data.)

Since so many of our projects rely in part on population projections, I am pleased that the Census 2010 results released today closely match the projections we have been using.  On a practical level, it saves a lot of work adjusting and reestimating models, and means we won't have to back track from conclusions drawn from them.

While some will moan that these estimates are bad for California since we won't gain Congressional clout, it is actually a win for California policy analysis to get away from the overly-high DOF population estimates.  The DOF estimates and projections are being used to justify big public spending proposals such as a peripheral canal, dams, high-speed rail and more.  Let's hope the Census numbers will finally get all the various analysts to revise down their demand projections to more realistic levels, and take a second look at these projects and see if they still make sense with fewer people to both use the services and pay the bill.

The first to fix their models should be the PPIC/Davis water wonks.  As I pointed out over 2 years ago, they were exagerrating the already overstated CA DOF projections.

Monday, December 20, 2010

Census Bureau finds Mendota unemployment is 16%

A few days ago, the Census Bureau released data on the economic characteristics of small towns for the first time since the 2000 Census.  The data come from the American Community Survey which has replaced the long-form in the Decennial Census, and reports a 5-year average value from a year-round survey conducted between 2005-2009.

It reports the Mendota unemployment rate at 16%, link here.  This will no doubt come as a shock to people following California water issues who have been hearing about 40% unemployment in this town for the past two years, but it is not surprising to those of us who have been explaining that 40% is a bogus number, crudely extrapolated from 2000 Census results that measured Mendota unemployment at a stunning 32%.  While Census is now reporting a much smaller unemployment rate, the reported income levels in Mendota remain miserable, under $9,000 per capita in the new release with over 50% of children living below the poverty line. 

Why did the Census estimate of unemployment drop from 32% in 2000 to 16% for 2005-2009?  It results from an improvement in methodology to a year-round sample, not an improvement in the Mendota economy.  The Census' new ACS is a year-round survey, whereas the old decennial Census figures were a snapshot of conditions on April 1.  April 1 is at the tail end of the high-unemployment season in Valley farming areas, just before conditions begin improving with the season.  The EDD unemployment estimates people have been citing have been inflated because they were based on an April 1 unemployment proportion, and then applying this to data year round.  It therefore exagerrates unemployment estimates in Mendota and all farming communities during the rest of the year.

As I have stated repeatedly, the only valid current unemployment rates are at the County level.  The official, monthly County level unemployment estimates from EDD/BLS match very well with what the Census Bureau reported from 2005-2009.  For example, Fresno County unemployment averaged 10.2% from 2005 to 2009, and the new Census 5-year average is 10%.  However, California EDD estimates for small farm towns are wildly off due to the crude methodology.  (EDD staff have told me privately that the crude technique was created because a local area unemployment estimate was needed to distribute federal funds, the local area estimates were never intended to be used for policy purposes, and the estimates come with a warning about the untested method.)  The error is now apparant since California EDD has reported average Mendota unemployment from 2005 to 2009 at 29% with their crude formula during the same period the Census measures 16% with a real local survey.  As discussed above, the EDD estimate is wrong because it applies a seasonally high unemployment proportion from April 1 to all months to make a crude guestimate of unemployment rates from County data.  EDD will eventually revise their city level estimates to the new Census data, and their reported unemployment rate for Mendota will drop remarkably.  They should be sure to revise it backward to 2005 so that there isn't any misinterpretation that the recent rains caused unemployment to drop.

This post should not be used to minimize the problems with unemployment and poverty in Mendota.  It is a large and disturbing problem, but it is also a chronic problem not something created by environmentalists.

Thursday, December 16, 2010

Financing a Big Delta Tunnel will Require Big Water Exports

For the past two years, I have said that "beneficiary pays" financing of the peripheral canal only pencils out if it increases water deliveries to record levels.  After reviewing Wednesday's state and federal BDCP updates and subsequent news stories, it is becoming more obvious that this is true.

These quotes from Mike Taugher's article are particularly revealing.
"We need to know that the yield of the project that is going to be proposed is at a level that is cost-effective for us," said Jim Beck, general manager for the Kern County Water Agency...

Still, the state report suggested that water districts in the San Francisco Bay Area, San Joaquin Valley and Southern California could receive 5.4 million to 5.9 million acre-feet a year on average under the plan. The federal report said it appeared that the plan could result in more than 5.2 million acre-feet a year.

That's an improvement over the 4.7 million acre-feet that can be delivered on average with new restrictions in the Delta but less than the 6 million acre-feet a year delivered from 2000 to 2007.

"If it's under 5.9 ... it will require our water users to re-evaluate whether BDCP meets their water supply objectives," Beck said.
Some back of the envelope calculations reveal that the exporters' concerns are very valid.  At $13 billion and over $80 million annual operations costs, the annual costs of operating the 15,000 cfs tunnel for exporters will be about $900 million per year.  As Taugher reports above, the BDCP highlights report reveals that conveyance is only expected to increase diversions between 0.7 and 1.2 million acre feet.  Thus, the each additional af of water delivered because of the canal will cost about $900 per af.  And that only gets the water to Tracy, delivery from there to end users and treatment for urban users further increases costs.  That is well beyond the ability of agricultural users to pay, and it makes conservation, recycling and desal. look a lot cheaper to urban users.

Of course, most of this is fixed costs, so if deliveries were increased by 2 maf or more, the unit costs drop quickly.  This is a simplistic calculation worthy of no more than blog publication, but it is nonetheless revealing. (I am aware that the project adds value not just through additional water, but by increasing reliability or the risk of disruptions...but conservation, water recycling and desal. provide equally if not more reliable water.)  It is rather obvious that the pressure to increase deliveries beyond whatever limits will be agreed upon in the BDCP will be enormous.  And if it doesn't happen, it is likely that agricultural water exporters will be unable to meet their financial requirements and there will be calls for billion dollar taxpayer subsidies or a lot more costs will be dumped on Socal urban users than they expected.

Why, after 4 years, can't a 100 page document on the BDCP take its financial analysis one baby step forward?  Some real economic analysis early in the process would have helped create more realistic expectations on the part of participants and greatly increased the probability of reaching a solution.  (I also note that Met's new water plan says they are only planning on a $2.3 billion contribution to the Delta plan.  Is that realistic?  Who do they think is going to come up with the other $10.7 billion the BDCP allocates to water exporters?)

This is part of the reason I have been so critical for so long of the economic analysis in the 2008 PPIC study that exagerrated the willingness of exporters to pay for a canal as well as the costs of "doing nothing".  In doing so, they gave a lot of people false expectations about the financial viability of a BDCP type plan.  I am disapointed in the way the federal document seems to cite the 2008 PPIC report as the sole, infallible source of Delta analysis.  Indeed, my pastor typically cites more non-Bible sources in his Sunday sermons than the federal government cites non-PPIC/Davis sources on the Delta.  The PPIC report does not follow the federal governments own guidelines for cost-benefit analysis for infrastructure, and exagerrates the costs of alternative water supplies among other problems.  According to PPIC, water exporters should be willing to pay for a $20 billion canal AND ecosystem improvements.  So, either these exporters are lying or PPIC's calculations were wrong.  I believe it is the latter.

(lightly edited from original at 8 am)

Wednesday, December 8, 2010

Tax Deal Changes the 2011 Outlook

I am surprised at the size of the tax deal, particulary the 2% payroll tax holiday for 2011.  Combined with the accelerated depreciation component, that is over $200 billion in unanticipated stimulus for 2011 (most of the other components of the deal were anticipated or relatively small).  That's a big deal.

In October, we significantly revised down our forecast for 2011 and 2012, in large part due to anticipating contractionary government policies.  In the Valley, we would probably benefit more if some of these federal dollars were spent on infrastructure and further props to education and health and human services funding as in the original stimulus.  Still, the payroll tax is a substantial injection of funds into the wallets of households, particularly middle-class and upper middle-class households.

The big winners are people like me.  The Making Work Pay Credit in the original stimulus maxed out at $800 for married households and phased out at higher incomes, so that people like me received virtually nothing.  With the 2% 2011 payroll tax holiday, a married couple with 2 wage earners and household income in the mid-$100s is looking at an unanticipated $3,000 increase in our disposable income in 2011.  What should we do with it?  (It will probably go towards a needed new car I have been postponing.)

A similar married household with $40,000 in wages will see a $800 reduction, the same as the credit in the 2009 stimulus bill, and lower wage earners will see even less. 

Of course, this is all paid for by adding it on to the national debt, and it is going to be hard for Congress to put the payroll tax back where it was before.  That creates a number of risks.  There is no free lunch. 

But our forecast for 2011 is brightening a little, and with it my mood for the holidays.

