Inland Empire Outlook Spring 2011 Issue

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INLAND EMPIRE OUTLOOK Economic and Political Analysis Volume II | Issue 1 | Spring 2011 ONT: An Airport in Crisis and at a Crossroads INSIDE pg. 2-6 A First Look at Inland Empire Census Data pg. 7 Great Recession’s Impact on I.E. Economic Performance pg. 8-11 Renewable Energy’s Future in the Inland Empire pg. 12-15 Redevelopment Authorities Under Fire pg. 16-21 Stagnation and Recovery: The Inland Empire’s Housing Market pg. 22-27


Working Toward a Recovery


his issue of Inland Empire Outlook reflects the Inland Empire’s ongoing struggle to emerge from the recession. In prior issues, we have examined the recession’s toll on this region and have described strategies for building a more secure economic future. This issue continues that important discussion. We begin with an in-depth analysis of the crisis facing Ontario Airport (p. 2). The airport should be one of the region’s greatest economic assets, but for several years mismanagement by L.A. World Airports and a high cost structure have driven away passenger and cargo traffic. We explore changes that could make the airport a more competitive and profitable transportation center. Next, our economic update shows that the Inland Empire still lags far behind the rest of the nation in its effort to achieve economic recovery (p. 8), with unemployment rates far above the national average. Our analysis shows that Riverside County was hit harder by the recession and is recovering more slowly. We see the same pattern in our study of the housing market data for the two counties (p. 22). Fortunately, there is some good news: foreclosures are declining and prices appear to be stabilizing. Looking to the future, we see renewable energy as a potential growth industry for the Inland Empire. Governor Jerry

Brown recently signed into law a bill that mandates 33 percent of electricity in California must come from renewable sources by 2020. We expect the Inland Empire to emerge as a key player, but we also analyze several factors impeding this development (p. 12). Also on the horizon is the potential loss of redevelopment agencies and enterprise zones (p. 16). Governor Brown’s proposal to eliminate them has ignited opposition from Inland Empire officials. Finally, we take a first look at the recently released 2010 census data (p. 7). On June 22, 2011, the Inland Empire Center, in partnership with the UCLA Anderson FORECAST, will hold the second CMC-UCLA Inland Empire Forecast Conference at the Riverside Convention Center. Jerry Nickelsburg of the UCLA Anderson Forecast will present a state and national economic forecast and CMC economists Marc Weidenmier and Manfred Keil will present an economic forecast for the Inland Empire. The conference will also feature panels on the future of Ontario Airport and on the impact of trade, logistics, and foreign direct investment on the Inland Empire economy. For updates to these stories and other Inland Empire news, please visit our website, —The Editors

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ONT: An Airport in Crisis and at a Crossroads


o the average traveler, a flight out of Ontario International Airport is a dream come true. Located in the city of Ontario, it sits at the border between Los Angeles County and San Bernardino County, and offers easy access to the LA metropolitan area as well as the Inland Empire. While a trip to LAX from the Inland Empire can take upwards of an hour, traffic going to Ontario Airport is rarely an issue. Travel through the airport is speedy too. Even on the busiest travel days of the year, lines at Ontario Airport are virtually non-existent. Flights mostly run on time, and the airport is small, well-designed, and easily navigable. While the short lines at Ontario Airport may be a blessing to passengers, to airport officials and insiders, they are just the latest symptom of a dying airport. Officials in Ontario, Los Angeles, and the Inland Empire have all expressed concern about Ontario Airport’s future, and called attention specifically to the airport’s unique operational structure. Ontario International Airport is actually owned and operated by the city of Los Angeles. Los Angeles World Airports (LAWA), a department of the Los Angeles city government, runs both LAX and Ontario Airport, as well as Van Nuys Airport in San Fernando. Although LAWA successfully managed Ontario Airport in the past, the airport’s recent decline has caused many to question this operational model. The statistics for Ontario Airport certainly point to trouble. In 2009, Ontario Airport’s annual passenger volume fell to five million, a decline of 28 percent in a decade. Average daily departures on Southwest, Ontario Airport’s highest volume airline, declined from 58.4 in 2001 to 39.7 in 2010. JetBlue and ExpressJet, once promising new additions, have more recently abandoned the airport entirely. Passenger traffic at Ontario Airport has fallen sharply, domestic flights have been slashed, and airlines have left in droves. While other airports

Page 3 around the country and in Southern California have been on a road to a post-recession recovery, Ontario Airport has remained stagnant. Ontario Airport’s decline has serious consequences for the entire region. Recent estimates by the city of Ontario suggest that the Inland Empire lost upwards of $400 million in business and revenue, as well as more than 8,000 jobs from 2007 to 2009 directly because of Ontario Airport’s decline. Ontario Airport wasn’t always on such a tumultuous path. Thanks to low costs and robust support from numerous airlines, Ontario Airport enjoyed significant increases in annual passenger volume throughout the 1980s and 1990s. Annual passenger volume increased from approximately two million in 1980 to seven million in 2007. In 2000, JetBlue chose Ontario Airport as its first west coast destination.


What went wrong in Ontario? The answer is not difficult to identify—for airlines, it is an exorbitantly expensive place to operate. Airports use a measurement called Cost per Enplaned Passenger (CPE) to compare costs. In United States airports, the median CPE is $6.76. In contrast, Ontario Airport’s estimated CPE was $14.50 for 2010, more than 214 percent above the median. This is higher than every other major regional airport. Similar sized airports in the southern California region, such as Long Beach ($5.34) and Palm Springs ($4.07), are less expensive. Even LAX, despite being a much larger airport, has a CPE of $11. With such prohibitively high costs, Ontario Airport is unable to offer competitive prices, and consequently, airlines have low profit margins at Ontario Airport and little incentive to operate there.


