Inland Empire Outlook Fall 2014 Issue

Economic and Political Analysis

Volume V | Issue 2 | FALL 2014

San Bernardino: Two years into Bankruptcy pg. 2-9 Ignition... Lift off? pg. 10-15 Photo Credit: California Department of Corrections

Photo Credit: Curtis Perry | Flickr

INLAND EMPIRE

CHALLENGES

Tough Start for the IE’s Newest Cities pg. 16-23 Continued Recovery or the Next Recession? pg. 24-31

We begin this issue of the Inland Empire Outlook with an update on the City of San Bernardino’s bankruptcy filing (p.2). Next we examine the differences in employment data generated by the Current Population Survey, which is household and residency-based, and Current Employment Statistics, based on employer surveys (p.10). An interesting incorporation issue faced by four Inland Empire cities is the subject of our third article (p.16). Finally, we examine the Inland Empire’s unemployment data in the context of the current, slow economic expansion (p.24).

On October 29, 2014, the Inland Empire Center, in partnership with the UCLA Anderson Forecast, will hold the eighth CMC-UCLA Inland Empire Forecast Conference at the Citizens Business Bank Arena in Ontario. Edward E. Leamer of UCLA Anderson Forecast will present the state and national forecasts, Professor Manfred Keil of CMC will present the Inland Empire and San Bernardino County forecasts. The conference will also feature a panel on industry perspectives on the forecasts. Citizens Business Bank is the major sponsor.

We at the CMC Inland Empire Center hope you find this edition of Inland Empire Outlook a useful guide. Please visit our website, www.inlandempirecenter.org, for updates to these stories and other Inland Empire news.

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San bernardino: Two Years into bankruptcy Photo Credit: Amerique | Commons Wikimedia

Facing $296 million of unfunded liabilities, a $45 million budget shortfall, and depleted general fund reserves, San Bernardino filed for Chapter 9 bankruptcy on August 1, 2012. The city sought protection from its creditors while it developed recovery plans in hope of achieving financial stability.

In our Fall 2012 issue we examined the factors that resulted in the City of San Bernardino’s insolvency and outlined the bankruptcy process (See “Municipal Bankruptcy” in the Fall 2012 Inland Empire Outlook).

Just over two years later, San Bernardino is still in the midst of this arduous process and economic recovery has been slow to come. The city has been enmeshed in court challenges by CalPERS (California Public Employees’ Retirement System) and has been undergoing increasingly difficult negotiations with public unions, most notably the San Bernardino City Professional Firefighters. In addition to severe budget cuts, the city is also experiencing a rise in crime rates as well as relatively high unemployment rates in comparison to similar-sized municipalities in California. Although the current state of San Bernardino is far from ideal, a new city council led by first term mayor Carey Davis, as well as potential economic expansion in a variety of sectors offers some reasons for optimism about the future.

In the years leading up to bankruptcy, San Bernardino suffered heavily as important sources of revenue fell, notably property taxes, vehicle license fees, and redevelopment funds. San Bernardino Fiscal Year CAFR reports for 2006-2008 show that property taxes generally accounted for about 30% of total revenue. The Great Recession demonstrated that property taxes can also be extremely volatile. San

Bernardino experienced a huge housing boom with straight forward development projects such from 2001-2007, and a corresponding growth as the city’s minor league baseball stadium and in property tax revenues, when cheap financing renovated historic theatre, San Bernardino also facilitated a disproportionate number of subused its redevelopment revenue to fund items prime mortgages. Cities like San Bernardino that less clearly related to development such as its experienced an influx of residential construction public access television station. Moreover, it used were especially hard hit when the housing market redevelopment funds to pay citywide operating crashed. While home prices around the country expenses including the salaries of the city manager, fell by 24% from 2005 to 2010, they fell by code enforcement officers, human resources staff, over double that in San Bernardino, which also the city clerk, and the city attorney. As former experienced a foreclosure rate around almost four mayor Patrick Morris said in 2012, “One might times the national average. From 2008 say [the loss of redevelopment funds] to 2011, property tax revenue was the nail in the coffin in fell from $74.7 million terms of our unbalanced to $46.7 million, a budget.”

Despite steep 37% decrease.

In July 2012, Meanwhile, Riverside-San reducing its Proposition 13 Bernardinobarred San Ontario had one workforce by 20% Bernardino and of the highest from 2008-2012, San all California foreclosure cities from rates of any Bernardino still faced attempting metropolitan to make area in the U.S, substantial debt and up this lost with Business revenue through Insider reporting filed for bankruptcy increased property that 1 in every 187 protection on tax rates. The homes receiving a 1978 constitutional foreclosure notice. In august 1, 2012. amendment pegs the that same month, the statewide property tax rate City of San Bernardino to 1 percent of the property’s had an unemployment rate assessed value at the time Prop of about 16%, twice the national 13 was enacted or the sale price when the average. Despite enacting labor cuts of about property changes hands. Annual increases of $10 million annually, including reducing its assessed value are limited to 2 percent in the years workforce by 20% from 2008-2012, the city still the property is not sold. faced substantial debt and filed under Chapter San Bernardino also suffered a loss of 9 (Adjustments of Debts of a Municipality) of approximately $30 million a year in redevelopment the federal bankruptcy code. According to the revenues when redevelopment authorities (RDAs) Congressional Research Service, “The focus were officially dissolved on February 1, 2012. of Chapter 9 is not necessarily to attempt to (See “Redevelopment Authorities Under Fire” in balance the rights of the debtor and its creditors the Spring 2011 Inland Empire Outlook). Along but to meet the needs of the municipal debtor.”

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So while creditors can force individuals and the bankruptcy process has been CalPERS, the businesses into bankruptcy, they cannot compel powerful agency that administers the state’s public municipalities to file under Chapter 9 or propose employee pension system. CalPERS requested alternative reorganization plans. As part of the that the bankruptcy court lift the automatic bar bankruptcy process the city adopted a Pendency on collection actions to allow it to sue the city in Plan in November 2012, which according to a state court to force San Bernardino to continue February 2013 City Manager’s Budget Message making payments during the bankruptcy process. is “essentially a balanced budget that enables Judge Meredith Jury denied Calpers’ request on the City to provide basic services during the the grounds that the city would be left without bankruptcy process and prepare the Plan of funds to pay its employees and that the city’s A d j u s t m e n t .” ability to reorganize After the United in bankruptcy States Bankruptcy would be undercut.