Monday, December 6, 2010

Sacramento Bee on Wastewater Rates

Like a good reporter, Matt Weiser is skeptical of SRCSD claims about the magnitude of increasing wastewater rates in last week's Sacramento Bee.  However, if the Bee is looking for government agencies being dishonest about Sacramento wastewater rates, they should also investigate the claims of the regulator, the Central Valley Regional Water Quality Control Board.

The Sac Bee article about SRCSD begins
A letter hitting most residential mailboxes in the capital region this week offers startling information: It soon may cost three times more to flush your toilet.

That is, if you agree with the numbers
The article goes on to suggest that rates may not actually increase by $40, it looks like they could increase by 2.5 times instead of triple ($30 per month more rather than $40 per month), although there is a lot of uncertainty at this stage.  I agree with this, it probably won't be as bad as SRCSD is saying, although their scenario is not wildly exaggerated  (SRCSD would have to start weaving tales of thousands of homeless Sacramentans to approach the exaggerations routinely made by water exporters about regulatory costs). 

In the article, Central Valley Regional Water Quality Control Board staff also complain that the flyer didn't describe the environmental benefits from the upgrade.  That's a fair comment, but after reviewing many documents the Regional Board's staff uses to justify the upgrade, they are also guilty of producing one-sided analysis that fail to properly analyze the economic impact of their rulings on communities they regulate.  Even more bothersome is the way they misrepresent the small amounts of information they do present to justify the costs of upgraded treatment. 

1. The board's staff compares current rates in communities that they have already required to upgrade their plants to the projected rates in Sacramento.  It is an inexcusable apples to oranges comparison.  Many of the communities for which they cite current rates have recently approved large wastewater rate increases to pay for plant upgrades that have yet to affect current rates.  I am most familiar with Stockton which the regional board notes has monthly fees of $22.75.  However, Stockton just approved a large rate increase to pay for an upgraded plant that will nearly double wastewater costs between now and 2015 to around $40 per month.  Lodi is similar although they are already halfway through the 5-year process of roughly doubling rates.

2.  The board's states in reports and correspondence with Senator Steinberg and others that "other communities that have completed the plant upgrades and are operating the upgraded systems without irreparable economic harm."  Really?  That is a pretty strong assertion for which they provide no evidence, and have conducted no assessment.

It is almost certainly a false statement.  We have yet to see the full impacts of higher rates in most areas so any conclusion to this effect would be premature.  As one current example of a place where high wastewater rates have already hit, the City of Placerville just voted to increase sales taxes to subsidize increased wastewater rates that were hitting low-income residents hard.  While this has allowed them to off-load some of the costs on non-residents and reduce the regressive effect of the rate increase, their wastewater costs are now being paid from a revenue source that typically supports general fund services like police, fire, parks and libraries who will now be unable to use sales tax increases to offset cuts to these vital services.

3.  Most annoying to me, the Regional Board staff misrepresents Pacific's economic impact reports (most notably on page 39 of this report).  They do not cite the main result of the study, an annual employment loss of 976 jobs and annual income loss of $246 million over the next 30 years.  Strangely, the only thing they report is a conservative assumption that we made to facillitate the calculations, "increased wastewater rates will not be significant enough to affect the location, operation or investment decisions of businesses, and that lost corporate income flows outside the region." This is presented in a way to suggest that we disagree with the local building industry.  They left off the fact that we had clearly labeled this assumption as conservative and a reason why our impact estimate could be too low.  

I was surprised that they also cited our other reports on the effects of Delta problems on other stakeholders (Valley farms and salmon fishing), specifically citing the losses to income and employment that have been sufferred.  I would be pleased by that if they had reported the Sacramento impacts in the same way, but they don't.  If they did, it would show that the negative impacts on Sacramento for the proposed permit are actually larger.  [Note: I called CVRWQCB staff last week and offerred to explain how to properly report and interpret the results to our study and brief their board, but the call was not returned.]

I am not saying that Sacramento shouldn't make some upgrades to their wastewater treatment.  Maybe they should go as far as the Regional Board proposes, I can't say.  But neither can the Regional Board without making an honest, good faith effort to properly report and assess the economic impacts on both Sacramento and other cities affected by their previous rulings.

Thursday, December 2, 2010

Valley Mayors on High-Speed Rail

I have resisted stepping into the high-speed rail issue, despite the tempting targets of the thinly documented but often repeated claim that HSR will create 450,000 permanent jobs, and optimistic ridership projections.

If we are going to do it, we need to be smart about it (such as taking another look at the Altamont vs. Pacheco pass decision).  Being smart about it is also the point of the op-ed by north Valley mayors, including Stockton's Ann Johnston, in today's Sacramento Bee.

California is challenged with building a technological wonder rivaling the economic and social impacts of the Transcontinental Railroad. Instead, the California High-Speed Rail Authority appears set on building a rail line to nowhere that only provides critics with 66.4 miles worth of reasons to attack the project.

The staff proposal runs from the rural region of Borden with a couple of hundred people south of Madera to Corcoran – population 25,000, including 13,000 inmates.

Sunday, November 21, 2010

Will State Leaders Ever Get Real About Peripheral Canal Costs?

The Director of the California Department of Fish and Game touts the peripheral canal in today's Sac Bee without mentioning costs.

A few days ago, Natural Resources Agency Secretary Lester Snow sends a press release about the BDCP without mentioning costs.  The release says the new BDCP reports "will also identify issues that require further resolution, including additional scientific analysis to improve upon water operations for Delta fisheries, ecological metrics to measure progress, and ongoing development of an adaptive management plan."  No cost or financing on that list either. 

How can you be a state agency head in November 2010 and push a $13+ billion public works project without even mentioning cost?

Tuesday, November 16, 2010

Fresno Bee Illegal Immigration Series

The Fresno Bee is running a week-long series on illegal immigration titled, In Denial.

So far, I think it's good.  Each day has a feature story, and two shorter supporting stories.  The biggest economic topics: budgets, jobs, visas, consumers are in the days to come and should make for good blog material.

If you haven't seen it, here is the link.

Would BDCP staff accept "dots" instead of dollars in their paychecks?

For a process that makes all sorts of high-minded statements about being guided by science, the flim-flam that passes for economics in BDCP is stunning.  Here is the summary of the cost assessment in the BDCP options evaluation. (table E-2, page 13 of executive summary).  Options 3 and 4 include isolated conveyance, a peripheral canal/tunnel.  4 dots is the highest ranking, 3 dots second highest, 2 dots is third highest, and 1 dot is the lowest ranking.

I thought the canal/tunnel had high costs, but according to BDCP, it is the choice that minimizes costs.

How did they do it?  A look at the methods document is revealing.  Instead of adding up dollars, they used unique rating scales for each cost category, thereby converting dollars to "dots" with an arbitrary, subjective scale.  Here is an example of the scale they used (from page 2-59 of the assessment).

Construction Costs Rating Scale:
High Rating = cost less than $1 billion
Moderate Rating = cost likely $1 to 3 billion
Low Rating = cost likely $3 to 5 billion
Very Low Rating = cost likely greater than $5 billion

Reduced Downstream Water Treament Costs Rating Scale:
High = greater than $2 billion
Moderate = $1.5 to 2.0 billion
Low = $1.0 to 1.5 billion
Very Low = less than $1 billion

Apparantly, BDCP analysts reject the notion of assessing all costs with a consistent, uniform measure (dollars) that happens to be the same units that those costs will be paid in the real world.  They reject the idea of using the units utilized by all credible economic assessments and budget analyses.  Instead, it is better to slice the costs up into categories, apply arbitrary and inconsistent rating scales to each category, qualitatively assess the results, and then assign them a ranking. 

It reminds me of those Wall Street geniuses who divided up and rebundled all those sub-prime mortgages into securities that magically made all the risk go away.

What a bold scheme.  A cost category that is unfavorable to your preferred outcome can be assigned $2 billion between increments, whereas a category that is favorable to your preferred outcome can be arbitrarily assigned $0.5 billion per unit on the rating scale.  Even better, we can assign all costs exceeding an arbitrary threshold to the lowest/highest rating.  Thus, if the canal ends up costing more than $5 billion, say $8 billion, $13 billion, it doesn't matter at all, since everything above $5 billion is in the same rating class.

I wonder if this clever financial innovation can be used when it is time to pay back the bonds issued to finance the BDCP.  If Wall Street bond buyers need a demonstration project to ensure it works, I recommend we use BDCP staff salaries as a pilot program, and issue paychecks in dots instead of dollars.  We can redeem the "dots" for 25 cents on the dollar, using the same arbitrary "exchange rate" used in the BDCP options analysis.  Also, mirroring the options evaluation, anyone earning more than a $100,000 per year will receive a fixed $25,000 payment since all salaries over the threshold are in the "very high" category and treated the same. 

There are even more issues with the cost analysis, from the relevant cost categories that were eliminated, the double counting of issues already assessed for other criteria (cost is one of only 17 criterion used), to the comparison of "economic impacts" with direct costs as if they are the same thing.