What is behind these enormous costs? According to Greg Devereaux, Chief Administrative Officer of San Bernardino County, there are three primary reasons for the high cost of operation at Ontario Airport: a costly and unnecessary administrative fee imposed by LAWA, overstaffing, and overcompensation of airport employees. LAWA charges Ontario Airport a 15 percent fee as overhead for “administrative fees.” Some believe that this fee is superfluous. Devereaux estimates that once the administrative fee is taken into account, the airport is effectively paying staffing costs “triple the size of other [comparable] airports.” According to a report commissioned by the City of Ontario in 2010, Ontario International Airport – A Recovery Plan, “this administrative charge alone adds $3.68 per enplanement to Ontario Airport’s costs—which INLANDEMPIREOUTLOOK.COM | 3

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is more than Orange County, San Diego, or Burbank paid in total compensation and benefits per enplanement in FY2008.” The second issue is overstaffing. Until very recently, Ontario Airport had more than twice the number of employees as most comparably sized airports. With 302 budgeted employees, and 85 additional LAWA employees (compensated via the administrative fee), Ontario Airport employs a significantly larger staff than John Wayne (175) and Long Beach (124), despite comparable traffic. This problem is nothing new. As Deveraux notes, “Even at the point where [Ontario Airport] had 7 million passengers, it was clearly overstaffed.” While other airports were able to cut down on staff following a decline in business, local labor unions have been a major obstacle to initiating staffing changes at the airport.


The final source of Ontario Airport’s high cost is perhaps the most surprising. Not only does Ontario Airport appear to have significantly more employees than necessary, it also pays them at an inflated rate. Ontario Airport, with a compensation budget of $30.9 million for 302 budgeted employees, pays an average of $102,400 per employee. According to Devereaux, this high level of compensation occurs because employees of Ontario Airport are paid according to the Los Angeles living wage ordinance and payroll structure, rather than that of Ontario. Ontario Airport employees are compensated as if they lived in Los Angeles even though most live in the Inland Empire, where the cost of housing alone is 34 percent lower, according to CNN/ Money. Thus, overstaffing compounded by overcompensation of airport employees has contributed to the high cost of operations at Ontario Airport. In response to mounting criticism, LAWA recently cut Ontario Airport staff by 30 percent through early retirements and transfers to other LAWA-owned airports. Yet even now, LAWA Executive Director Gina Marie Lindsey acknowledged in an interview with the Daily Breeze that the airport has “not been able to keep pace with the reduction in traffic and revenues.” Ontario Airport remains an overstaffed and exceptionally expensive airport, even after these reductions. The alleged inefficiencies caused by the governance structure at Ontario Airport are not the only points of concern for local officials. Devereaux and members of the Ontario city council have repeatedly expressed their concern that the city of Los Angeles is not doing enough to help save Ontario Airport. Devereaux points out that LAWA “hasn’t been meeting out in Ontario” for several years and appears to be “focusing on building in LA,” rather than Ontario Airport. These facts, says Devereaux, combined with LAWA’s decision to slash Ontario Airport’s marketing budget by 85 percent in 2008, appear to indicate of a clear “lack of focus and interest [from LAWA] even as the number of passengers [at Ontario Airport] was declining.” Executive Director Lindsey responded to these concerns in a March 1, 2011 letter acknowledging the difficulty of giving Ontario Airport complete focus, while denying that LAWA has been inattentive. “We do agree that given LAWA’s portfolio of responsibilities, it is impossible for our senior management team to devote its full attention to [Ontario airport], just as it is impossible for us to devote our attention exclusively to Los Angeles International Airport or our other two airports.”

Page 5 While diagnosing the problem of high costs facing Ontario Airport is fairly simple, prescribing a solution is much more difficult, and there remains a significant divide over what action should be taken. Officials in the City of Ontario and in San Bernardino County argue that the best course of action is to have LAWA retain ownership, but to transfer operational control to the City of Ontario. Devereaux firmly believes that costs could be reduced immediately with the transfer of operational authority. “You could get it down to about a $10.50 CPE right away,” he says. Devereaux isn’t the only advocate for such a change at Ontario Airport. State Senate Minority Leader Bob Dutton (R-Rancho Cucamonga) recently authored a resolution calling for a transfer of control over Ontario Airport from Los Angeles to a local authority. It is cosponsored by Assembly members Wilmer Amina Carter (D-Rialto), Kevin Jeffries (R-Lake Elsinore), Brian Nestande (R-Palm Desert) and Norma Torres (D-Ontario). The resolution asserts that a local authority, such as the City of Ontario, would be the most capable of turning Ontario Airport around. Deveraux and others have been involved in ongoing negotiations with the City of Los Angeles to transfer control of the airport; however, Executive Director Lindsey and other LAWA officials have expressed concerns that the City of Ontario, without any experience in airport management, may not be the best group to take over control. As a result, LAWA has recently begun exploring other options for a transfer of authority, including a number of potential private solutions. Viggo Butler, an expert in airport privatization and the chairman of the aviation subcommittee at the Los Angeles Economic Development Corporation, sees a number of potential solutions involving private contractors working in conjunction with government groups. Ten private firms, including the Carlyle Group and Goldman Sachs Infrastructure Partners, have thus far expressed interest in becoming involved with Ontario Airport.


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According to Butler, a private solution for Ontario Airport could take a number of forms. One idea involves Los Angeles retaining ownership, while granting operational authority to a private entity through a long term lease. A public-private partnership, in which a government sponsoring agency (either Ontario or a new authority with Ontario and San Bernardino County) joins with a private investment firm to operate the airport jointly, similar to the model employed at the Burbank airport, may also be possible. A third possibility involves an outright sale of the airport; Los Angeles officials, including City Councilwoman Janice Hahn, have expressed a newfound willingness to put a transfer of ownership on the table. While there is little precedent for airport privatization in the United States, Butler points to London Heathrow Airport as an example of successful private airports. Further, he notes that Ontario Airport has large capacity for terminal expansion—an asset no other Southern California airport enjoys—and direct access to the Inland Empire. Both give it enormous potential for growth. According to Butler, these factors make control of the airport particularly appealing to private entities. The potential for long term cost reduction with a transfer of ownership is substantial. A transfer of operational control to the City of Ontario or a private firm could present costcutting options currently unavailable to LAWA. Depending on the structure of ownership and control, a new owner may not be bound by the L.A. living wage ordinance in the future. Devereaux believes that with a staff cost reduction and relief from the LAWA administrative fee, Ontario Airport’s CPE could eventually fall to the $5-$7 range. If Ontario Airport succeeds it may be able to convince low cost carriers like Virgin, Jet Blue and Southwest to return or expand service. With more carriers, lower costs, and increased marketing, Ontario Airport may be able to get back on track. The battle over Ontario Airport’s control and future is enormously important to the Inland Empire and Southern California as a whole. Despite some setbacks and delays, local officials remain optimistic. “We have made a lot of progress and I am hopeful that many of these groups know that it is in the long term interest of Southern California and L.A. to make the airport successful,” said Devereaux. For now, Ontario Airport remains at a crossroads, grounded squarely on the tarmac.