Court for the The agency then CALPERS, the Central District of responded with a California ruled lawsuit challenging powerful agency San Bernardino San Bernardino’s was eligible for filing, arguing that administers bankruptcy that since the City protection in did not attempt California’s August 2013, the to negotiate with city rushed to draft its creditors and public employee a plan that both did not properly satisfied its creditors reorganize its pension system, and balanced finances before filing the budget. for bankruptcy, has been the city’s Under Chapter it is not eligible 9, municipalities for bankruptcy most aggressive have considerable protection. After latitude in Judge Jury ruled challenger. developing a the city eligible, reorganization plan CalPERS filed that accommodates an appeal. The their unique economic and political conditions; case is still pending before the Ninth Circuit however, the municipality’s creditors must Court. In August 2012, San Bernardino city approve the plan before it goes into effect. The officials decided that CalPERS should be treated Congressional Research Service advises that “the like any other creditor and ceased payments municipal debtor and a majority of its creditors to the biggest pension fund in the country, reach an agreement on a plan to readjust an unprecedented action. Although the city the municipality’s debts.” Formulating this resumed pension contributions in July 2013, agreement, however, has been no easy task for the CalPERS argued in court that the $17 million City of San Bernardino. in missed payments must be paid in full. State The city’s biggest challenger throughout courts have consistently upheld the “California

Rule,” which states that once a city grants a pension increase that pension must be paid in full regardless of the circumstances. More recently in Detroit’s bankruptcy case, the largest municipal bankruptcy in history, the court ruled that federal bankruptcy law took precedence over state laws. CalPERS adamantly stated that the Detroit ruling does not apply to California. In an amicus brief, CalPERS argues that “Congress did not envision that Chapter 9 would become a haven for municipalities that seek to ignore and break state laws and constitutional provisions in order to adjust their debts.” With roughly $280 billion in invested assets, CalPERS could have easily absorbed the $17 million loss, but the agency is concerned that this decision could set a precedent of struggling municipalities using the bankruptcy system to delay or withhold pension payments. “We are under the microscope, no

question about,” said Mayor Carey Davis to the New York Times in April. “San Bernardino took a different approach in bankruptcy as related to pensions, and everybody is waiting to see how it comes out.”

After Judge Jury expressed frustration over the slow progress of negotiations and the city’s formation of a plan of adjustment in May, the two parties finally reached an interim deal in June. The specific details have yet to be released as they are subject to a court-imposed gag order, but according to the June 2014 Status Conference Report the city will begin making payments on the debt it owes to CalPERS, a tough break for the city attempting to regain its financial footing.

CalPERS is not the only group that has challenged the City of San Bernardino. The city has been conducting ongoing negotiations Photo Credit: Don Barrett | Flickr

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with its public safety unions, a sector that accounted for nearly 50% of total expenses in 2012. Around 500 city employees, about a third of the city’s payroll, have been laid off. One hundred of these are police, cutting the force by nearly thirty percent. In August 2014, the city reached an undisclosed tentative agreement with the police union, but talks with the firefighters have been ongoing. Currently, a provision in San Bernardino’s charter has resulted in unsustainable salaries for the police and fire departments.

Enacted in 1955, Section 186 of the City Charter guarantees that police and firefighters get paid the average of the monthly salaries of “like or more nearly comparable positions of the police and fire departments of ten cities of California with populations between 100,000 and 250,000.” The problem is that most of these cities – such as Pasadena, Irvine, and Hunting Beach – have higher per-capita income and

much broader tax bases than San Bernardino.

For instance, according to U.S. Census data, the 2012 median household income in Huntington Beach was $81,849 compared to $39,097 in San Bernardino. According to expert testimony earlier this year, the city currently pays an average of $190,000 annually to its top 40 firefighters, with the next 40 being paid an average of $166,000.

In September 2014, Judge Jury rejected the current bargaining agreement between the city and firefighters, allowing the city to form a new contract. Jury stated that she recognized that the cuts were a hardship on the fire department, but also that the city’s ability to reject the firefighter’s collective bargaining agreement was a significant step in its recovery from bankruptcy. Mayor Davis has stated that charter reform is a top priority, especially after the City Council had no choice but to approve $2 million in raises to publicsafety workers last year, despite massive debt and Photo Credit: Don Graham | Flikr

cuts in nearly all other areas. Fire union president Jeff English defended the language of the charter in a statement to the San Bernardino Sun: “Since 1955, Charter Section 186 has worked successfully to remove politics from determining firefighter salaries with an objective average wage formula. Repealing 186 would be a political action that would divide the community and damage the city’s ability to move forward.” Charter reform will be on the ballot this November under Measure “Q”, which states, “Compensation of police, fire and emergency safety personnel shall be set by resolution of the Mayor and Common Council after collective bargaining as appropriate under applicable law, as it does for other City employees.”

Overall, the economic condition of the City of San Bernardino has not improved significantly in the past two years, though the potential outcomes had the city not filed for bankruptcy could have been much worse. For the month of July, San Bernardino had an unemployment rate of 12.2%. With the exception of May and June, this is the lowest figure since October 2008, but is still significantly higher than the state average of 7.8%. Further, according to U.S. Census data from 2012, over 30% of the population were living below the poverty line in 2012. According to the LA Times, an economic ranking from the consumer financial website WalletHub ranked San Bernardino the Least Recession-Recovered

The July 2014

unemployment rate for san

bernardino was 12.2%. With

the exception of May and June,

this is the lowest figure since Occtober 2008. It is, however, still significantly higher than the california average of 7.8%.

City in the U.S. WalletHub looked at the 150 most populous cities in the country and scored them on various economic indicators, including changes in unemployment rates, median income and home prices. Public funding in all areas of the San Bernardino budget has been slashed. Earlier this year, all three branch libraries faced the threat of closure and many public pools have remained closed. To generate additional revenue, the city is contemplating raising its 8.25% sales tax, which is already higher than the state average of 8.08%, as well as imposing new development and impact franchise fees.

Crime is also up. According to the website Neighborhood Scout, San Bernardino is only

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Photo Credit: Zappos | Wikipedia

safer than 4% of cities in the U.S., with a resident’s chance of becoming a victim of crime at 1 in 95, significantly higher than the national rate of 1 in 236. According to the New York Times, an aggressive gang intervention effort helped cut the homicide rate by almost half since the 2005 peak, but it shot up over 50% in 2012 following San Bernardino’s bankruptcy and ensuing cuts to the police force. “All of our crime is up, and the city has a very high crime rate per capita anyway,” Police Chief Hardy said to the New York Times.

“I can’t police the city with much less than this.

We’re dangerously close as it is.”

Despite all of this, there are still reasons for optimism. Although not limited to the City of San Bernardino, the San Bernardino County Workforce Investment Board has created a “Rapid Response” program that matches business consultants with companies facing difficulties.

The program uses federal funds from the Department of Labor to hire consultants to work on a variety of cost-saving and revenue increasing projects. In the past two years, the county-wide program has saved 686 jobs, created 114 new positions and assisted the companies with $13.5 million in operational cost savings and revenue according to the Workforce Investment Board.