Yes, I know the options evaluation was done in 2007, but it remains a critically important assessment.  This is the analysis that was used to conclude isolated conveyance was the "most promising" option, a statement that BDCP participants had to accept to be included in the process.  It is the analysis that was used to justify the singular focus on isolated conveyance from the beginning.

If (when?) BDCP fails, it will most likely be due to excessive costs and the lack of a real financing plans.  Blame will be placed on the recession and other unknowns, but these assessments reveal that BDCP never treated costs or economics seriously from the beginning.

On second thought, I've got to try this with my wife.  "Honey, as you can see in Figure 3, for your new car, a cost over $20,000 gets a high cost rating, but for my new car the scale shows that it has to go over $80,000 to get rated as high cost.  Using this scientific scale, it is clearly optimum for us to get a BMW for me and a KIA for you.  You might think it's unfair, but this is the same process used by the largest, and most complex habitat conservation plan in history that is committed to scientific rigor.  Trust me."

Wednesday, November 10, 2010

Sacramento Wastewater Treatment Plant: Updated Impact Report

We have updated our assessment of the cost of upgrading the Sacramento Wastewater Treatment Plant as would be required by the tentative discharge permit under consideration by the Central Valley Regional Water Quality Control Board.  Over the next 30 years, the report finds that meeting the requirements of the draft permit would reduce Sacramento area incomes by an annual average of $246 million and reduce employment by 976 jobs in an average year.  While the construction and operation of the advanced treatment facility will create some jobs and income, these gains are more than offset by the negative impacts of a 140% to 210% increase in wastewater bills and fees on Sacramento households and businesses.

Link to full report.  The executive summary is below.

Ecological problems in the Sacramento-San Joaquin Delta have raised concerns about the discharge from the Sacramento Regional County Sanitation District (SRCSD) wastewater treatment plant that serves most of Sacramento County and West Sacramento in Yolo County. The Central Valley Regional Water Quality Control Board recently released a Tentative NPDES Discharge Permit that would require over $2 billion in upgrades to the Sacramento Regional Wastewater Treatment Plant. This report evaluates the economic costs to the Sacramento region of complying with tentative permit. All costs and economic impacts in this report are measured in 2009 dollars.

The project would require nitrification, denitrification, microfiltration, and UV disinfection. The capital cost is estimated at $2.083 billion, and operation and maintenance of the completed facility is estimated at $77 million per year. We project that the project will require SRCSD to generate an additional $239 million annually through increased rates and fees. SRCSD is projecting even higher rate increases, because they anticipate larger debt coverage requirements to maintain their bond rating and continued slow growth in their service area. The range of potential rate and fee increases is as follows:

• The typical Sacramento household wastewater treatment bill would increase between $28 and $42 per month ($336 to $504 annually) from their current level of $20 per month.
• Government, commercial and industrial users would also face proportional wastewater treatment cost increases between 150% and 200%.
• New development wastewater treatment impact fees would increase from $7,450 to between $15,000 and $35,000 per ESD (equivalent single family dwelling). In-fill development impact fees would increase from $2,800 to between $6,000 and $13,000 per ESD.

In addition to higher bills, the total economic impact of the project was assessed by estimating the negative effects of reduced disposable income on consumer spending, the negative effects of reduced construction activity, and the positive effects of building and operating the wastewater plant. Considering all the effects, the average annual economic impacts over the 30 year analysis period on the Sacramento Region are:

• Annual income loss of $246 million.
• Annual employment loss of 976 jobs.

This is a conservative assessment of regional impacts. SRCSD estimates rate increases will be even larger than our projections. We also assume increased impact fees will only have a small effect on the amount of new development over 30 years, and only reduce the average output of the construction industry by an amount equivalent to the increased fee payments. While the impact on development over 30 years will be relatively small, the effect will be greatest in the near term, pushing back the date at which many development projects become financially feasible for several years and delaying Sacramento’s recovery from the recession. The report assumes no effect on local electricity costs, although the project will generate a substantial increase in SMUD’s electricity demand. We assume increased wastewater treatment rates will not be significant enough to affect the location, operation or investment decisions of businesses, and that lost corporate income flows outside the region. Due to these conservative assumptions, the negative impacts could be larger than we estimate. On the other hand, the negative impacts could be smaller than we estimate if less advanced, lower cost treatment options suggested by Central Valley Regional Water Quality Control Board consultants were developed in more detail and proven to satisfy regulatory requirements as well as the scale and site requirements of the SRCSD plant.

The results of this study inform planning and regulatory decisions regarding the San Joaquin-Sacramento Delta, and can be compared to analysis we have conducted on other aspects of the Delta issue. In a recent analysis conducted in cooperation with UC-Davis researchers, we estimate that reduced agricultural water supplies due to Delta pumping restrictions to protect endangered species result in an income loss of $72 million and the loss of 1,400 jobs in the San Joaquin Valley. We have also estimated that the closure of the salmon fishery in 2008 and 2009 created an annual loss in California of about 1,800 jobs and $120 million in income. Our initial analysis of Sacramento wastewater treatment upgrades was limited to nutrient reduction, and we estimated an average loss of 390 jobs and $94 million in income. The $246 million estimate of lost income from the Tentative NPDES Discharge Permit for Sacramento are more than double the loss estimated in these other cases, whereas the job loss is lower since sewer impacts are distributed across hundreds of thousands of households rather than being concentrated on a low-wage industry such as agriculture.

Tuesday, November 2, 2010

Our Katrina? More like our Dennis.

Tom Philp, executive strategist for the Metropolitan Water District, is the latest to compare a seismic-induced Delta flood to Katrina.

Katrina is a bad numerical comparison, but the exploitation of the greatest American tragedy since 911 to push his employers' business agenda is offensive.  Are Tom Philp and Met comparing dead grass in an LA lawn to Americans dying in the Superdome?

His post emphasizes water supply, and does not mention the potential loss of life or property in the Delta region which is the only loss that is comparable to Katrina (in type not magnitude).  The tunnel solution he pushes in the post does nothing to protect against Katrina-type losses (lives or property in the Delta), it would just protect some of the exporters water supply.  In fact, the agenda Philp is pushing explicitly recommends letting large chunks of the Delta be lost in Katrina-type floods because fixing the levees is too expensive.  While I don't advocate unlimited spending on Delta levees, if there is anyone who has a legitimate case to invoke Katrina to support their Delta cause, it would be the people living in the Delta who want more public investment to upgrade levees.

On to the numbers, Katrina killed nearly 2,000 people, and caused $125 billion in direct property losses.  I have read the studies Philp and others reference, and it looks to me like the comparable property damage and fatalities of the big Delta earthquake scenario is about 1-2% of Katrina.  It might get to 3-4% if you added in crop losses.  It would be a tragedy, but in the low range on this NOAA list of the 96 largest U.S. weather disasters over the past 30 years.  A catastrophe for sure, but a manageble one.

Yes, I know the state's study says there could be as much as $40 billion in losses from a Delta earthquake.  But that number includes the value of lost services (such as what people are willing to pay to keep their lawns green), estimated multiplier effects from crops not grown, etc.  A comparable number for Katrina would include losses for all sorts of business transactions that did not take place as a result, plus multiplier effects.  A comparable total from Katrina would easily be in the trillions and still increasing five years later.

In the future, I hope Philp uses more correct and relevant comparisons to California natural disasters.  From this chart, the Valley freezes, the 1995 floods, and wildfire outbreaks that occur every few years would be most comparable.  The linked chart doesn't include earthquakes, but I believe this Delta quake scenario is a lot less costly than the 1989 and 1995 California earthquakes too, so the freezes and wildfires seem the best comparisons.

At least he used a question mark.

Thursday, October 28, 2010

Is this headline in California's future?

$9 billion project now tunnel to nowhere
New Jersey governor says state too broke 
Trenton, N.J. (AP) - The biggest public works project in the U.S. - a $9 billion-plus train tunnel connecting New Jersey and New York City - is dead in its tracks...
It also leaves New Jersey with nothing but a $600 million hole in the side of the hill.
(headline on page 6 of today's Stockton Record, no link available)

The obvious comparison is the $10+ billion Delta water supply tunnel envisioned in the deceptively titled Bay Delta Conservation Plan (BDCP) that still doesn't have a credible financing plan or economic analysis to justify the cost. 

Governor Christie is much admired by Meg Whitman and was out here campaigning for her.  He is also discussed as a potential Republican nominee for President.  California (both its government and its households) is a lot more "broke" than New Jersey, and has a weaker economic outlook.

The apparant refusal of BDCP to even analyze lower cost alternatives, including but not limited to a smaller tunnel, is simply bad government.  [Afternoon update: I am encouraged that the new FAQs posted by the BDCP state clearly that they in fact are evaluating, smaller tunnel options.  I had heard otherwise, but perhaps that is just what certain interest groups are urging them to do.]