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A First Look at Inland Empire Census Data


he recent release of the 2010 Census data confirms that the population of the Inland Empire has grown considerably in the last decade. Since the 2000 count, Riverside County has grown by about 40 percent, while San Bernardino County has grown by about 20 percent. The majority of the growth in these counties came in outlying areas rather than in large cities. The population of Riverside County grew from 1,545,387 in 2000 to 2,189,641 in 2010. Communities along the I-15 from Corona to Lake Elsinore have experienced rapid growth. The area from the 60 Freeway south to Murrieta has also seen big increases. In San Bernardino County the population grew from 1,709,434 in 2000 to 2,035,210 in 2010. Chino Hills and Los Serranos along the 71 Freeway saw the large increases. The other area of significant growth is along the 210 extension corridor where Rancho Cucamonga grew from 127,743 to 165,269 in 2010.


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Great Recession’s Impact on I.E. Economic Performance


he United States unemployment rate is now in single digits after decreasing quite sharply over the last four months to 8.8 percent. It stood at 10.1 percent in October 2009. At the same time, the Inland Empire continues to face double digit unemployment rates. The region was hit earlier and harder by the Great Recession and is recovering much slower than most parts of the nation. While output figures for the Inland Empire are only published with a considerable delay and are only available at an annual frequency, these are now posted through 2009. The Great Recession started in December 2007 and ended in June 2009. The output decline for 2008 in the U.S., as a whole, was negligible (you may recall the Bush tax cuts in the second quarter of 2008, when Gross Domestic Product (GDP) actually increases slightly): there was no decline for the U.S. figures in annual numbers. The severity of the U.S. recession started with the third quarter of 2008 with the fall of Lehman Brothers, and we saw the sharpest declines in the second half of 2008 and the first two quarters of 2009. Despite the recovery for the last two quarters of 2009, U.S. real GDP declined by 2.6 percent for the year, making it the most severe post World War II recession in the U.S. However severe the U.S. numbers may sound, they pale compared to those of the Inland Empire. To begin, there was a small decline in real GDP from 2006 to 2007 of 0.7 percent, probably starting in the summer of 2006 with the burst of the housing bubble. The recession worsened in the Inland Empire in 2008, when real GDP declined by 3.4 percent. 2009 proved to be a true disaster year, with output declining by a further 4.9 percent. This represents 1/20th of output lost in a single year. At the end of 2009, real GDP in the Inland Empire stood at a horrifying 8.8 percent below its 2006 peak. It will take quite some time to recover from this low point.

Page 9 How did the two counties within the Inland Empire fare during this period? The recession and subsequent recovery are far from even for San Bernardino County and Riverside County. While San Bernardino County currently has an unemployment rate of 13.7 percent, Riverside County is suffering from an unemployment rate of 14.1 percent. A detailed analysis of industrial composition and per capita income shows that Riverside County was hit harder by the recession and is recovering more slowly. Due to their location and proximity to the Greater Los Angeles area, both counties have a similar industrial composition. Trade and transportation (logistics) dominate, employing approximately a quarter of the labor force (26 percent in San Bernardino County and 23 percent in Riverside County). Educational and health services, leisure and hospitality, and manufacturing follow closely, each FIGURE 1: EMPLOYMENT BY INDUSTRY IN RIVERSIDE averaging roughly 10 percent in both COUNTY, DECEMBER 2009 counties.


Both counties have sustained severe job losses in their key industries of construction and manufacturing. This is not surprising, since the Great Recession affected these sectors particularly hard. As a result, it is sometimes referred to as a “mancession� due to the significant job losses for males in the two sectors. In September 2006, construction and manufacturing employed 17 percent of the workforce in San Bernardino County and 23 percent in Riverside County. By December 2009 these numbers had fallen to 12 percent and 14 percent respectively. This is quite dramatic. Since the employment share of construction and manufacturing is higher in Riverside County, it is not surprising that the recession had a more severe effect there. The construction industry in Riverside County, in particular, has suffered much more than its counterpart in San Bernardino County. In Riverside County, the construction industry accounts for 40 percent of cumulative losses since January 2007, or approximately 36,000 jobs. In San Bernardino County, the construction industry has lost 21,500 jobs since January 2007, accounting for 27 percent of the jobs lost.