Following its bankruptcy filing, San Bernardino received some good news when Amazon announced it would be building its first distribution center in California at the former Norton Air Force base. When the fulfillment center first opened in October 2013 it employed 700 people. Now, Amazon says that over 1,400 people work there, and they are looking to hire more. Although these figures are not likely to create a noticeable change in unemployment rates, the presence of a successful warehouse from

a leading company may drive more business to the area. Within the Inland Empire, Amazon also operates a distribution center in Moreno Valley and is planning to open a third in Redlands in late October.

The Inland Empire’s recent commitment to the development of the “logistics sector” is also a promising potential source of revenue growth for the city. The County of San Bernardino Economic Development Agency along with the County of Riverside Economic Development Agency have partnered with the City of Los Angeles Harbor Department with the goal of enhancing international investment, stimulating job creation, and promoting economic development.

The two counties are hoping to increase the volume of goods manufactured in the Inland Empire that eventually get exported through the Port of Los Angeles. “More than 80 percent of all goods shipped through the Port of Los Angeles pass through the Inland Empire and that makes it a powerful catalyst for economic opportunity in our region,” said Cindie Perry, Deputy Director, Economic Development Department for the County of San Bernardino, recently to the Daily Bulletin. “We have available, affordable land for development, local and national economic development programs, and an abundant, skilled workforce that continues to grow. When portrelated businesses expand in our counties, the impact is felt on a local, national and global level.”

Despite many setbacks, the San Bernardino International Airport has also shown signs of moving forward, an encouraging sign for the city. Located on the former site of the Norton Air Force Base about two miles southeast of the

city, the 1,329-acre airport continues to undergo developments and improvements. Although SBIA is still awaiting its first commercial passenger carrier, the airport board and interim executive director AJ Wilson have been busy at work. According to the San Bernardino Sun, the SBIA’s maintenance hangars are leased to various companies and the airport is in the process of building an additional 30 general aviation hangars. The board also approved a five-year lease with Unical Aviation Inc., a global supplier of aircraft parts, at $200,000 annually. According to a press release from the Inland Valley Development Agency, the airport has invested over $21,800,000 on 14 local projects and generated over 280 estimated direct construction jobs. The Southern California Association of Governments projects that by 2035 SBIA will serve 2.8 million passengers, significantly less than the 30.7 million predicted passengers at Ontario International, but still positive news for the city.

Lastly, the city is also considering allowing medical marijuana dispensaries in hopes of garnering additional revenue from regulation fees and cutting back the high costs associated with shutting down illegal dispensary operations.

It is estimated that 20-30 dispensaries are currently operating in the city and that shutting down a single dispensary costs around $720 in staff hours. Currently, 40 California cities allow dispensaries. Palm Springs, which decided last year to legalize regulated marijuana dispensaries, has dramatically cut the number of unauthorized operations and is expecting to collect over $1,000,000 this fiscal year.

Ben Fusek ’17

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Ignition...

Lift Off? Photo Credit: Astrid Westvang | Flickr

You may have noticed the headlines of “USA Recovers Pre-Recession Jobs� on the front page of newspapers last summer. After years of trudging through an unspectacular recovery following the most severe post World War II recession, it is easy to get caught up in the sense of euphoria that has taken over the news about the American economy as of late. Finally, it seems as if we are getting somewhere.

Even the Inland Empire, an area that was much more heavily impacted by the Great Recession than the nation as a whole, has seen job numbers return to their pre-recession peak last month.

However, there is something more to the headlines that meets the eye. To get an in-depth look at the latest job figures, we need to analyze the difference in job recovery numbers between the Current Population Survey (CPS), which is household and residency based, and Current Employment Statistics (CES), an establishment survey. Additionally, note that job recovery was neither identical in each sector of the economy, nor was it the result of jobs returning primarily to those sectors that had experienced the heaviest losses.

The difference in job recovery numbers when looking at the CPS and the CES is quite intriguing.

The CPS is conducted through household interviews by the U.S. Census for the Bureau of Labor Statistics (BLS) and is therefore by location of household (residency). From the CPS we receive information on whether a member of the household is employed or unemployed, or not in the labor force (labor force equals the total number of employed and unemployed U.S. workers). On the other hand, while CES is also done by survey and by the BLS, it uses payroll records from firms to provide industry statistics

on employment, average hourly earnings, and average weekly hours by zip code. As a result, it can be aggregated to calculate statistics for the nation, states, metropolitan statistical areas (MSAs), counties, or cities. Taken together, these surveys give a comprehensive view of the state of the labor market. Importantly, differences between the surveys regarding employment are the result of the CPS listing if someone is employed, unemployed, or not in the labor force, while the CES lists every employee on the payroll.

This means that a person who holds multiple jobs will be counted only once by the CPS, but more than once by the CES. Furthermore, the CES does not capture individuals who are selfemployed, unpaid volunteers, farm workers, domestic workers, or those who are at a new establishment (until it becomes part of the CES).

For the Inland Empire, there is another crucial dimension that is of interest. Since

employment is measured by residency, a commuter who was laid off from her job in the Greater Los Angeles area but resides in the Inland Empire, is counted as having lost her job in the Inland Empire, not in the coastal region.

Roughly 40% of the Inland Empire labor force commutes, therefore employment measures by the CPS will be substantially higher than CES, since the latter only looks for employment by entities located in the Inland Empire. This also explains why employment losses as measured by CES do not appear to be as severe as listed by the CPS. California had a bi-furcated recovery, with the coastal areas experiencing higher job growth than the areas which are further inland. Hence those workers who reside in the Inland Empire but work in the Greater Los Angeles area (and to a lesser extent in San Diego County) experienced faster job recoveries.

Figure 1: Inland Empire CES and CPS Employment, Sep 07 July 14 (Seasonally Adjusted) 1,800,000

1,700,000

Number of Employees

1,600,000

1,500,000

1,400,000

1,300,000

1,200,000

1,100,000

1,000,000

CES

CPS Source: Bureau of Labor Statistics

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Figure 2: Percent change in employment during the last three recoveries; 1% and 4% trend growth since September 2007 35.00%

% Changes in Employment from Start of Recession

30.00% 25.00% 20.00% 15.00% 10.00% 5.00%

~90,280 jobs below trend 0.00% 0

6

12

18

24

30

36

42

48

54

60

66

72

78

-5.00% -10.00% -15.00% IE Employment At 4% Growth Rate

IE Employment At 1% Growth Rate

Defense Recession IE (1990)

Great Recession IE (2007)

dot-com Recession IE (2001)

Source: Employment Development Department

Figure 1 shows that the employment numbers from CPS are always higher than those shown by the CES. Clearly there are a significant number of individuals hidden in CES, in addition to the commuters. CES numbers also display a more significant percentage decline in employment during the recession. While the CPS indicates that the number of jobs lost during the Great Recession of 2007-2009 (better, 20072010, for the Inland Empire) were recovered by June 2014, the CES data finds that we are still 18,700 jobs, or 1.4% employment, short of the pre-recession peak. We expect this small amount of net job losses to be made up before the end of the year.