Friday, October 22, 2010

Unemployment Friday

Another month passes, at California unemployment is still stuck at 12.4%.  As reported earlier this week in our new forecast, we now expect unemployment to remain at or above 12% through the first half of 2011, and not drop below 10% until the end of 2013.  Yes, that is more than 3 years from now.  At 13.808 million, California payroll jobs reached a new low for this cycle, and is now 250,000 jobs below where we were when the recession "officially ended" in June 2009, and 1.4 million below the 2007 peak.  Most losses are now in local governments and schools, although construction also has yet to end its 4 year slide.

The bright spot continues to be San Jose, the only place in Northern California that is clearly in recovery mode.  It is being totally driven by the bounce back in the computer/tech sector, with both computer manufacturing and computer system design jobs up 5% over a year ago.  Temp. employment services (likely related to the computer bus.) and private universities are also posting strong numbers.  With unemployment in San Jose still topping 11%, it will be a while before their renewed growth starts spilling over to the rest of the region in a big way.

San Francisco also posted its first solid monthly report since I can remember.  SF has been the biggest disapointment through the first year of recovery, as I had expected it to show a pattern more like San Jose.  Scientific and professional services in the San Francisco area are finally showing the gains we have been anticipating.  Don't get too excited, SF only gained 1,000 jobs back this month, and is still way down from a year ago.  It will take more than one good report to clearly show a new trend.

It is in the Valley where the reports turn uglier, and it isn't surprising given the dependence of these areas on government and construction, and the relative absence of technology, R&D, and other areas fueling growth.  Sacramento and Stockton took another significant step back this week, and unemployment rates across the Central Valley are all over a full percentage point above last year's level.

Thursday, October 21, 2010

Delta Stewardship Council Should Ignore the Water Contractors' Protest Against the Environmental Water Caucus

I just read the letter the state and federal water contractors wrote to the Delta Stewardship Council urging them to ignore the Environmental Water Caucus (EWC).  I found the second sentence in the letter especially interesting, and completely misleading.
There is no need for the Council to revisit that which was reviewed by the Delta Vision process and has been evaluated carefully by credible independent analysts in recent years... (note: the analysts they refer to repeatedly in their letter is the PPIC and the 2008 Comparing Futures report)
Much has changed, and there are an abundance of good reasons to revisit these old reports.

1.  No one was talking about tunnels in either Delta Vision or PPIC, and the estimated costs of building the alternative conveyance have roughly doubled since these reports were done. 

2.  Those reports did not evaluate the type of proposal EWC is making.  In particular, PPIC compared a scenario of No Exports (with wildly exagerrated costs from water shortages) to a large surface canal.  There was no evaluation of a small tunnel vs. a large tunnel as many reasonable and credible people are now suggesting.  And even the BDCP "discussion document" says the loss in water exports if we do not build alternative conveyance in 2050 is about 1.5 maf, not the worst case, disaster scenario of 0 exports (-6 maf) modeled by the PPIC.  PPIC did not account for water conservation or anything close to what is being discussed by EWC or BDCP.

I should also note an unsubstantiated claim in the contractors' letter about the economic contribution of westside farmland.  "These lands develop about $12 billion in economic value for California annually." 

Really?  I challenge the water contractors to provide a reference for that ridiculous claim.  $12 billion is 3 times the entire GDP of Kings County ($4 billion of which $1.5 billion, 38%, is government/military spending.  For comparison, the GDP of Sacramento is only 23% govt/military).  Maybe they shouldn't be so quick to point out when people ignore gross vs. net water conservation when they are triple and quadruple counting dollars, and failing to differentiate between revenue/output and value/income.
Finally, do they have any references other than the 2008 PPIC report?  As noted above, the PPIC did not analyze $10+ billion tunnels, or an alternative scenario that looks anything like the EWC vision.  Furthermore, the 2008 PPIC has plenty of its own exagerrations that tip their analysis in favor of a canal.  For example, I wouldn't call a report that completely leaves out the commercial value of the salmon fishery, and uses phony projections of the state's future population as "careful."  Regardless of its weaknesses, that report is severely outdated now, to the point of being irrelevant.  We have a lot of new information, the scenarios have changed, and I am willing to bet that even the PPIC folks would have a hard time arguing against the need for some substantially updated analysis after nearly 2.5 years of new developments.
In fairness to the PPIC people, it must be frustrating to be so selectively cited, and their report isn't all bad.  For example, the contractors don't mention that their recommendation of new conveyance also hinged on the contractors paying a lot more for Delta restoration than currently proposed in BDCP discussion documents, they recommend water exports even with a canal quite a bit lower than the contractors want, and a number of these researchers were involved in the Delta flow requirements report for the SWRCB that the contractors like to disparage as irrelevant.

(A few minor edits on 10/22)

New Economic Forecast Released

Like most forecasters, we have been busy marking down our outlook.  It's not pretty, especially in the Central Valley.  Summary pasted below.  Summary tables, more highlights and subscription information at this link


California Double Digit Unemployment Will Last Through 2013

Sacramento has the weakest 2011 outlook.

(Stockton, Calif.) October 21, 2010 – The faltering recovery will keep California’s unemployment rate above 10% for three more years according to the Business Forecasting Center at the University of the Pacific. This quarterly forecast is a significant downward revision in the 2011 and 2012 outlook, and reflects a slowing national economy.

In the Central Valley, which is disproportionately impacted by continued weakness in construction and state budget cuts, unemployment rates are projected to plateau at their current high levels for nearly two years. Homebuilding remains at record lows in the Valley, and cuts to schools and local governments are offsetting any gains from improved conditions in agriculture.

Sacramento has the weakest outlook for the next 12 months, with no job growth projected between 2010 and 2011. Sacramento unemployment will exceed the state average for 2011, the first time this has occurred in over two decades of consistent data. By 2013, Sacramento and Stockton will be leading a strong recovery in the Central Valley, but the next two years will be extremely challenging for the region.

San Jose continues to be the only area in Northern California that is clearly recovering. We project 3% job growth for San Jose in 2011 and 2012, and this strength will eventually spill over to its lagging neighbors. Unemployment in all the Bay Area metros should drop below 10% by the end of 2011.

Wednesday, October 20, 2010

State of Debt

The LAO reports on the $15 billion and climbing shortfall in the state's Unemployment Insurance Trust Fund.  The entire shortfall has accumulated since January 2009, and hundreds of millions of dollars in interest payments will soon become due.

In other cheery news, the Treasurer's Debt Affordability Report was released detailing the $89 billion in current taxpayer-backed debt with an additional $50 billion authorized but unissued to date.  The report also details "Yields on the State’s 30-year tax-exempt GO bonds ranged from a low of 4.82 percent to a high of 6.10 percent. Compared to AAA-rated tax-exempt GO interest rates, these translate to spreads of 87 to 172 basis points."  That means the state is paying about an extra 1% on its debt due to its lousy credit rating.  That's a lot of extra interest, that could be used for other purposes.  The report also details the state's debt burden is the 2nd highest in the country after New York.

Not to be outdone by their state government, California's households have proven themselves to be pretty adept at loading on their own debt.  The state may have the 2nd highest debt burden in the country (for now), but our private households have the highest per capita debt burden in the U.S. according to the Federal Reserve Bank of New York, $80,000 per capita compared to the U.S. average of about $50,000.(see page 18).


Wednesday, October 13, 2010

Does Jerry Brown's Water Plan Really Call For a Peripheral Canal?

This AP headline caught my attention this afternoon "Brown calls for delta canal in Calif. water plan".  The article states,
In a plan he released on his website, Brown endorsed building a canal or tunnel around the Sacramento-San Joaquin Delta... Brown previously has said California needs a better system to more efficiently move water, but the Democrat's water plan is his most explicit support of a canal or tunnel to help to deal with the state's current water troubles...
Oddly, the article includes no quotes from Brown or his campaign that clearly endorses a canal. So I went to his website to read the plan to see what it actually says.  The canal doesn't come up until the 5th bullet under point 5 of the 7 point plan.

5.  Protect and Restore the Delta....
  • Complete scientific, economic and environmental review of alternative conveyance facilities recommended by the Bay Delta Conservation Plan
6. Invest in California's Water Infrastructure including water storage facilities

California desperately needs investment in its water infrastructure, but given the State's financial condition, we must ensure that investments are cost-effective and funded by the appropriate sources. The beneficiaries - or users - of water infrastructure projects should pay their share of the costs of those projects. The state should invest in infrastructure improvements providing benefits to the general public or the environment. The projects must be cost-effective and make long-term sense. As Governor, I will:
  • Support infrastructure investments, including water storage projects, that achieve the multiple goals of increasing water supply reliability, protecting the environment and other public benefits, such as wetlands protection and restoration, and flood protection.
  • Support conveyance and storage investments, such as a peripheral canal or tunnel, that provide a net benefit in ecosystem and water quality conditions and where the beneficiaries pay for the benefits they receive

It doesn't sound like very explicit support to me.  It sounds like he is calling for studies "a scientific, economic and environmental review of the BDCP", and offers conditional support if the canal passes some cost-effectiveness and beneficiary pays tests. 