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In contrast, the logistics industry has fared better during the recession in Riverside County than in San Bernardino County. San Bernardino County lost 2,300 jobs in the trade and transportation industry from 2007 to 2009. During the same period, Riverside County actually gained 2,200 jobs in the same industry. These gains, however, are dwarfed by the sheer size of the losses in the construction industry. FIGURE 4: CUMULATIVE EMPLOYMENT LOSSES BY INDUSTRY IN SAN BERNARDINO COUNTY FROM JANUARY 2007 TO DECEMBER 2009

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Per capita income in Riverside County is historically slightly higher than that in San Bernardino County. However, San Bernardino County per capita income increased steadily during the recent recession and is now almost equal to that in Riverside County. From 2006 to 2008, San Bernardino County’s per capita income has climbed by roughly $1,750 to slightly more than $30,360, while Riverside County’s increased by only $600 dollars to approximately $30,900; there was actually a small decline in the Inland Empire’s per capita income from 2008 to 2009. Although San Bernardino County and Riverside County have historically grown at similar rates, the former has gained considerably on the latter from 2006 to 2009, which is the most recent year available. Looking at the graph, it appears that San Bernardino County is approaching Riverside County primarily because the growth rate of Riverside County has significantly flattened out, while San Bernardino’s has not changed much from historical patterns. It will be interesting to make further comparisons once data becomes available for the post recession year. It appears likely that San Bernardino County will pass Riverside County in per capita income in 2010. The continued growth of per capita income in both Inland Empire counties over the past twenty years illustrates the incredible economic boom the area enjoyed until the start of the Great Recession. In particular, from 1997 to 2003 annual growth rates reached seven percent. Yet, despite the fact that increases in per capita income have flattened since 2006, per capita income has still increased by over two-thirds for each county since 1990. Meanwhile, Orange County per capita income has actually dropped since 2007, though it remains significantly higher than the per capita income in either Riverside County or San Bernardino County. Los Angeles County per capita income continues to grow at a rate similar to both parts of the Inland Empire, despite the fact that, again, Los Angeles per capita income is higher than in the two counties of the Inland Empire.


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Renewable Energy’s Future in the Inland Empire


n April 12, 2011 Governor Jerry Brown signed into law a mandate that one-third of electricity in California must come from renewable sources by 2020. California had previously required investor-owned utilities to generate 20 percent of their electricity from clean sources by 2010, with a three year grace period. The new law raises the requirement to 33 percent and will also apply to municipal utilities, which manage about a quarter of the state’s electricity load. In the coming years the Inland Empire should emerge as a key player in California’s push toward meeting this mandate due to the region’s abundant available land, sun, and high wind. California currently lags behind other western states in its quest to expand production of green energy. There are four primary impediments to its growth: aesthetics, environmental concerns, huge acreage requirements, and cost. Even many people who support renewable energy object to the sight of power lines or wind farms in their own neighborhoods. This issue came up recently in Chino Hills, where Southern California Edison is constructing power lines and poles as close as 75 feet to some homes to bring wind-generated energy from Kern County to the Los Angeles area. Residents are rallying against Edison concerned that the project will lower property values, destroy trees and land, and risk toppling towers onto homes. Edison counters that the new power lines are necessary because existing power lines are at full capacity. Continued construction of green energy will not make sense without sufficient infrastructure to transmit power from the generation site to the place where people use it.

Page 13 In addition to aesthetics, many people are concerned about the environmental costs of green energy projects. One of the first large-scale solar projects in the Inland Empire is the Ivanpah Solar Electric Generating Facility, currently under construction in northern San Bernardino County. The project, owned and designed by BrightSource Energy Company with the help of a $1.375 billion dollar loan from the United States Department of Energy, was recently approved after years of debate over its environmental impact. A key issue was the project’s impact on the desert tortoise.

The desert tortoise was considered “threatened” for several decades before this project began. It is prone to various diseases, vulnerable to many predators, and also has very specific habitat requirements. Moreover, the desert tortoise has not withstood past attempts to alter its habitat. As part of the expansion of Fort Irwin military base in the Mojave Desert, the Army was required to relocate the desert tortoise to unoccupied lands. But the $8.7 million effort to relocate over 760 tortoises proved unsuccessful. Many tortoises died quickly from attacks PHOTO: BRAD MITZELFELT, SAN BERNARDINO COUNTY SUPERVISOR by new predators like the coyote, increased spread of disease likely due to the tortoises’ close proximity to each other during transport, as well as injuries inflicted by humans and cars.


Flash forward to the BrightSource solar project. Conservationists are extremely worried about the desert tortoise’s continued survival. A preconstruction study of the area found only 16 tortoises in a 5.6-square-mile area surveyed. Yet when construction actually began in late 2010, biologists hired by BrightSource found 23 tortoises in the first 2 square-mile area to be developed, with an additional 18 found very near the project area. While the company has taken pains not to reproduce the overcrowding and potential disease spreading transport methods utilized by Fort Irwin, a number of tortoises have already died. This spring another tortoise round up and relocation will begin and conservationists anxiously await the results. San Bernardino County Supervisor Brad Mitzelfelt was initially opposed to BrightSource’s construction plan for a number of reasons, including the impact on the desert tortoise. In a phone interview, Supervisor Mitzelfelt expressed his view that “[we] need to adopt a more aggressive



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conservation plan, not just to stop decline, but to recover the species.” The California Energy Commission compelled BrightSource to purchase 8,000 acres of desert habitat to be set aside permanently for conservation to offset the 4,000 acres used for the Ivanpah facility. Mitzelfelt cited this as a positive start towards conservation, but also pointed out the purchase of this much land for a single project raises other concerns.

BrightSource purchased a total of 12,000 acres in San Bernardino County to house both the solar facility and the required conservation area. It now owns ten percent of the undeveloped land in the county. Supervisor Mitzelfelt points out that the scale of this habitat offset requirement will not be sustainable given the high number of potential new projects in the area. He cautions, “We’ll see more projects go to Arizona and Nevada” if we continue to require such large offsets. Mitzelfelt says there is already an uneven playing field among the western states, as states such as Nevada require much lower offsets for the desert tortoise. Because it is easier to do business in the other states, “[San Bernardino] County is in danger…of losing opportunities.” Another problem is that much of the land eyed for solar or wind power projects is owned by multiple entities. The federal government owns much of the desert land in San Bernardino County and Native American tribes also lay claim to some potential sites. In February, Native American protection groups sued the Bureau of Land Management over plans to construct green energy projects, including a solar project planned in Blythe (Riverside County). The lawsuit claims that the land is culturally significant to tribes in several Western Deserts. The 7,000-acre Blythe project has been moved several times in an attempt to address tribal concerns, but construction is now underway despite the ongoing lawsuit. Finally, the fact that these developments will increase costs for consumers is also an issue. In promulgating the new renewable energy standard, Governor Brown stated a goal of developing 20,000 megawatts of green power from new sources; he believes this will help create hundreds of thousands of new jobs. But the construction cost of enough new renewable energy sources to reach this goal will require much higher utility rates for consumers. According to an analysis done by California’s Public Utilities Commission, utility rates could increase by as much as 14.5 percent in order to reach Brown’s goal by 2020. A look to California’s northern neighbor is instructive: the largest wind farm in the United States is currently under construction in the Columbia River Gorge in Oregon. The building costs are estimated to be $1.9 billion, much of which is subsidized by the federal