It is crucial to keep in mind that, since the start of the Great Recession, population growth in the U.S. has been a steady 1% per year. If we followed recent trends, that growth rate for the Inland Empire would be 4% per year. However, such population growth in the Inland Empire cannot be sustained since it would imply a doubling of the population roughly every 18 years. Assuming that the long-term population growth for the Inland Empire lies somewhere between these two numbers, then the Inland Empire is still many jobs short of the figure we would consider healthy. (The same is true for the U.S., of course.)

Figure 3: US Employment to Population Ratio, U.S. Employment to Population Ratio, 1947-2014, Seasonally 1948-2014 Adjusted 66.0%

Employment to Population Ratio

64.0%

62.0%

60.0%

58.0%

56.0%

54.0% 1948

1954

1960

1966

1972

1978

1984

1990

1996

2002

2008

2014

Source: Bureau of Labor Statistics

Figure 2 shows percentage changes in employment for the Inland Empire during the last three recessions. Not surprisingly, there was no decrease in Inland Empire employment during the dot-com decline, since most of its impact was centered around the Bay Area. However, the 1990s recession was quite severe since there was structural adjustment in the Inland Empire following the end of the Cold War and the contraction of defense related expenditures. Even in this case, employment levels returned to prerecession values within 18 months. Compare that to the Great Recession: it took almost seven years to get back to September 2007 employment levels. Assuming a trend line for Inland Empire

employment growth of 4% a year, then the Inland Empire economy is currently lacking a massive 466,000 jobs. Even for the more modest 1% growth, the current job number is noticeably below the trend line, showing a deficit of roughly 90,000 jobs.

A further concern regarding the current “Not So Great Recovery� is that nationally, the Employment to Population Ratio has dropped dramatically from a pre-recession level of about 63% to under 59%. This ratio is a more objective indicator of labor market weakness relative to the unemployment rate. Unemployment is a somewhat subjective measure, which does not depend on whether a person receives unemployment benefits

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Figure 4: Sectoral Employment Losses and Subsequent Gains Inland Empire, Sep 2007 to Aug 2014 60,000 Net employment loss, Sept 2007 - Sector's Trough Net employment gain, Sector's Trough - Aug2014 Employment recovery, Sector's Trough - Aug 2014 * Employment in September 2007

142,900* 40,000

Change in Employment

20,000

0

230,000*

65,300*

129,400*

219,200* 146,500*

118,100*

113,600*

49,000*

-20,000

-40,000

-60,000

Source: Bureau of Labor Statistics

or the intensity with which she searches for a job.

Being registered as “out of the labor force” rather than being unemployed hinges on the answer to a single question in the CPS. The Employment to Population Ratio, on the other hand, also considers discouraged workers, since they are part of the population. Figure 3 shows that there has been a decline in the Employment to Population Ratio since the turn of the millennium, and that we have not seen levels as low as the current ones since the late ‘70s and early ‘80s. Something seems to be seriously wrong in the labor market; worse, it is not captured by the unemployment rate or by employment levels.

What about the pre- and post-recession job composition? Figure 4 provides an answer

by looking at the job recovery in various major industries of the Inland Empire economy. It shows that the sectors that have experienced the worst job losses, Manufacturing and Construction, have also faced some of the slowest recoveries.

Manufacturing has yet to make up over 30,000 jobs to reach September 2007 employment levels, while Construction needs to recover over 40,000 positions. The figure lends credence to the idea that the Great Recession was a “Mancession,” as both sectors primarily employ male workers. Of the industries that have been able to recover their job losses and grow, Education and Healthcare has been the greatest success story. Healthcare, which makes up more than 121,000 of the approximately 188,000 jobs in the combined

sector, is the main driver of job growth in this sector. The largest portion of the job growth in healthcare has been seen in home healthcare services, which have grown from roughly 11,500 to almost 13,500, or by approximately 17% from March 2011 to March 2014.

This points to a worrisome fact. Sectors that have grown the most are typically made up of lower paying jobs. According to the BLS, the mean hourly wage of Home Health Aides (Education and Healthcare) in the Inland Empire in May 2013 was only $11.60 an hour. The mean hourly wage of Bartenders (Leisure and Hospitality) was $10.00. Meanwhile, jobs such as Carpet Installer (one of the lowest paid jobs in Construction) or Carpenter had a mean hourly wage of $15.50 and $27.30, respectively. Taken together with the job recovery statistics, this means that people in the Inland Empire are finding new jobs that do not pay nearly as well as their old jobs did.

To summarize, the current job recovery in the U.S. and in the Inland Empire is not as positive as portrayed by some in the news media.

The recovery has been relatively weak and any good news therefore deserves some celebration.

While job numbers might have reached their pre-recession peak, they are nowhere near levels where we would want them to be. Furthermore, the industries that have led the job recovery can mostly be characterized as low paying jobs. This means that the Inland Empire job market can currently be seen as consisting of individuals, who have either given up looking for employment following long stretches of unemployment, or are struggling to find good jobs, namely those anywhere near their pre-recession ones. People should think twice before popping the champagne and toasting to the fact that we have finally fully recovered from previous employment losses.

Better, perhaps, to keep the bubbly in the fridge for just a little longer because the Inland Empire job market will see a lift off in the near future. We believe that serious lift off, following the ignition phase, will happen as the national economy strengthens further and as we enter the true expansionary phase of the business cycle.

Martin Sartorius ’15 and Manfred Keil

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Tough Start for IE’s Newest Cities Photo Credit: Kevin Harris | Flickr

Following the passage of SB 89 in 2011, the four newly incorporated cities of Jurupa Valley, Menifee, Eastvale, and Wildomar in Riverside County faced drastic cuts in state funding. The vehicle license fee (VLF) revenue expected from the state was reallocated elsewhere, leaving considerable gaps in municipal budget plans. For the 2012-2013 fiscal year, these cuts totaled an estimated $15.7 million, threatening these cities’ fiscal viability and even their continued existence. They have led to continued reliance on county services, which are frequently minimal, or substantial cuts in the city workforce.

The city most affected by these cuts has been Jurupa Valley, the last of the four to incorporate.

Opening for business only two days before the legislature passed SB 89, it was particularly vulnerable.

Jurupa Valley lost 47% of its expected revenue the first year that SB 89 was in effect, and was behind only Los Angeles for the total dollar amount withdrawn. On an annual basis, the VLF allocation would have been about 35% of revenue. In response to the drop in revenue, Jurupa Valley has cut law enforcement services, restructured debt payments to Riverside County, and kept city hall staffing at a minimum. According to Stephen Harding, the first city manager of Jurupa Valley, the city’s operating budget of $18 million should be at least $35 million. If funding remains at current levels the city risks becoming insolvent by mid-2015.