Maybe I don't know the full story, but it looks to me like AP botched this story and misrepresented Brown's water plan.

Update 10/14: The front page of the Stockton Record ran the AP story today under the bold headline "Brown Supports Building Canal or Tunnel around the Delta."  No doubt that headline just cost him a few votes in Stockton.  I see no press release on the Brown website regarding the release of what the AP says is a "new" water plan.  Hopefully, the Brown campaign will clarify his position so people know exactly where he stands.

Update 2, 10/14:  It seems that most people think this is a clear endorsement.  I guess I don't understand how to read politicians' statements although Brown supposedly has a reputation for speaking clearly.  I still read this as weak conditional support, that could be withdrawn if the costs are too high and environmental benefits and safeguards are weak. 

Tuesday, October 5, 2010

How much should crop production decline during a drought?

According to the report I recently published with UC-Davis researchers, crop production in the San Joaquin Valley declined between 2.3% and 2.5% in the 3rd year of a extended drought in which water supplies declined by a much greater percentage.  I find the 2.5% decline to be a remarkably low number, half what most experts predicted, and the agriculture industry and water managers certainly deserve credit for their achievement in the face of adversity. 

Still, the conventional wisdom is that we have a terribly broken water system, especially for agriculture.  Would a truly broken and disfunctional system deliver such results?  To those who hold this view, I wonder how much would crop production have to decline in a drought for them to be satisfied with the water system.  Would -1% be good enough?  0%?

When the drought is over, agricultural production in the Valley will still be constrained by environmental pumping restrictions brought on by a collapse in fish populations.  The highest estimate I have seen of the impact of these pumping restrictions on Valley crop production is a 1% decline.  Is that too much to ask given the great environmental damage created by the pumps?  What is a reasonable expectation?  -0.3%?  0%?

Postscript (10/6):  I see that asking reasonable questions like this about Valley agriculture has been called waterboarding and generates comparisons to Nazi's these days.

Monday, October 4, 2010

Realtors' Economic Forecast

One expects, and typically receives, an optimistic assessment of the economy from the California Association of Realtors. Today's news release accompanying the new CAR housing market forecast contained the most optimistic statement I have seen about the California economy in a long time. According to CAR chief economist Leslie Appleton-Young,
We expect a net jobs increase of approximately 1.4 million jobs in California for the year to come ...
That has to be a misquote. A net gain of 1.4 million jobs would be roughly 10% growth. Surely, she means 140,000, we will see when the details are presented later this week.

More importantly, they are predicting a 2% gain in the median home price from 2010 to 2011 which is pretty modest for CAR and suggests the jobs quote is indeed a mistake. I expect median prices to be flat with some continued declines at the high end of the market that will not affect the median.

Thursday, September 30, 2010

Cardoza Refinance Bill Deserves Serious Consideration

Dennis Cardoza has introduced a new mortgage modification bill, HR 6218 http://in.reuters.com/article/idUSTRE68N33220100928

Cardoza's bill would allow refinancing at current fixed rates for all mortgages without any principal reduction.  His plan is very similar to that proposed by serious economists like Glenn Hubbard and Chris Mayer of Columbia University, and I heard Mark Zandi endorsed it too.  These aren't bleeding-heart liberals advocating bailout plans for the irresponsible, but serious economic thinkers who more typically advise Republicans.  They understand the magnitude of the problem and realize that we need to do something big.

As discussed in older posts, my preferred policy alternative for reducing foreclosures would combine principal reduction with a new shared appreciation mortgage in which homeowners would share any future gain on their homes with those who financed the principal reduction.  This has been promoted by a number of economists for the last two years, but principal reduction hasn't been able to garner a lot of serious political backing (although it would help if Valley reps. like Cardoza were pushing this too).

Although Cardoza's new bill isn't my first policy choice, it has two key characteristics that I really like.

1.  It's big and it's simple.  This is an enormous problem, and it should be clear now that is isn't going to be solved by a bunch of mini-programs.  That is what Washington has been doing for 2 years now.  It is also really simple to understand (which is an advantage over my preferred plan) which is key to getting enough participation to actually solve the problem.

2.  You do not have to be delinquent on your mortgage or unemployed to qualify for help.  Most of the mortgage relief plans in action now require borrowers to be 60 days delinquent or are restricted to the unemployed.  These create perverse incentives for people to default on their mortgage payments and not search as hard for work. 

As Representive Cardoza noted in his Huffington Post essay,
We are long past foreclosing on the subprime mortgages that helped create the meltdown. As the saying goes, we are now cutting into the bone: middle-income families who through no fault of their own are now losing their homes.
I am not quite ready to endorse Cardoza's bill, but I am warming up to it.  It definitely deserves serious consideration, and I hope it gets the debate and consideration it deserves. 

P.S. On a side note, I was quoted in a newspaper article about water and jobs saying, "This valley has incredible problems, but our leaders are completely consumed with this one issue" I will say that Dennis Cardoza has focused a lot more than his Valley colleagues on the critical foreclosure issue, and I am pleased he is listening to the advice of serious people.

Tuesday, September 28, 2010

New estimates of the economic impacts of reduced water supplies

Richard Howitt and I (with the assistance of his UC-Davis collaborators who worked very quickly and professionally) have completed a joint retrospective assessment of the economic impacts of reduced water supplies to San Joaquin Valley agriculture.  Those of you who followed these estimates last year may find this an unlikely collaboration.  Although we don’t agree on all the details, we do agree that the revised estimates are close enough together that the public discussion around these contentious issues is best served through this joint report that emphasizes similarities rather than differences and criticism.  Both of our estimates have been improved by the collaboration and feedback in addition to newly available data on what actually happened last year. 

When it comes to jobs, our (Pacific's) final estimate for 2009 was a total decline of 5,567 jobs with 1,392 of these attributable to environmental pumping restrictions on Delta water.  The new Davis estimate for 2009 is 7,434 lost jobs with 2,973 due to pumping restrictions.  I appreciate the Davis team's willingness to take another look at this and work together to get better information out there.  Although we were unable to settle on one number and differences remain, I think anyone who reads the report will recognize that the differences represent reasonable differences in professional judgement on a question where it is impossible to get a precise answer.

As this has been a topic of a number of posts on this blog, regular readers will recall that our (Pacific's) initial estimates, issued during Summer 2009, were 6,000 lost jobs with 2,000 due to pumping restrictions.  Although there has not been much of a change in our estimates over time, there are differences in the details and our confidence, source data, and approach to these estimates is much sharper now.

You can download the full report here.  You will find estimates of fallowing, agricultural revenue and income declines in the report, all of which are as important as estimates of job loss that received the most attention in this miserable economy.

(mildly edited 9/29 at 9:47 A.M.)

Thursday, September 23, 2010

If Fresno is "awful" and "Looks Like Detroit," I wonder what Meg Whitman thinks of Stockton?

OK, I'll bite on the Fresno/Detroit comparisons following Meg Whitman's comment,  as reported in the article in the Fresno Bee.  I agree that Whitman's comment is being blown out of proportion, but it is a teaching opportunity about the Valley Economy.  My perspective is someone who was born in Michigan, now lives in the Valley, is a professional regional economist, and has spent a fair amount of time in each area over the years.

First, about the numbers.  The Bee makes valid comparisons of economic conditions inside the city limits, but does not compare the greater metro areas.  This is deceptive, as one of the key differences between Fresno and Detroit are the surrounding areas.  The city of Detroit is indeed very bad, but its suburbs and surrounding small towns are much more prosperous, and more people in the Detroit area live outside the city limits than inside.  The Detroit metro area includes over 4.4 million people, and only 900,000 live in the city (about 20%).  In the Fresno metro area, half the population lives inside the city limits and a lot of the surrounding areas are actually poorer (some areas are more affluent like Clovis).  So, if you compare the statistics for the larger metro area, the Detroit area has significantly higher income than Fresno.

Detroit is indeed a sad case of one of America's greatest and most affluent cities that has been sliding substantially backwards.  The Detroit situation is similar to a lot of old industrial cities in the Eastern U.S. some of which are struggling (Cleveland), others that are prospering (Baltimore), but all have a poor, high crime, shrinking population, urban core city as families left for the suburbs.