Page 15 government. The Energy Department provided a $1.06 billion federal loan guarantee so that the owners, General Electric Co. and Caithness Development LLC, could find lenders to finance the project. The U.S. Treasury will provide a $490 million cash grant once the wind farm is operating. In contrast, a natural gas plant of comparable size would cost less than half, about $865 million, and would not need government support. The potential increase in costs for consumers also makes construction of new renewable energy projects more difficult for developers. Because of the pressure on companies to plan for consumer costs upfront, “a change in the [cost] margin doesn’t have to be too much to make a project not feasible,” says Fred Bell, COO of Noble Enterprises in Palm Desert. Initial costs are going to continue to be problematic for companies trying to develop green projects in California. “It’s getting more expensive to make anything in California,” says Bell, “if we really want green power…[we] must get involved in the key metrics to make it more viable than it is now.” Despite an increased focus on creating more renewable power, energy from green sources still accounts for just 8 percent of the country’s power, while petroleum makes up 37 percent. If California wants to reduce its dependence on foreign petroleum then it will have to make major changes in its renewable energy plan. With the recent enactment of the renewable energy standard, the discussion of increasing renewable power has now become a reality. The Inland Empire will likely soon become the region of focus as California strives to lead the country in renewable energy use.


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Redevelopment Authorities Under Fire


alifornia Governor Jerry Brown’s 2011-12 Budget proposal calls for eliminating the approximately 400 redevelopment agencies throughout the state. It aims to shift economic development responsibility from the redevelopment agencies to local governments, in an attempt to cut back the enormous debt incurred by the agencies and invest the money saved directly in education and other local needs. Redevelopment agencies are government subdivisions whose main goal is to reinvigorate and improve blighted, deteriorated, and economically downtrodden areas. Sixty years ago, the California legislature established a process whereby a city or county can declare an area to be blighted and in need of redevelopment. Thereafter, most property tax revenue growth from the “project area” is distributed to a newly created redevelopment agency rather than to other local agencies. Once a community establishes a redevelopment project area, property tax revenue allocated to local government bodies is frozen at its current level, known as the frozen base. If the value of the property increases due to improvements to the redevelopment area or any other factor, than the amount of property tax revenue also increases. The amount of the increase above the frozen base is called the tax increment. In many cases the use of redevelopment agencies has provided substantial benefits. For example, Riverside embarked on a housing redevelopment project in the city’s University neighborhood by renovating a 64-unit building rife with health and safety violations. Today, the Topaz and Turquoise housing complex has been substantially rehabilitated and is now a

Page 17 vibrant asset to the city, providing affordable housing for low-and moderate-income families. On the other hand, redevelopment agencies have also come under attack for subsidizing projects that would not ordinarily be considered “blight.” State Controller John Chiang’s audit of eighteen agencies found that Palm Desert’s redevelopment agency proposed to eliminate so-called blight by spending nearly $17 million on refurbishing a municipal golf club. Establishing a redevelopment area is one of the easiest ways for local governments to raise significant money. This is because they are not constrained by some of the key accountability and transparency elements required of other local government bodies. Specifically, redevelopment agencies can incur debt without voter approval and redirect property tax revenues from schools and other agencies without voter approval or consent of the other agencies. Tax increment revenues in California totaled $5.7 billion in 2008-09. Over the last three decades, redevelopment agencies’ share of total statewide property taxes has increased to 12 percent. In some counties, nearly 25 percent of all property tax revenue collected goes to a redevelopment agency rather than schools, community colleges, and other local agencies. The current law allocates 20 percent of tax increment revenue to low- and moderateincome housing. Another 22 percent (on average) passes through to local governments and is distributed among counties, K-14 schools, special districts and cities. The remaining 58 percent of tax increment revenue is available for redevelopment activities. Controller Chiang’s office found significant flaws with the state’s redevelopment agencies. These include inaccurate audits, substandard reporting procedures and inappropriate use of housing funds. Supporters of redevelopment agencies argue that they reduce unemployment and promote long-term economic prosperity. However, the Legislative Analyst’s Office notes that there are no objective or standard performance measures to gauge whether these agencies do, in fact, promote job growth or generate GOVERNOR BROWN’S significant economic returns to the taxpayers. Under Governor Brown’s proposal, a local successor agency, most likely the city or county that originally authorized the redevelopment agency, would be responsible for managing the existing contractual obligations and paying the agency’s debts. Tax increment revenue would first go to the successor agency to retire the redevelopment agency debt and then to fund other local government services. The Governor’s proposal assumes tax increment revenues of $5.2 billion in 201112. It allocates $2.2 billion to successor agencies to pay down redevelopment debt. It maintains the local pass through at $1.1 billion, approximately 21 percent, and adds



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another $210 million to local governments. However, the proposal also contains a onetime $1.7 billion dollar payment to the state in 2011-12 to fund trial courts and Medi-Cal. After the first year, any property tax revenues remaining after the successor agencies pay redevelopment debt would be distributed to other local governments in the county. Brown projects that these changes will save the state approximately $1.7 billion—the amount of the one-time payment to the state—during the next fiscal year. The governor argues that California’s enormous deficit makes it no longer feasible to subsidize the work of redevelopment agencies. Supporters of redevelopment agencies, however, fear that their elimination would be devastating to the California economy for a number of reasons. First, they argue that the eradication of these agencies will kill jobs and shift much of the fiscal burden on cities themselves. At a time when the state faces a high unemployment rate, they argue that the redevelopment agencies provide much needed employment. They also point to the use of redevelopment to improve many areas of the state through the revitalization of public infrastructure and commercial development, such as Riverside’s Topaz and Turquoise housing complex. Further, because 20 percent of tax increment revenue must go to low- and moderate-income housing, redevelopment funds have been a significant source of revenue to local housing districts. It has been noted, however, that state audits and oversight reports have concluded that a significant number of redevelopment agencies take actions that reduce their housing program productivity, such as maintaining large balances of unspent housing funds, using most of their housing funds for planning and administrative costs, and spending housing funds to acquire land for housing but not on actual building. The League of California Cities is also critical of the Governor’s plan, saying that it violates Proposition 22, which prohibits the state from reaching into local government funds. The