Menifee has also seen a decline in services.

For the 2012-2013 fiscal year, the city’s Comprehensive Annual Financial Report (CAFR) estimated that Menifee lost about $4 million due to SB 89. According to Mayor Scott Mann, this constitutes 17% of the general fund budget, assuming estimated losses of $4.5 million. The city has managed these cuts by laying off 14 deputies and has seen the near-elimination of an off-road vehicle team.

Eastvale and Wildomar have gotten through the cuts with the least amount of pain. Both cities have been able to transition slowly from Riverside County support services as planned. In Eastvale, the city finances are helped by a higher than projected sales tax revenue and an amended property tax allocation factor. Sales tax revenue increased by nearly $2 million from fiscal year 2011-12 to fiscal year 2012-13, and negotiations with Riverside County on the method for deriving property tax allocation resulted in $483,427 in additional revenue. Nevertheless, Eastvale continues to lose approximately $3.4 million because of SB 89. Wildomar, which is running a surplus of roughly $1.5 million, has adjusted by cutting expenditures by $2,030,718, but not to the same service level as Jurupa Valley. The city’s most recent CAFR estimated that $1.8 million was lost every year because of SB 89. Working with the Riverside County for an eight-year extension of debt payments for county services during the transition from unincorporated area to city has also helped.

SB 89’s overall purpose was to help pay for Governor Jerry Brown’s 2011 prison realignment plan, which shifted responsibility for certain offenders from the state to the counties. Much of the realignment focused on public safety, but greater mandates for county and city governments required greater funding, and the VLF was a superb source. Prior to SB 89, VLF revenues were divided between administrative expenses for the Department of Motor Vehicles,

Orange County (a continued effect of its 1994 bankruptcy), and cities for general purposes.

SB 89 raised the motor vehicle registration fee by $12, which covered $300 million in administrative expenses for the DMV. Cutting the VLF allocation to Orange County and cities allowed the state to free up additional money to use for local law enforcement grants necessary for realignment. The LAO estimates that the change in VLF allocation will save the state $453 million in General Fund expenditures for realignment.

The four cities, incorporating after 2004, were substantially more vulnerable than other cities in California. Most cities had seen their VLF allocation change in 2004 as a result of the property tax swap, but that deal was never offered to new cities, or to areas that incorporated inhabited areas. While there was a fix offered in 2006, it was eliminated in 2011 with SB 89.

To most cities, SB 89 presented a manageable

Jurupa Valley lost 47% of its expected revenue the first year that SB 89 was in effect, behind only Los Angeles for the total dollar amount withdrawn.

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VLF Revenue Lost Due to SB 89 from expected budget, 2011 $25,000,000

16%

$20,000,000 $15,000,000 $10,000,000

47% 22%

$5,000,000 $-

Jurupa Valley

Menifee

Revenue from Other Sources

Wildomar

38%

Eastvale

Amount of VLF Revenue Lost

Source: CaliforniaCityFinance

inconvenience, but it devastated the budgets of these four new cities. This article analyzes the effect of SB 89 on two metrics. First, how it affects state goals of incorporation, and second, how it fits into current spending priorities, particularly public safety realignment.

Incorporation in California Originally passed in 1935, the VLF took the place of property tax on cars. Following the passage of Proposition 13 in 1978, the state began keeping the VLF revenues that had previously been shared by state and county governments.

By 1986, opposition had crystallized in the form of Proposition 47, which specified that VLF revenue, or its successor, had to go to cities and counties. It passed with 82% of the vote.

The state, nevertheless, kept the authority to alter the tax rate, assessment schedule, and the

allocation of revenues among cities and counties.

From 1999 to 2004, the legislature gradually decreased the VLF from 2% to 0.65% of the value of a vehicle. This was offset, or backfilled, from the state’s General Fund until 2004. At that time, the legislature enacted the “VLF-property tax swap,” which substituted VLF revenue for property tax revenue that had previously gone to the Educational Revenue Augmentation Fund (ERAF). Property tax would grow every year with the change in assessed valuation in each jurisdiction. Overall, cities have profited enormously from this switch, gaining upwards of $2 billion in additional revenue.

There were concerns from city governments about this swap, specifically that the state would change the funding formula. As a result, cities pushed Proposition 1A in 2004, which did two things to protect cities. First, it prevented the legislature from reducing any additional property tax received by cities as a replacement for the VLF. Second, it prevented the legislature

from reducing the VLF without replacing the lost revenue to cities and counties. This cemented the amount of revenue existing cities would receive, but unintentionally left new cities vulnerable to the variable funding levels from the state.

Following the swap, there was no compensating property-tax-in-lieu-of-VLF for newly incorporated cities or annexations of inhabited areas. By also deleting the seven-year boost of additional VLF revenue, designed to help encourage incorporation, annexation and incorporation became financially infeasible. In 2006, AB 1602 was passed to address the issue.

Beginning with an annexation or incorporation after August 5, 2004, cities would receive an allocation of additional revenue coming out of the remaining VLF revenues. Instead of the seven-year augmented revenue, cities now received five years, calculated by an artificially inflated population factor. Originally set to expire on July 1, 2009, SB 301 eliminated the sunset provision on additional VLF revenues.

This, however, became irrelevant in 2011 with the passage of SB 89.

VLF revenues to cities are only one aspect of a broader issue of municipal incorporation that goes back several decades. Beginning in the 1950s, California cities began to take advantage of the Lakewood Plan, where they could contract with counties for a wide variety of municipal services.

While lowering the costs of incorporation, this was also a source of revenue for counties. This fiscal incentive to incorporate was compounded by the 1955 Bradley Burns Uniform Local Sales Tax, which created a uniform sales tax rate. By incorporating, cities were able to siphon money away from counties. In 1978, California voters passed Proposition 13, commonly known for capping property taxes, which had an unexpected effect on municipal incorporation. Before Proposition 13, cities had been able to raise property taxes with a simple majority vote. When

control o v e r property tax revenue shifted to the state, property owners could be more secure that a newly formed city would not raise their property taxes. Thus, incorporation improved the fiscal standing of property owners.

Beginning in the 1980s, the calculations that had encouraged incorporation began to change. New incorporations were diverting revenue from already starved county governments.

This was particularly true when a more affluent community formed a new city, as high-revenue, low-need areas ceded, worsening the county’s fiscal situation. In the early 1990s, a combination of decreased defense spending and a crashing housing market led to an economic downturn in the state. This led to the passage of the revenue neutrality law in 1992, which mandated that all future incorporations be “revenue neutral,” meaning that the incorporation cannot cause fiscal harm to a county or other affected agency.

The law attempted to solve the discrepancy between revenue sources and county obligations.

Counties have two main obligations. The first is to provide police and fire services to unincorporated areas, and to some cities on a contract basis.