Next, some quotes from the article.  I actually liked and agreed with this comment from the Whitman campaign.
"Meg knows that Fresno cannot be left behind as it has been in the past when the economic situation around the state gets better but Fresno doesn't respond as quickly," campaign spokeswoman Andrea Jones Rivera said in an e-mail.

The comments attributed to former California Secretary of State Bill Jones were less on target.
And former California Secretary of State Bill Jones said that Detroit and Fresno are in similar situations where they are overly dependent on one industry -- in Detroit, the automobile industry, and in Fresno, agriculture -- that has been hit hard.

Jones is correct that Fresno needs to diversify its economy to reduce dependance on agriculture, but the woes of the Fresno and Central Valley economy have much more to do with the housing collapse and construction industry than agriculture.

Which raises my final point, alluded to in the title. What about Stockton and Modesto? Unemployment in these cities is even higher than Fresno, when historically it has actually been lower. What is Meg Whitman's answer for the Northern San Joaquin Valley (and Sacramento and the Sacramento Valley) which was hit earlier and arguably harder by the recession.

While most of the outrage about her comment is calling Fresno awful, I am left wondering why she answers every question and comment about the Central Valley in the context of Fresno. I am interested in how Meg Whitman has balance her time and concern in the Valley between Stockton and Fresno. For example, how many trips has she made to Stockton compared to Fresno? I would be interested to see the numbers, maybe the Record should call the campaign and find out.

Update 9/29: To be fair, I noticed that Whitman said companies should be putting call centers in "Fresno or Stockton" instead of Phoenix in the last night's debate.  While I don't think call centers will be the Valley's savior, I was pleased to her mentioning both Fresno and Stockton, and to her acknowledging that fixing the Valley's economic woes is much more than an agriculture issue (or green jobs).  Perhaps I have been too critical of her.

Friday, September 17, 2010

Unemployment Friday

This report was truly dismal.  California's unemployment rate ticked up .1%, but most importantly private payrolls actually declined by 25,000!  That is not supposed to happen when you are supposedly a full year into a recovery.  Including government, total payroll jobs declined by 33,500.  Private sector job growth has been pathetic recently, but it has not been negative.  Truly awful.  And it is a broad based malaise that spans virtually all sectors and all metro areas.  The state has now given back all of the modest job growth posted in the first half of the year.  Even the areas like Orange County and San Jose that were showing life in the first half of the year have lost their momentum.  The story is virtually the same everywhere, the private sector has been moving sideways at best for nearly a year, and now public sector employment is eroding.

I am not in the double-dip camp yet.  I would estimate the probability for the U.S. to sink back into recession is 20-25%, but for California it could be 50%.

Wednesday, September 15, 2010

Stockton Cuts Impact Fees

Stockton has substantially cut impact fees on nonresidential construction projects, and downtown development.  I generally agree with the proposal and hope the conversations continue about adjusting residential development fees and how to make overall city finances less dependent on impact fees in the long-run. 

I am a little concerned that city leaders are thinking of this as a short-term stimulus program rather than a necessary long-term adjustment that will support a healthier economy.

Friday, September 10, 2010

U.S. Chamber of Commerce Attack Ad on Barbara Boxer

Wow, I just saw this ad from the U.S. Chamber of Commerce.  I interact and sometimes give speeches to Central Valley Chamber of Commerce groups, and I can assure you that Chamber members here in the Valley are a lot more thoughtful than this ad.  Plenty of them care about the environment, like fish, and they know what is really driving unemployment in the Valley (see the previous post about the $6.4 billion annual decline in private construction). 

The key line is "She voted to cut water to the Central Valley … killing jobs …and driving unemployment as high as 40%." 

I followed their instructions and went to their website to get the "facts."  Here is their documentation sheet.

While it is true that the California EDD has published city unemployment estimates of 40%, the documentation they provide clearly states that the estimate is based on the 2000 Census, a time of abundant water that predates the Smelt order.  Here is an exact quote from the Chambers' documentation (emphasis added),
Monthly city and CDP labor force data are derived by multiplying current estimates of county employment and unemployment by the employment and unemployment shares (ratios) of each city and CDP at the time of the 2000 Census...  The method assumes that the rates of change in employment and unemployment, since 2000, are exactly the same in each city and CDP as at the county level (i.e., that the shares are still accurate).  If this assumption is not true for a specific city or CDP, then the estimates for that area may not represent the current economic conditions.  Since this assumption is untested, caution should be employed when using this data.
I wouldn't describe taking a number out of context to use in an attack ad as employing caution.

They provide no documentation to support their claim that water drove unemployment to 40%.  As I must point out again (apologies to loyal readers who know this already), the 2000 Census found these towns had unemployment exceeding 30% when water supplies were high and we were not in a recession.  Mendota had 32% unemployment - the highest of all 474 California towns even when water supplies were high.  In fact, historical data shows that massive unemployment rates in this area did not occur until after the CVP started delivering Delta water.

I should also note that they list the unemployment rate for towns in Tulare County.  Tulare County does not even receive water from the Delta.  It is also kind of crazy, because the unemployment rate in Tulare County in 2009 (the year they were supposedly devastated by the drought) was LOWER than it was during the entire decade of the 1990s (ok, I'm exagerrating just from 1991 to 1999, 9 out of 10 years, here are the facts http://www.calmis.ca.gov/file/indhist/visa$haw.xls).  Unemployment is at all time highs in most areas, and they are focusing on perhaps the only place where unemployment was actually lower in 2009 than in the 1990s. I am glad Valley unemployment is getting attention, but we have to recognize that it is a chronic, long-term problem in order to come up with real solutions.

I can see that this is going to be a long fall.

Tuesday, September 7, 2010

San Joaquin Valley Private Building Permits Declined $6.4 Billion over 4 years

Since this weeks economic proposal is to add another $50 billion to U.S. infrastructure spending, here is some perspective using numbers on the private building hole in the San Joaquin Valley (8 counties from Bakersfield/Kern to Stockton/San Joaquin).

Total private building permits issued in 2005 equaled $8.75 billion.  For 2009, the total was $2.3 billion and 2010 in on pace to be the same as 2009.  That's a $6.45 billion decline.  Even if you consider 2005 was a bubble year, $6 billion per year is a very sustainable level in the Valley (about 30% below 2009).

If the San Joaquin Valley received a population weighted share of the $50 billion Obama is proposing (we are a little more than 1% of U.S. pop.), our piece would be about $600 million. 

As someone who spends a lot of time on 99, it isn't hard to envision worthwhile places to spend highway money in the Valley, so this could be a good investment if well managed.  It will reduce some construction unemployment in the area, and put some idle resources to work creating things of lasting value.  However, your expectations for it working economic miracles should be tempered by the fact that it is only $600 million into the $6 billion annual hole in our construction economy ($4 billion if you want to think more in terms of returning to a non-bubble level.).

Friday, September 3, 2010

Sacramento Wastewater Economic Impact Could Be 3 Times Higher

According to the Sac Bee, the Central Valley Regional Water Quality Control Board draft permit requires both microfiltration and the nutrient reduction program.

We knew this was possible, but we did not analyze this scenario in our earlier report since we wanted to stay focused on the ammonia issue and did not want to be accused of exagerrating.  We will update that analysis to fit this draft permit in the next few weeks.  The costs of the microfiltration process are actually higher than the nutrient reduction process, so the total impact will be nearly 3 times what we estimated in our earlier report.

The Bee quotes the SRCSD saying monthly residential rates could go from $20 per month to $62.  Our more conservative estimate would be about $50 per month, but SRCSD is planning on a lot of reserves being required and for this to keep growth very low (thus keeping impact fee revenues way down).  They may be right, I've never tried to sell $2 billion in bonds.  That's a lot of debt, especially for an agency whose current revenues are only about $150 million per year.

Thursday, August 26, 2010

Thank Goodness For Las Vegas

First American CoreLogic released its negative equity report today, and for the first time I can remember has published data for more than just the 50 biggest metro areas.  That allows us to see how Valley metros are fairing, and the news (unsurprisingly) is not good.  Here is the list for California metros with the % of all mortgages with negative equity (the U.S. avg. is 23%), and the rank among 165 largest U.S. metro areas.  These rates will come down over time as foreclosures continue

1.  Las Vegas, 72.8%
2.  Stockton, 62.4%
3.  Modesto, 59.6% 
4.  Vallejo-Fairfield, 57.9%
9.  Bakersfield, 52.0%
12.  Riverside-San Bernadino, 51.3%
16.  Fresno, 46.8%
20.  Visalia, 44.8%
26.  Sacramento, 43.4%
27.  Salinas, 41.6%
35.  Oakland-Fremont, 32.4%
37.  San Diego, 30.5%
41.  Santa Rosa, 29.2%
43.  Santa Barbara, 27.0%
50.  Los Angeles - Long Beach, 25.3%
63.  San Jose, 19.8%
64.  Santa Cruz, 19.5%
71.  Orange Cty, 18.1%
128.  San Francisco, 9.5%

Most of the non-California areas in the Top 20 are Florida (and Phoenix and Reno).  Merced isn't large enough to make the list, but you have to wonder if they would have challenged Vegas for the top spot.  I am a little surprised by Los Angeles and Orange County, I thought they would have a littley higher negative equity, closer to San Diego's 30%.