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League argues that the first year allocation of $1.7 billion to the state flies in the face of the 61 percent of California voters who passed Proposition 22 last November. Governor Brown’s proposal has ignited opposition in the Inland Empire. With traditionally high unemployment rates, his proposal has significant impact in this area of California. Riverside County in particular is among the top ten counties in the entire state in redevelopment growth (first in the Inland Empire) and makes extensive use of redevelopment agencies. Riverside County Supervisor John Benoit is a leading local advocate of redevelopment agencies and argues that they have helped revitalize economically depressed communities. “We have absolutely been able to use redevelopment agencies to ameliorate the unemployment problems. We have used RDA money to put 8,700 people back to work in Riverside County, particularly construction workers who were previously out of work,” Benoit said.


Benoit fears that if redevelopment agencies in Riverside and the Inland Empire are eliminated, it may require years to adapt to the change. “We’ve clearly made some dramatic improvements using RDAs; it’s a source of pride for us in Riverside, but it’s also in danger. The projects that have been completed have created long-term economic development so significant that it makes it hard to argue about the benefits of RDAs.” Perhaps the biggest impact that redevelopment authority spending has had in Riverside is Mecca, a community of 5,000 Hispanic farm workers. A small area in Riverside County that had previously been severely impoverished, underdeveloped, and with over 40 percent of the population under the poverty line, Mecca used $50 million dollars of redevelopment money to vastly improve the lives of its inhabitants. “There has been impressive work being done by the redevelopment agency in Mecca,” Benoit says. “Redevelopment has been used to build a medical clinic, library, sheriff’s station and a lot more that never would have been possible without RDAs.” Redevelopment agency advocates acknowledge that eliminating them would provide a temporary improvement to the state budget deficit. Advocates hope to see an improvement of the redevelopment process and have developed compromise proposals to save redevelopment authorities. A recent proposal put forth by Los Angeles Mayor Antonio Villaraigosa, suggests that the agencies could help the state borrow money in order to alleviate the budget deficit. The proposal calls for allowing the agencies to divert approximately $200 million a year to the state for 25 years, thereby allowing the state to finance a $1.7 billion loan to help reduce the


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deficit. In addition, the proposal would ask redevelopment agencies to divert more tax funds to pay for local services with $50 million going to schools annually. Governor Brown’s proposed budget also targets enterprise zones—another popular local government program. Currently, there are forty-two enterprise zones throughout the state that offer special tax breaks and other incentives to businesses in designated areas to encourage economic development and growth. The tax benefits provided for most of these areas include a hiring credit, a credit for sales tax paid, a credit for employees who earn wages within the area, and a deduction for interest received from businesses in the area. The governor estimates that his proposal to eliminate all enterprise zone tax incentives will generate an estimated $343 million in 2010-2011 and $581 million in 2011-12 in additional tax revenues.


The enterprise zone program has grown remarkably since the legislature enacted it in 1984.The program started in 1986 with ten zones and expanded to fortytwo by 2008. The average cost per zone increased from $48,000 to $11.1 million. The California Budget Project puts the cost of enterprise zone tax credits and deductions at $465.5 million in 2008, up from $657,000 in 1986. The hiring tax credit accounts for 58.7 percent of this cost, $273.5 million in 2008. Yet because the hiring credit is granted for new hires, rather than new jobs, companies can claim it without creating any new jobs. Critics argue that this rewards companies with high turnover rates more than those that create steady employment.

Governor Brown’s proposal sparked an outcry from local officials, legislators, and business leaders who have come to rely on enterprise zones as a tool for economic development. Californians for Jobs and Safe Communities is a coalition of local government bodies, statewide trade and industry groups, local and regional chambers of commerce, and businesses. It argues that eliminating enterprise zones is a tax increase on the more than 10,000 businesses in California currently benefiting each year and it strongly opposes such a move. Assembly Member Manuel Perez’s Coachella Valley district is home to four enterprise zones. Perez acknowledges that there are problems with the program, but believes that the solution is to reform it, not to eliminate it completely. Perez has an alternative plan, the 2011 Enterprise Zone Reform Package, which would reform the program in several ways. Most notably his plan would phase out the 5-year hiring credit, replacing it with a 3-year credit. The new hiring credit would reward employee retention by increasing the amount of credit each year. It also would offer more accountability by designating “poor performing zones” for zones that have not demonstrated

Page 21 progress and tracks how local resources are spent on zone activities. The Perez proposal would check the unlimited expansion of zones and require enterprise zones to follow census tract boundaries. It also would raise the reporting requirements for claiming the hiring credit and limits the carryover of excess tax credits to 15 years. Perez strongly supports these reforms because, under current laws, low-income populations in rural areas are treated differently than those in cities. “Too often, rural areas are not invited to the table and we tend to lose out to urban areas with regards to resources,” Perez asserts. He contends that the perception that the program is a wasteful form of corporate welfare is inaccurate, citing data to demonstrate that enterprise zones have improved economic conditions in Indio. Perez knows that accountability will be an important issue. “Another element of my reform legislation includes implementing measurements of success that over the course of time, will show numbers grow steadily in terms of variables such as how many jobs are being created in enterprise zones and how many people are getting off social welfare.” Defenders of enterprise zones also argue that eliminating them would be unconstitutional. Marty Dakessian represents the Communities to Save Enterprise Zones coalition and strongly opposes Governor Brown’s proposal. “Governor Brown’s proposal violates agreements involving the state, local governments, and businesses lured to the zones by hiring tax credits, operating loss deductions, and other invectives.” He argues that repeal of the enterprise zone program violates the contracts and due process clauses of the United States Constitution and the contracts clause of the California Constitution. Governor Brown’s proposal to eliminate redevelopment agencies and enterprise zones has sparked serious debate throughout the state. Inland Empire officials have come to rely on both as valuable economic development tools. They vow to fight both proposals. PHOTO: GOVERNOR JERRY BROWN