Second, counties also provide the infrastructure of the criminal justice system – district attorneys, public defenders, correctional facilities – as well as social services and public health services, which are available to all county residents regardless of residence.

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The revenue neutrality law has led to a marked drop in incorporations. Previously, many cities were able to incorporate if they California saw had the desire, but that has been narrowed to only two types of cities: relatively affluent three full decades cities with high revenue and low service needs and cities with a substantial commercial or retail activity, giving where there was an them a sufficient sales tax revenue base.

In the period following the enactment explosion of new cities. of the revenue neutrality law, VLF allocations had become critically Since 1992, this growth important for many of these cities, as it was the only means to fund initial costs. has slowed to a crawl.

SB 89 eliminated two aspects of the VLF allocation that were key to the city. The first was the allocation that most cities no longer received, having swapped it out for property tax

revenue in 2004. The second was an additional allocation that new cities got, exclusively through VLF. This allocation was good for 5 years, declining gradually over that period. For Jurupa Valley, losing this bump alone meant a loss of Funding Formulas several million dollars. As a result, incorporation is now substantially harder for cities.

The year after the governor signed SB 89, Incorporation in California has long and varied history. In the postwar era, California saw the legislature proposed a fix in AB 1098. This three full decades where there was an explosion of bill would fix the reduced VLF allocations for both newly incorporated cities and cities that had new municipalities. Since 1992, however, growth annexed inhabited areas. Nevertheless, Governor of municipalities has slowed to a crawl. Mostly a casualty of funding battles emanating from Jerry Brown vetoed the bill with a succinct Sacramento, the virtual halt raises doubts over message: the state’s future effectiveness at meeting some As drafted, this bill would undermine the of its own objectives. More recently, the state 2011 Realignment formulas in a manner has begun shifting responsibilities for programs that would jeopardize dollars for local to counties, particularly with the public safety public safety programs, provide cities realignment in 2011. These funding battles, new funding beyond what existed under particularly the competition for VLF revenue, previous law, and would create a hole in the continue to drive policy at the state level.

General Fund to the tune of $18 million.

Given the current fiscal uncertainties, this is not acceptable.

Taking the broader view of California’s budget, the Governor’s veto protects two things.

The first is the counties, who are primarily responsible for the realignment in 2011, and the second is the long-term status of the VLF allocation. The third cited reason, the $18 million budget hole, seems to be more circumstantial than permanent.

In the 2011 realignment plan, the state shifted non-serious, non-violent, and non-sex inmates from state prisons to county jails (See “Prison Realignment” from the Spring 2014 Inland Empire Outlook). This involved the transfer of $6.3 billion to local governments, mostly counties, to carry out their increased responsibilities. Reallocating VLF revenue to counties accounted for about 7% of the total cost of realignment. A side effect of this was to create a divide between the counties and the cities.

While cities were hurt by the removal of the VLF (though only a few dramatically), counties

benefited immensely. Moreover, counties now had an incentive to keep the funding formulas intact – a change in the formulas could result in the counties being on the hook for more of the realignment costs. For Governor Brown this seems to have been the deciding factor.

In both the Assembly and Senate analyses on SB 89, only one organization offered formal opposition to AB 1098, the California State Association of Counties (CSAC). The organization made two claims. First, the calculation for appropriating VLF revenue to newly incorporated cities and cities that have recently annexed inhabited areas will exceed the $25 million gained by removing the DMV’s appropriation from the Motor Vehicle License Fee Account. Eventually, this would lead to money being taken out of county realignment funding to pay for these cities. Second, the cities would get permanent funding from the VLF. Giving the new cities the startup allocation (a boost in VLF Photo Credit: Kevin Harris | Flickr

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revenue for the first 5 years after incorporation, declining every year), as well as an ongoing allocation, ensures that the bill would remove some of the funding sting from realignment. If, however, a particularly large incorporation were to occur, such as East Los Angeles, it would cause serious reductions in funding for counties.

Governor Brown’s concerns, shared by the counties, center on the issue of mandate claims.

Currently, California’s Constitution requires the state to reimburse local governments if it mandates either a new service or a higher level of service.

Government Code Section 17556 specifies that the state is free from mandate reimbursements if it increases the amount given to local agencies “specifically intended to fund the costs of the state mandate in an amount sufficient to fund the cost of the state mandate.” More recently, the Commission on State Mandates has interpreted Section 17566 so that the state gets credit for satisfying a mandate claim only if it directly links revenues to a particular mandate. This has been

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compounded by the passage of Proposition 22 in 2010, which prohibits the state from using VLF revenues for mandates. Together, these create an added risk that the state will be forced to pay local governments additional money. While the issue of mandates was alleviated in 2012 with the passage of Proposition 30, which eliminated the state’s mandate liability, this was not the case five months before the election, when AB 1098 was passed.

SB 89 shifted the VLF revenue from the city governments over to law enforcement. Now, VLF revenue is distributed through grant funding in the Local Law Enforcement Services Account.

This has given law enforcement agencies an ability to carry out the demands that realignment has placed upon them. In the four cities where VLF allocation has disappeared, the irony is that these cities have suffered from drastic cuts to their police forces. For them, law enforcement agencies are likely worse off than they were before 2011.

For the vast majority of counties, however, the

grants given to law enforcement agencies have helped smooth the edges of realignment and put them in a better position.

More recently, bills were brought forward in each chamber to solve the funding problem for the four new Inland Empire cities. In the Assembly, AB 1521 sought to remedy the VLF allocation formula, but only for those cities that have annexed inhabited areas.

In the Senate, SB 69 targeted cities that incorporated after January 1, 2004, but before January 1, 2012.

AB 1521 proposed taking $5 million in property tax revenue from the ERAF. The amount lost to the ERAF would be backfilled from the General Fund.

Over time, the $5 million would grow as property taxes increase. SB 69 gave newly incorporated cities a property tax allocation equal to what they would have received in VLF. In essence, this gave the four new cities the same deal handed to all other cities in 2004.

Nevertheless, this only applied to the four cities that incorporated between January 1, 2004 and January 1, 2012. As such, it did not deal with the broader issues of municipal incorporation and whether new cities should be created. Nevertheless, on September 28, the Governor vetoed both bills. His veto message echoed his veto message for AB 1098: While it is true that the state’s economy has improved markedly, and significant progress has been made in aligning revenues and

expenditures, I do not believe it would be prudent to authorize legislation that would result in long term costs to the general fund that this bill would occasion.

The Governor seems primarily concerned with the long-term status of the VLF allocation; it is one of the reasons he gave in his veto message for AB 1521. This raises the central question of the funding problem: if not through the General Fund, then how will these cities be funded? It seems that no matter the source, the General Fund will be affected (it is unlikely that new revenue would be raised exclusively for the purpose of funding these cities, so the funding will have to come from some existing source). For the Governor, this will be the crux of his problem moving forward.