Monday, August 23, 2010

Sacramento Wastewater Report

Today, we released a study of the economic impact of of requiring total nutrient (primarily ammonia) removal from the Sacramento Wastewater Plant.  SRCSD estimates the capital cost at $770 million, and it will take about $30 million per year to operate it, including a lot of electricity.  Over a 30 year period from the start of construction, we find that the average annual economic impact on the Sacramento area will be a $94 million loss in income, and a decline of 390 jobs.  The full report is posted on our website, http://forecast.pacific.edu/.

So, is this a lot?  A $94 million income loss is a lot, about $65 to $70 per capita each year, but it is not an economic catastrophe.  For comparison, Sacramento County's total personal income is about $50 billion, so this amounts to a total income loss of 0.2%. 

Given the political debate, a more relevant comparison would be to the cost of the biological opinions on agriculture in the San Joaquin Valley.  We will release an updated estimate of this loss in a few weeks that shows pretty clearly that the lost agricultural income from environmental restrictions on pumping is actually lower than the loss in income from removing ammonia from Sacramento wastewater.  (The ag. cost is more concentrated on a smaller area, and does create more employment loss.)

Another current Sacramento comparison would be the 3 day per month state worker furlough program that is estimated to be reduce Sacramento incomes by $600 million per year.  So, the effect of nutrient reduction would be about 1/6 the current furloughs, or like having 6 permanent furlough days per year (every other month) for state workers (of course, just like the agriculture example above, the effects of wastewater charges would be broadly distributed across households than furloughs). 

Another way to think of it is a regressive tax increase.  Unlike many utility bills (e.g. cable tv, phone, electricity), households are unable to reduce this cost by changing behavior or forgoing services.  I am sure many households are willing and able to pay another $120 to $180 per year on their wastewater bill to help the Delta.  Lower income households (and over half of Sacramento households have incomes below $50,000) will find it a tough burden, and likely have a different opinion.

So should Sacramento be required to incur the cost for more advanced treatment?  I don't know.  That depends on the environmental benefits, and the emerging science in this area.  Cost is only one part of the decision.

Friday, August 20, 2010

Unemployment Friday

The California unemployment rate holds steady at a miserable 12.3%.  That's not a surprise.  We expect it to stay 12% or higher for the remainder of this year, before declining in 2011.

Payroll jobs declined by 9,400, mostly due to Census lay-offs.  Taking out government losses, private payrolls inched up by 13,700, continuing a pattern of painfully slow private job growth.  For the past year, our forecast has been that private job growth would start picking up now, and we would see monthly private sector job gains of about 25,000 in the 3rd quarter.  Given the recent string of weaker than expected economic reports at the national level, I expected this to come in much lower than our forecast (which we will be revising down next month). 

The metro areas are hard to read this month, because they are all dominated by a loss in local government jobs.  Local government jobs include schools, and they always decline a lot now due to summer break, not to mention the new fiscal year affects for local governments.  So, there is a lot of noise in this data, and it will be hard to get a good feel for the depth of this effect until Sept/Oct.  On the more postive side, construction job loss seems to have bottomed out now in most areas, although we have yet to see growth. 

Taking a longer view, 6-12 mos., the best performing metro areas are clearly Orange County (hospitality rebounding well, as is health care and professional services), San Jose (computers, tech rebounding well), followed by San Diego and LA.  Inland areas are lagging badly, and SF and the East Bay have not had a great year either.

I will be looking at this data and the outlook a lot in September/October, and will have more to say about it this fall.  Turning my focus back to water for the next 2 weeks.

Tuesday, August 17, 2010

Cardoza fired up over foreclosures

I am happy to see Dennis Cardoza being so critical of the Obama administration about foreclosures.  Here is a link to his op-ed in the Fresno Bee, and he also wrote a letter to the President among other actions (including proposing to slash the HUD travel budget).  I won't comment on his political tactics or specific proposals, but the first step is to move the issue to the top of the agenda.

As I have pointed out repeatedly, Obama's efforts on foreclosure mitigation have been the weakest part of his economic recovery agenda since the beginning. 

I have given Valley Congressional Reps a hard time about expressing so much outrage over water when the foreclosure mess is at least 10x more important to their economic woes.  That was the point of the Fish or Foreclosure report we published about a year ago.  So, I am glad to see Rep. Cardoza getting more vocal (to his credit he has paid more attention to this issue than his colleagues since the beginning) on this issue, and would like to see some of his neighboring reps. co-signing these letters.

Sunday, August 15, 2010

Democrats' State Budget Proposal

While I was away, the Democrats finally made a budget proposal.  There is a lot to it, and I haven't been able to analyze it in detail.  Here are my preliminary thoughts on a few parts of the proposal.

1.  "Tax Swap":  The proposal to increase income tax rates and decrease the sales tax is the headline, but it is not much of a budget solution.  They also propose a sizable increase to the VLF (vehicle license fee), and that is what generates the net tax increase.  I support the income-sales tax swap, and I am less enthusiastic about the VLF increase, but there may be no better alternative here.  As the Democrats emphasize, both the income tax and VLF have the advantage of being deductible from federal income taxes, but they have been overplaying the size of the federal subsidy.  (Sales taxes may not get the federal subsidy, but they are subsidized by visitor spending, and there is a macro case to be made for taxing consumption instead of income).

As I have pointed out in other posts, I would rather see the income/sales tax swap made with local governments, as I think the local government dependence on sales tax creates a lot of negative incentives to subsidize retail and encourage sprawl.

2.  Assume the rosier LAO revenue forecast, a $1.4 billion solution.  I think this is unwise, the number comes from the LAOs May analysis of the Governor's proposed budget.  This came right as some a brief blip of positive economic data in April/May increased optimisim about the economy (remember Dow 11,000!), and most of the data in the past 3 months has been less positive.

Both the LAO and our Center are part of about 8 California forecasts compiled and compared by Arizona State.  Last I checked (about 6 weeks ago), LAO had the most optimistic forecast (we were the 2nd or 3rd most optmistic).  I really respect the LAO analysts, but I suspect that they, like most forecasters, have revised down their outlook since May.  I think the older DOF revenue estimates in the Governor's budget are more realistic at this point.

3.  Federal Government Assistance, $4.1 billion.  Even with the recent $26 billion boost in federal funding for education/health, there is unlikely to be more than $3 billion coming from Washington. 

Bottom Line:  Although there are aspects to the proposal that I like, I think the Democrat's proposal is $3 billion or more short of being balanced even if they get their revenue additions passed with the Governor's signature.  Deeper cuts will be needed, and we may not have a budget until after the election.

Thursday, August 5, 2010

On Vacation

I will be on vacation until August 16, so no new posts for a while. 

Unfortunately, I am confident there will still be no state budget, continuing water wars, high unemployment, and a foreclosure crisis when I return.  It seems there are a few bits of better news starting to appear, but perhaps my spirits are being lifted by vacation.

Thursday, July 29, 2010

Governor Vetoes Farm Worker Overtime Bill

Sen. Florez is right, the differential labor laws for agriculture are discrimination, and it is a shame that the Governor turned down this opportunity to right a historic injustice. 

Echoing the farm bureau's position, the Governor says the veto is justified because agriculture is "different."  However, the biggest difference in agriculture labor from other industries is its history of poverty and exploitation, not the characteristics cited here as excuses not to modernize the industry.  Seasonality, weather, thin profit margins describe many industries, some more than farming which has faired relatively well in the recession.

The Governor touts the importance of leadership when he wants California to go beyond other states in cutting greenhouse gases, but when it comes to farm worker rights, he hides behind the fact that other states exempt agriculture from labor rules.  He should adopt his global warming attitude on this issue, position California as a leader, and as the state with the most labor-intensive agriculture industry we can clearly lead the way in securing equal rights for farm workers in the entire United States.

Yes, I am a mainstream economist, and I agree that this bill will do more than just take money from the pockets of farm owners and put it in the pockets of farm workers.  There will be side-effects such as adjustments to work schedules, incentives for mechanization and other efforts to reduce the increased labor costs created by the bill.  However, some of these side-effects are actually good for the Valley Economy in the long-run and do not overly concern me. 

If this is too costly and burdensome for agricultural businesses, then California labor laws are too costly and burdensome for all businesses.  Once standards are aligned, farmers are free to work with other businesses for relief from the rules.

See a post from a few weeks ago for more comments.

