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,

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.