The cities’ problem is both larger and more immediate. Funding shortages risk continued cuts to city services, including public safety. Jurupa Valley in particular will have to find a way to fund operations for the next year, which may not be possible, leading the city to become insolvent. The other cities will suffer financially as well, but have a better chance of getting through these obstacles. As cities consider incorporation, the answer for most will be no. It will remain too difficult, if not impossible, to find the fiscal base to support a new city without assistance from the state.

Tim Plummer ’17

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Continued Recovery or the Next Recession?

Photo Credit: Brian Liao| Flickr

The latest data for the national unemployment rate shows a decline of 0.2 percentage points to 5.9% in September. Good news, right? After all, we have not seen rates this low since July 2008, before the fall of Lehman Brothers. After reaching a double digit peak in October 2009, four months after the official end to the Great Recession, the U.S. economy has seen unemployment rates decline by 4.1 percentage points. A year ago, the figure stood at 7.2% but has decreased significantly, despite the lack of strong economic growth in output, especially by historical standards during a similar phase of the recovery. While the unemployment rate we observe at “full employment” is not constant over time, we appear to be approaching that rate estimated to be between 5.0-5.5%. Figure 1 shows that national unemployment rates at full employment were approximately 4% in the 1960s, increasing to perhaps as high as 6.5% until the mid-‘80s, before returning to lower levels again during the ‘90s and until the start of the Great Recession in December 2007.

The situation is not quite that rosy for California and the Inland Empire. Here unemployment rates remain higher than the national average, with state and regional numbers now standing at 7.4% and 8.3% respectively. However, this represents a 5 percentage point decline from the peak in February/ March 2010 for the state. While the California unemployment rate has remained unchanged for the last three months, this simply appears to be a break in the long-term downward trend. It is still 1.5

Figure 1: US Civilian Unemployment Rate, Jan 28 - Sep 14

Source: Federal Reserve Bank of St. Louis

Figure 2: Unemployment in California and the Inland Empire, Jan 90- Aug 14

Source: FRED and California EDD

percentage points lower than a year ago, declining faster than the national rate and converging towards a similar level. The Inland Empire was one of the epicenters of the housing bust and hence experienced a severe subsequent economic decline. Thus, the current unemployment rate represents an impressive decrease from a peak of 14.8%. Figure 2 shows the state and regional

unemployment rates since 1990.

With all these good numbers, why are we not celebrating? After all, California knows how to party (like it’s pre-recession 2006). There are two reasons. First, much of the national, state, and regional decline in the unemployment rates was achieved by a drop in the labor force participation rate (the percent of the population

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that is either employed or considers itself unemployed in surveys). This suggests that many workers dropped out of the labor force because they gave up searching for jobs after long spells of unemployment, with some of them collecting disability benefits. If these so called “discouraged workers,” decided to return into the labor force, then the unemployment rate would be considerably higher or at least would further decline at a slower rate. Participation rates have not been this low since late 1977, 37 years ago. A more objective measure of the labor market (than labor force participation) is the employment to population ratio. It measures the proportion of the country’s working age population (age 16 and above) that is employed. In September it stood at 59.0%. It has been under 60% since February 2009, falling from a peak of 64.7% in April 2000. Again, we are now at levels not seen

since the recovery from the Volcker recession in early 1984 when it ranged from 58.8% to 59.1%.

How Much Longer Will the Expansion Last?

The second reason for caution is the fact that the American economy is now headed into its 63rd month of expansion, five months past the post WWII-average of 58 months. However, and as always, the mean typically does not tell the whole story. There is significant variation in expansion length ranging from just four quarters in 1980-1981 (there was the infamous “doubledip recession”) to almost ten years in 1990-2000.

So what does this suggest? The next recession could just be around the corner or we could still have a few years to go in this “Not So Great

Figure 3: Employment-Population Ratio, Jan 84 - Sep 14 66%

65%

Employment to Population Ratio

64%

63%

62%

61%

60%

59%

58% 1984

1990

1996

2002

2008

2014

Source: Bureau of Labor Statistics

Figure 4: Business Cycle Length

The three most recent expansions lasted an average of 98 months, or roughly eight years.

Recovery.”

We are not the only ones to have this concern, others have also noticed and discussed the issue.

The Economist, for example, ran an article in its August 16 edition titled “How Long Will the Expansion Last? Weighing the Evidence.” The graph in Figure 4, from The Economist, shows the length of the expansion following the various post World War II recessions to illustrate the point about average length and variability.

The important question is whether the current expansion is different from previous ones. If so, this would allow us to relax for a while longer before worrying about the next wild ride down approaching rapids. For example, the socalled Great Moderation (the period following the 1981 Volcker recession) led to differences in deep structural factors such as companies’ control of inventories (“just in time…”) and a conducting business in a low inflation environment. Inventory cycles and monetary contraction to fend off high interest rates were major causes for recessions in pre-‘80s era.

Such changes, rather than sheer luck, may

well have increased the length of expansions. The three most recent expansions lasted an average of 98 months, or roughly eight years. Based on this model, we should not worry about a downturn until mid-2017. Economists at JP Morgan claim that every percentage point increase in the output gap of a recession (the percentage difference between GDP and full employment GDP) adds two quarters to the subsequent expansion’s life span. Under this scenario, the current expansion will continue for at least two more years.

The arguments presented above may also overestimate the risk of recession completely, since they are based on historical regularities regarding volatility and the severity of the previous recession. What if the latest recession was completely different in character? After all, it was the result of a financial crisis rather than the typical monetary contraction/negative oil price shock. Financial imbalances are just now working themselves out fully – hence the Federal Reserve cutting quantitative easing this month. Interest rates have remained very low to induce a more robust recovery, and therefore lessons learned

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from previous crises and subsequent recoveries may not be directly applicable to our current situation (we would have to go back to the Great Depression to analyze a similar situation). For example, despite the fact that the U.S. economy currently seems to approach full employment by traditional measures, there is no evidence of any upward pressure in wages. The implication is that economists must find a different metric for the current recovery rather than using the typical gage of months from trough to peak.

The The Special Role of the Inland Inland Empire in Business Cycle Analysis Empire is Instead of engaging in an intellectual a leading discussion here about the appropriateness of various measures for an expansion, is indicator there a radar device that could help us forecast a new downturn? The answer is yes, both for California and the nation: of economic if a recession is coming, the first signs will show up in the Inland Empire economy. It looks to us like there is declines for absolutely no evidence of another downturn in the near future. the Greater Los Unfortunately for San Bernardino County and Riverside County residents, the Inland Empire is neither the “last in Angeles area first out” (LIFO) nor the “first in first out” (FIFO) in a recessions. Rather, it is “first and perhaps in and last out” (FILO). Therefore it is a leading indicator of economic declines for the Greater Los Angeles area and perhaps even the even the nation. Note that prior to the start of the most recent recession in December 2007, housing prices and employment peaked as early as mid-2006 in the nation.