Tuesday, July 20, 2010

The Cost of AB 32 vs Delta Levee Failure

Quiz: Choose the smaller amount of money?
A.  $4 billion to $34 billion
B.  $0 to $1.6 billion

If you answered that A is a smaller number, Congratulations!  You can get a job analyzing environmental policy for the state of California.   If you answered B is lower, you might be pretty upset since A is clearly 20 times larger.  But in California environmental policy, the amount of costs don't matter, it is the issue.

If we are talking about global warming, any cost to reduce greenhouse gases is modest and small.
If we are talking about water supply, any disruption has catastrophic costs.

An open letter from economists released yesterday calls the cost of AB 32 on California "modest."  The Air Resources Board has also called the cost small.  So what is small?  According to the ARBs latest analysis that most economists think is the best standard, the annual cost in 2020 will range between $4 billion and $34 billion.

What about the scenario of the Delta earthquake that floods 30 islands, etc?  We are always told that this would be catastrophic for the California economy, a "$40 billion disaster."  According to the analysis from URS corporation done for the Department of Water Resources (look at figure 6a if you want 1 picture), the range of expected 25 year cumulative costs is between $0 and $40 billion.  The midpoint (50% exceedance probability) looks to be $15 billion cumulative over 25 years.    On an annual basis, the midpoint is $0.6 billion with a range from $0 to $1.6 billion.

Obviously, it isn't a perfect comparison, one event is the estimated cost of doing something (AB 32), whereas the other is the estimated cost if we do nothing in the Delta.  There are other key differences too.

Still, the differences between the adjectives that are used is very revealing.  AB 32 is small and modest, whereas not "fixing" the Delta in the way preferred by water exporters will cause "catastrophe", the economy to "run dry", and cut off the economys "lifeblood." 

(last sentence deleted due to error.  ARB/AB 32 is not funded by the state General Fund)

Thursday, July 15, 2010

Department of Water Resources Says Economic Impact Study Costs $450,000

Is this a joke?  From a Hanford Sentinel article on Juan Arambula's (now co-sponsored by Fran Pavley) bill regarding the sale of agricultural surface water to cities outside the San Joaquin Valley.

Assemblyman Danny Gilmore, R-Hanford, was one who didn't jump on the bandwagon. Gilmore said he sympathized with Arambula. But Gilmore didn't support the cost of putting the bill into action during a state budget crisis. The state Department of Water Resources estimated it would cost $2.3 million a year to oversee the groundwater monitoring and another $450,000 annually to do the economic impact studies.
I can't comment on the groundwater monitoring, but I would bid about $15,000 for our Center to do the economic impact work, and I know consultants who would do it for $3,000 to $5,000.  Heck, I'll do it for free just because I would like to see this bill pass.  Clearly, Arambula's bill reveals true motives even more than I initially realized. 

I am truly stunned by this $450,000 annual cost for economic impact studies of a very small number of proposed transfers.  If this kind of work really paid that well, I would have a house in Aspen.  Seriously.   

The irony is that the water exporters would actually like to use my assessments of water supply economic impacts in this case.  My estimates of water shortage economic impacts have tended to be lower than their estimates and therefore would be more supportive of water transfers.

I suspect the truth is that DWR doesn't want the bill to pass and doesn't want to do te analysis, so they made up some crazy cost figures to give legislators an excuse to oppose it.  Of course, DWR has been incurring the cost to assess the economic impact of the drought, and update it every month for their drought updates.  If they can't bear the cost of assessing Vidovich's "man made drought", then they should immediately stop assessing the impacts of the current drought since it is too costly.  [As a side note, I find it interesting that DWR is now doing the economic impact estimates themselves now rather than quoting the UC-Davis estimates or citing joint modeling projects with UC-Davis as in their previous updates.]

Update: 7/18

The Fresno Bee ran a story on this bill today as well.  It appears that the sellers are required to pay for the economic assessment, not DWR.  Still, their cost assessment is odd.
Assembly Bill 2776 requires water users wishing to make long-term transfers of surface water to pay for an evaluation detailing the economic, social and environmental effects of the sale. Also, users would not be allowed to replace the water with ground water unless the underground basin is strictly monitored.

New Forecast Released

We released our most recent economic forecast today.  Click here for more information, including how to subscribe!

The Highlights of the California outlook are below.  It has not changed much over the past year.  I'll discuss the metro areas tomorrow when the EDD releases new data tomorrow - yes, tomorrow is unemployment Friday!

Highlights of the July 2010 California Forecast

• California remains in the sluggish, early stages of a long, slow five year recovery.

• California unemployment peaked at 12.6% in the first quarter of 2010, and will remain at or above 12% through the end of 2010, and above 10% through all of 2011.

• Payroll jobs bottomed out this winter nearly 1.35 million jobs below their 15.2 million job peak in Summer 2007. Although California will add 250,000 jobs over the next 12 months, this is less than one-fifth the total lost. Jobs will not recover their pre-recession peak until the 1st quarter of 2015.

• After 7.5 years of zero net job growth from 2007 through 2014, the state’s population will have grown by over 2.4 million people, keeping unemployment above 8% through most of 2014.

• Growth in real gross state product will average a modest 3.1% over the next four years.

• Construction has lost 390,000 jobs, by far the most battered sector through the recession, and will lose another 10,000 jobs by year-end. This cyclical sector will eventually bounce back, and should experience almost 11% job growth during 2012 and 2013.

• With the NUMMI closure in the past, manufacturing is growing again. Next year could bring the first annual increase in California manufacturing employment in a decade.

• Retail jobs have bottomed out after declining more than 10%, and are projected to rebound by 47,000 jobs (3%) over the next 12 to 18 months.

• Professional and Scientific Service jobs are projected to increase by 55,000 (5.5%) over the next year after a steep decline in 2009.

• State and local governments, including public schools, will drive most remaining job loss and shed 36,000 jobs over the next year.

• Housing starts bottomed in 2009 at a record low 36,000 units. Although housing starts will recover to 45,000 units in 2010, this is still the 2nd lowest level in 50 years. By 2014, housing starts will be back to normal levels exceeding 150,000 units as foreclosures finally ebb and existing home prices recover to close the gap with construction costs.

• Retail sales are growing again, but will not recover their 2007 level until 2011.

Wednesday, July 7, 2010

Farm Worker Overtime Bill Goes to Governor

It will be very interesting to see whether Governor Schwarzenneger signs SB1121, a bill that would apply the same overtime rules to farm workers that apply to other workers in California. Except for agriculture, California law requires 1.5x regular pay for hours beyond 8 in a day, and 40 in a week. In agriculture, overtime does not apply until 10 hours in a day, and 60 in a week.

Opponents argue that the bill will hurt farm workers, because employers will reduce hours (using larger crews) to avoid paying overtime. I have no doubt that some of this will occur, especially when there is a lot of unemployed labor like there is now, but I don't think that farmers will be able to or want to completely avoid overtime. Thus, the law will increase the total income and reduce poverty in farm workers in the Valley, and will decrease the net income of farms in the Valley. This will be true in total, even if some workers experience a reduction in hours and income and farmers make adjustments to minimize the cost of the law.

The change will probably accelerate the current trends toward less labor intensive production through mechanization, crop choice, advanced irrigation, etc. But this change will not occur overnight, it will occur over years and decades. It will reduce agricultural jobs, but it should increase average wages either through overtime pay or by increasing the productivity of workers in higher-skill, more capital intensive positions. In the long-run, the Valley Economy will be better off if the wage level and quality of agricultural jobs increase, even if the number of farm jobs decreases as a result.

I have listened to the agriculture industry's arguments of why they are different and should be exempted, and I find it unconvincing. Lots of industries have these same characteristics of seasonality, competition from cheaper states/countries, and are family owned businesses with thin profit margins.

I appreciate the economic argument that minimum wage, overtime and other labor regulations can reduce jobs and increase unemployment, although the argument is often over-simplified and exagerrated. It is true that you can't legislate higher average incomes and regional prosperity, and too much government redistribution can reduce total income and prosperity.

There is a case to be made for California to be more like other states and loosen up it's labor-friendly employment regulations, but if it does, it should do so for all industries. Why not reduce overtime rules for industries with higher base pay or have a sliding scale? Shouldn't we be more worried about the international competitiveness of high-wage industries that aren't tied to the land? I can think of other industries and occupations that might have a better argument for exemptions from minimum wage and overtime rules than agriculture.

Although I certainly see the potential downsides, I am in favor of the farmworker overtime bill and hope the Governor signs it. My support is primarily based on equity, and I think it will encourage some long-run changes in the industry and culture that are good for the Valley economy.

If California farmers feel this puts them at a competitive disadvantage with other states, I recommend that they lobby to remove agricultural exemptions at the federal level. If they feel that it makes them less competitive with other countries and increases the costs of business too high, then I recommend they join with other business interests in California and lobby to change state law for all industries.