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Stagnation and Recovery: The I.E.’s Housing Market


ver the past two decades, the Inland Empire staple of affordable housing and abundant employment opportunities in the construction, manufacturing, and trade/logistics industries—located adjacent to the Greater Los Angeles area—made an attractive location to settle families. This led to remarkable population and output growth over that time period. San Bernardino County and Riverside County share many socioeconomic aspects, but the recession has had different distribution effects on the two counties. After hitting rock bottom in 2008-2009, San Bernardino County shows signs of emerging as the less bloodied of the two counties. Compared to Riverside County, San Bernardino County has exhibited lower rates of population growth within the last decade (18% versus 37% from 2000 to 2009) and lower home value volatility over that time period as well. Prior to the recession, the Inland Empire saw a steady population growth of nearly 3% per year for 2001 to 2006, most of that due to the 4% growth levels observed in Riverside County. For comparison, the entire United States typically sees population growth rates of 1% per year. Since differences in percentage points do not mean much to most people, we point out that a population doubles roughly every 70 years if it grows at 1% per year, but that it only takes approximately 18 years to double if the population grows at 4% a year. If growth had continued at that pace for Riverside County, then it would have seen twice as many people living there around 2030! As housing prices in the Inland Empire began to decline in the summer of 2006 and accelerate through 2008, population growth rates fell to a low of 1% in 2008. Lately population growth has seen a very small uptick to approximately 1.2% growth for each of the last two years.

Page 23 Residential home prices in the Inland Empire have followed a similar path. After an initial plunge, they have stabilized over the same period as population growth fell and leveled off. As early as the summer of 2006, signs of instability appeared in the Inland Empire, nearly a year before Los Angeles County home prices began their decline in August 2007. A noticeable difference in foreclosure dynamics between the two areas presents a plausible explanation for the lag-lead effect exhibited between the Inland Empire and Greater Los Angeles Area. Fueled by low lending standards and a faith in the market’s upward momentum, home values swelled from the stable levels of the mid 1990s to unsustainable heights peaking in 2006. As early as the summer of 2006, signs of an impending end to the housing bubble appeared in the Inland Empire, nearly a year before Los Angeles County home prices began their decline in August 2007. In retrospect, this should have been a warning sign to policy makers and businesses everywhere: if the periphery experiences problems and if similar conditions exist in the core, then the core can expect similar conditions in the near future. However, these warning flags were ignored by most. The following smoothed graph displaying foreclosures in the Inland Empire and the Greater Los Angeles area is quite informative.


From 2003 through 2005, banks lowered their lending standards and modified their mortgage origination practices to approve marginal clients for loans, sometimes for over 80% of the equity, and sometimes for piggybacking loans. In the words of Ed Leamer, Director of the UCLA Anderson Forecast, these practices, “extended the home ownership peripheries of [many] cities both in terms of income and location.” Subprime lending practices were pervasive throughout much of the Inland Empire, and the financing plans in place on these properties relied on the appreciation of leveraged houses for success. When credit tightened, the one of the first segments of residential demand to halt was in the owner-occupied houses in peripheral areas like the Inland Empire, notes Leamer. As demand in the peripheral markets tanked, banks found themselves in possession of many underwater properties


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in concentrated areas as mortgage delinquencies rose. The market was soon flooded with properties of delinquent owners, further compounding the situation and triggering greater home price depreciation.


During the fifteen years preceding the housing market crash in 2006, the Inland Empire’s Affordability Index, a statistic compiled by the California Association of Realtors (CAR) measuring the percentage of families capable of affording a median home in the area, plummeted from the stable 50% levels of the late 1990s and early 2000s to 16% in 2006, its lowest point in 18 years. The Inland Empire’s rising per-capita income could not keep up with its quickly escalating home prices, and it showed steeper declines in affordability relative to its neighbors, notably the Greater Los Angeles area. Later, the fall in house prices resulting from overbuilding and increased foreclosures contributed to all-time high housing affordability levels; the CAR climbed to 69 for San Bernardino and 63 for Riverside in 2010. Unfortunately the underlying story behind the affordability data is more complicated than price and income movements might suggest. Mortgage rates also play a significant role, since the vast majority of buyers require a mortgage loan in order to purchase a house. The CAR pegs mortgage rates in a particular area to the national average of all fixed and adjustable mortgage rates. As a result, a CAR index higher than the California average is an indicator of a region with a lower overall credit standard than the California average. As of the fourth quarter of 2010, the CAR index for the Inland Empire stood at 64 compared to the California average of 50. This 14-point differential indicates that, on average, the Inland Empire has lower credit ratings, lower per-capita income, and consequently, higher rates than the California average. This means that Inland Empire homeowners pay a higher interest rate for their mortgages, reducing the underlying value of homes in the area.