Inland Empire. Conversely, there were few signs of a contraction for the rest of Southern California and most parts of the country until the summer of 2007. The recession officially ended in June 2009, but the Inland Empire did not begin its recovery until early 2010. Thus, the Inland Empire is twice cursed: it does not receive many warning signals for recessions from other regions

Photo Credit: Tom Nolan | Geograph

and it is more strongly affected by recessions.

This was part of the motivation at the Inland Empire Center to construct an index of leading economic indicators for the region.

The overall outlook appears to be strong. At our last conference in April 2014, we predicted that the region would grow by 2.6% in 2015, and there would be an uptick to 3.1% in 2016.

Furthermore, housing prices have recently seen double-digit increases, and both distress sales and foreclosures have declined significantly.

Even housing starts, one of the strongest leading economic indicators, have finally shown some signs of life. There were clear signals for imminent rebound for the regional economy in the spring, and the theme of our upcoming October forecast conference in Ontario will be that lift-off in the Inland Empire has finally occurred.

What causes the Inland Empire to be a “FILO� region? As we see it, it is the result of the labor force composition in the RiversideSan Bernardino-Ontario Metropolitan Statistical Area (MSA). Consider three types of workers that represent the major composition of the labor market for the Greater Los Angeles area and the Inland Empire. The first group lives and works in

Los Angeles; the second group, the somewhat less educated workers, reside in the Inland Empire, but work in Los Angeles; the third group lives and works in the Inland Empire.

The first group tends to be, on average, the most qualified workers in this region’s labor market. These individuals have more human capital and therefore are better qualified for the higher paying jobs in Los Angeles County and Orange County. As a result, they can afford to live in the Los Angeles-Long Beach- Santa Ana MSA as well. The second group, the commuters, qualifies for some jobs in the Greater Los Angeles area, but they are not paid well enough to rent or own property in desirable locations there. However, these jobs are generally higher paying than those available in the Inland Empire, accounting for the willingness to undertake lengthy commutes into the counties further west (and to some small extent, into San Diego County). The third group is not qualified for the better paying jobs in Los Angeles and thus lives and works in the Inland Empire; or at least does not find it beneficial to take these higher paying jobs after taking into account the cost of commuting.

During the earliest phase of a contraction,

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firms lay off those workers first who are less instrumental to the business, and try to hold on to their core talent. The workers who commute occupy positions of lesser importance and are hence the more marginal workers, at least on average. Inland Empire residents, then, will be the first to be laid off in a contraction phase of the business cycle (“first in”). When these workers lose their jobs, unemployment rates increase in the Inland Empire, since the Current Population Survey is conducted by residency, not place of employment. Hence unemployment rates in the Greater Los Angeles area will remain relatively unaffected at first.

Following the lay-offs of the commuters, the next group of workers in line consists of those who live and work in the Inland Empire. This is the direct result of decreased demand from the newly unemployed commuters, who now have to cut back on their purchases. The last group to be affected is composed of employees who live and work in the Greater Los Angeles area, as they are the better qualified and less expendable in a firm (“last in”). This phenomenon causes the Inland Empire to be one of the first regions to show signs of the impending crisis and therefore act as a leading indicator of recessions.

Following a similar logic, we can explain the sequence of employment gains for the recovery.

During the early stages of the expansion, firms in the Greater Los Angeles area will first rehire residents closer to them, since these tend to be more qualified (LIFO). Hence we observe a bifurcated recovery. This will be followed by the commuters from the Inland Empire. The last group to see the benefits from the economic expansion will be the group that lives and works in the Inland Empire. They are completely reliant on the recovery of Los Angeles and the coastal regions. As a result, the Inland Empire, as a whole, is the first in and last out of recessions.

People who live and work in the Inland Empire are completely reliant on the recovery of Los Angeles and the Coastal Regions.

Photo Credit: Amerique

|

Commons Wikimedia

Photo Credit: Wikepedia

Will the Future Look Any Different?

What are some of the policy implications of this analysis? First, the communities of the Inland Empire should attempt to attract better paying jobs into the area. This would allow the better qualified workers to cut commuting times significantly. An astonishing 40 percent of the labor force in the Inland Empire commutes.

While their plight can be alleviated through better public transport, the sheer distance of the commute remains a fact. Second, in order to attract better paying jobs, potential employers must be assured to find local talent. This requires serious investment in education, or at least a restructuring of current programs, to improve high school graduation rates and to retain students in higher education.

Now is the time to plan ahead given that both county and city budgets will be less constrained due to increased tax revenues from an improving economy. It will be relatively easy to see returns on these policies when fewer qualified individuals feel the need to undertake long and costly commutes, and when the Inland Empire ceases to be a FILO economic area.

When all is said and done, there is little for the Inland Empire economy to worry about from the current economic situation. We are in calm waters with no rapids in sight. This is the time to check the sea-worthiness of the vessel and to make necessary improvements. While hectic times lie ahead at some point, we also hope that the guides will be more experienced to deal with white water, regardless of how difficult. As for now, we should relax a bit and enjoy the ride.

Patrick Shultz ’15 and Manfred Keil

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EDITORI A L BOAR D Andrew Busch,

PhD

THE INLAND EMPIRE CENTER

DIRECTOR, ROSE INSTITUTE

Marc D. Weidenmier,

PhD

DIRECTOR, LOWE INSTITUTE

Manfred Keil,

PhD

Kenneth P. Miller, Bipasa Nadon,

JD, PhD

The Inland Empire Center for Economics and Public Policy is based at Claremont McKenna College. It was founded as a joint venture between the Rose Institute of State and Local Government and the Lowe Institute of Political Economy to provide business and government leaders with timely and sophisticated analysis of political and economic developments in the Inland Empire.

JD

ST UDEN T S TAF F Ben Fusek ‘17 Francesca Hidalgo ‘17 Tim Plummer ‘17 Martin Sartorius ‘15 Patrick Shultz ‘15 Mengyue Vicky Yang ‘15

The IEC brings together experts from both founding institutes. Marc Weidenmier, Ph.D., director of the Lowe Institute, is a Research Associate of the National Bureau of Economic Research and a member of the Editorial Board of the Journal of Economic History. Andrew Busch, Ph.D., director of the Rose Institute, has authored or co-authored eleven books on American politics and currently teaches courses on American government and politics. Manfred Keil, Ph.D., an expert in comparative economics, has extensive knowledge of economic conditions in the Inland Empire. Kenneth P. Miller, J.D., Ph.D., is an expert in California politics and policy who studies political developments in the Inland Empire.

Bipasa Nadon, J.D., has worked in municipal government and specializes in local government policy.

To receive issues of the IEO electronically and news from the IEC, please e-mail us at contact@inlandempireoutlook.org