Perhaps the most visible and accessible measure of housing market performance is home sales price. In many areas of the country, prices skyrocketed during the housing bubble, but few counties showed such extremes as San Bernardino County and Riverside County. Fueled by bullish housing speculation and aggressive lending practices, home prices in San Bernardino and Riverside Counties soared nearly 124 percent from 2002 to 2007 on the Conventional Mortgage Home Price Index (CMHPI). This was the third largest spike in the nation behind Bakersfield, CA (127 percent) and Miami Beach, FL (126 percent). Compared to 2002 levels, prices in both San Bernardino County and Riverside County easily climbed higher in terms of percentage growth and subsequently experienced a larger decline than the Greater Los Angeles area or, indeed, California as a whole. Furthermore, housing prices in the two counties showed greater price volatility than the Greater Los Angeles Area. This difference in price levels and volatility is typical of what is developing into an East-West divide, rather than the traditional North-South divide, in California. It appears that prices have reached bottom, and are firming now, as investors have entered the market and absorbed some of the inventory through cashflow investments. However, the absence of a strong recovery in the Inland Empire underscores the uncertainty in the market and gives developers mixed signals, especially regarding the potential and timeframe to undertake new construction. Housing Permits, Starts, and Foreclosures One of the most important indicators of a real estate market’s health is the measure of new construction activity. It is well known, for example, that housing start levels and changes in housing starts are leading indicators of general economic conditions. The number of housing permits issued on a countywide basis is a proxy for housing starts. Figure 4 shows seasonally adjusted permits in San Bernardino County and Riverside County, taking into account changes in population. Demand for new construction has two main components: speculative non-owner occupied housing and owner-occupied housing. Speculative development often outnumbers the more individual, owner-driven construction, and therefore serves as an indicator of the market’s long-term momentum. INLANDEMPIREOUTLOOK.COM | 25

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Foreclosure data is also closely tied to the demand for housing permits and provides further insight into the health of the housing market. High foreclosure rates indicate a depressed market with lower home prices. Foreclosed homes are often sold at “fire-sale” prices—far below the cost of new construction. Accordingly, before the fundamentals are in place for investors to take the risk of speculative development, the overall market must absorb and reprice the inventory of older foreclosed homes and allow home prices to firm. In San Bernardino County and Riverside County, foreclosures lag housing permits. Construction there will not increase until foreclosures subside. Since San Bernardino County has seen a downward trend in foreclosures over the past two years, new construction may pick up once the inventory of foreclosed homes changes hands and its supply diminishes. Yet it is not clear that sufficient demand exists to absorb these foreclosed homes. There is some evidence of pent-up demand from the increased size of households as seen from census data: evicted individuals first moved in with friends and eventually with family. These increases in household size cannot be expected to be permanent. Eventually these individuals will move out again. However, it seems more likely that they will move into rental units before they will be able to move into single unit houses. Compared to the decade lows set in January 2008, home sales have increased 105 percent in San Bernardino County, 15 percent more than Riverside County in 2010. Both San Bernardino County and Riverside County demonstrate the lag-lead effect between foreclosures and housing construction permits. Each county issued the highest number of gross permits (roughly 1,650 for San Bernardino County and slightly more than 3,100 for Riverside County) in the second quarter of 2004. This was almost a year before foreclosures hit their lows in April 2005 (23 in San Bernardino) and May 2005 (17 in Riverside). However, when the housing bubble burst in 2006 and foreclosures started to rise in 2008, housing permits in San Bernardino County plunged to a decade low of 57 in January 2009 and in Riverside County to 75 in December 2008. Nearly eight months later, foreclosures spiked in both counties to almost 2,800 in July 2008 for San Bernardino County and close to 3,850 in August 2008 for Riverside County.

Page 27 This lead-lag effect following the burst of the housing bubble indicates that the speculative component of housing demand likely got out of hand. Even as developers were recognizing a fall-off in demand, inventory continued to grow as projects were completed. Supply was further increased as the foreclosures began to enter the market in greater numbers. Then, when prices started to fall, the relationship between housing permits, excess supply of homes on the market, and increasing number of foreclosures compounded to depress demand further and quicken the descent. The interactive nature of housing construction and foreclosures suggests supply stabilization is on the horizon since foreclosures have begun to stabilize (and even tail off). And as demand gains a foothold, construction will begin to pick up. But when this will occur is still too uncertain to predict. San Bernardino County and Riverside County Historically, San Bernardino County has had a lower foreclosure rate per 10,000 people than Riverside County, which should translate to a brighter outlook. However, the housing permit figures also show fewer new construction opportunities in San Bernardino County than in Riverside County. These are two elements of a complex story, and home sale prices add yet another layer. In the past, Riverside County has experienced higher home prices, seemingly more subject to the market conditions. Also note that San Bernardino County is steadily catching up to Riverside County in the CAR affordability index. Similarly, despite lower average housing prices in San Bernardino County, the percent change in home price from 2002 shows that San Bernardino County has emerged from the current recession less battered than Riverside County. These factors lend many different perspectives to the same problem, but perhaps the best indicator of each county’s immediate future is the measure of foreclosures as a percentage of homes sold. San Bernardino County and Riverside County have shown comparable levels of home sales per 10,000 people, with the slight edge favoring Riverside County. In the last three years, however, San Bernardino County has halved this gap. More impressively, as shown in Figure 5, San Bernardino County has been recirculating through its inventory of foreclosures more quickly than Riverside County or Los Angeles County, which may be a positive indicator of future performance. As home prices firm to a point above foreclosure sale values, speculative development should pick up, but again, there is little indication as to when this will happen. Perhaps the safest bet is to say that, at least for now, San Bernardino appears better off. FIGURE 5: FORECLOSURE RECIRCULATION PERCENT, LOS ANGELES, SAN BERNARDINO, AND RIVERSIDE COUNTIES, 1998-2010



Editorial Board Andrew Busch Director, Rose Institute Marc D. Weidenmier Director, Lowe Institute David Huntoon Manfred Keil Kenneth P. Miller Bipasa Nadon The Inland Empire Outlook is a publication of the Inland Empire Center at Claremont McKenna College.

Student Editors

The Inland Empire Center

Liz Johnson Aanchal Kapoor

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.

Staff Alex Johnson Saumya Lohia Riley Lewis Dave Meyer Sarah Quincy Jake Roth Samuel Stone INLANDEMPIREOUTLOOK.COM INLANDEMPIRECENTER.COM

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. David Huntoon, MBA, specializes in economic development, survey research, and tribal governments issues. To receive issues of the IEO electronically when they become available and to receive news from the IEC, please e-mail us at