Inland Empire Outlook Spring 2012 Issue

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OUTLOOK Economic and Political Analysis Volume III | Issue 1 | Spring 2012

INSIDE The Inland Empire Strikes Back pg. 2-11 Councils of Government: Effective in the IE pg. 12-17 Will Professional Football Return to SoCal? pg. 18-23 Coachella Valley: Municipal Revenue Uptick pg. 24-27


Employment Gains

his issue of Inland Empire Outlook is the first in many to document positive economic news for the Inland Empire. In prior issues, we have examined the region’s ongoing high unemployment and struggle to emerge from the recession. The most recent data show solid employment gains that outpace the improvement statewide and even nationally.

as an effective intermediary between local and statewide authority.

We begin with a close look at recent unemployment data (p.2). The Inland Empire unemployment rate was at 12.5 percent in January, 2012. While still high, this is an improvement of 1.2 percentage points over the previous eight months. California’s unemployment rate declined by 1.0 percentage points and the national rate by 0.7 percentage points over the same eight month period.

On May 15, 2012, the Inland Empire Center, in partnership with the UCLA Anderson Forecast, will hold the third CMC-UCLA Inland Empire Forecast Conference at the Miramonte Resort & Spa in Indian Wells. Jerry Nickelsburg of UCLA Anderson Forecast will present the state and national forecast and Professor Marc Weidenmier of CMC will present the Inland Empire forecast. The conference will feature panels on the elimination of redevelopment authorities, with an emphasis on the tools that continue to be available to local governments for economic development, and on election year politics and economics. Major sponsors of the conference include the Coachella Valley Economic Partnership and Rabobank.

The improved unemployment data is consistent with an uptick in municipal tax revenues seen in Coachella Valley cities (p.24). With consumer confidence on the rise, Desert Hot Springs, Palm Desert, and Indio all expect their tourism and leisure based economies to improve. We also examine two of the Coachella Valley’s councils of government: the Western Riverside Council of Governments and the Coachella Valley Association of Governments (p.12). Each agency is responsible for millions of dollars’ worth of transportation and economic development projects and serves

Finally, we analyze the two competing proposals for a new professional football stadium in the Los Angeles area (p.18). The downtown site is vying with a proposal locating the stadium in the City of Industry, significantly closer to the Inland Empire.

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. —The Editors

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The Inland Empire Strikes Back

The Numbers


n extraordinary economic development has recently occurred in the Inland Empire. Over the last eight months or so, the Inland Empire has seen larger employment growth compared to most other Metropolitan Statistical Areas (MSAs) in California, and its unemployment rate has finally shown significant declines. The Inland Empire unemployment rate stood at 12.5 percent in January 2012, having fallen by 1.4 percentage points over the last eight month period (and an impressive 2 percentage points from a year ago). This compares favorably to California as a whole, which saw a decline by 1.0 percentage points over the same eight month period, and the U.S., where unemployment rates decreased by 0.7 percentage points. Unemployment rates, in general, peaked much later in California than in the U.S. For the country as a whole, this economic indicator started to decline as early as October 2009 (even though the Great Recession officially ended in June 2009). The Inland Empire and California did not see a peak in unemployment rates until over a year later, in December 2010.


Figure 2 shows the development in unemployment relative to the Greater Los Angeles (Los Angeles and Orange County) area. The gap, which was as high as 3.0 percentage points in December 2010, now stands at 1.8 percentage points, and it is moving in a favorable direction for the Inland Empire. FIGURE 2: UNEMPLOYMENT RATES, GREATER LOS ANGELES AND INLAND EMPIRE, 1990:1-2012:11


What accounts for this decline in the unemployment rate? Since the change in the unemployment rate is approximately equal to the difference in the employment growth rate and the labor force growth rate, there is the nagging fear that the recent decline in the unemployment rate is simply the result of workers giving up their search for employment (“discouraged workers”). Given that the Great Recession of 2007-2009 has seen record numbers of long-term unemployment, this is a real possibility. Furthermore, if the economic situation continues to improve and discouraged workers resume their search for work in large numbers, then unemployment rates will remain high for quite some time (note that employment in the U.S. increased by significantly less than 200,000 in March while the unemployment rate fell to 8.2 percent because the labor force did not grow by as much).

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To analyze this question, we compare the decline in the unemployment rates across different geographic areas. Specifically we calculate the difference between the most recently available unemployment rates to the post Great Recession peak unemployment rate in the various locations. We did the same analysis last August finding the rather discouraging result that the labor force in all four areas (Inland Empire, Los Angeles, California, U.S.) had declined in varying degrees. The Inland Empire had seen the largest percentage decline in its labor force (1.4 percent points), while the labor force shrunk by 0.4 percentage points in the U.S., 0.7 percentage points in California, and 0.6 percentage points in Greater Los Angeles. However, only in California and in the Inland Empire had employment also declined over the same period. Note that the unemployment rate will fall if the decline in the labor force is greater than the employment decline. Still, this is not the picture of a healthy economy. In a strong recovery, employment and the labor force will grow together, with employment growth outpacing the labor force growth. Updating the analysis, however, shows a more positive picture for the Inland Empire. While the labor force shows an increase of 2.5 percent relative to the trough, employment growth was close to 5 percent. As a result, the Inland Empire’s unemployment rate fell by over 2.9 percentage points. In other words, had the Inland Empire not shown an increase in its labor force, the decline in the unemployment rate would have been even more dramatic than what we observed in the figures above. The other areas also show a decline in unemployment rates, but these are smaller.


Now that we have established that the decline in the Inland Empire’s unemployment rate is indeed caused primarily by growth in employment, it is useful to examine how the recent growth in (non-farm) employment compares to other regions in California. Figure 4 presents a sample of these for the period July 2011 to February 2012. Somewhat surprisingly, employment growth in the Inland Empire has outpaced gains in any most other geographical area with the exception of the Stockton MSA and San Jose MSA in California and even for the United States as a whole. FIGURE 4: EMPLOYMENT GAINS, JULY 2011-FEBRUARY 2012, U.S. AND VARIOUS CA MSA


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This seems quite remarkable given that in past reports we have characterized the Inland Empire as one of the epicenters of the Great Recession, with unemployment rates in many of its cities reaching levels of 15 percent and above 20 percent for some. Stockton was similarly hard hit. Both areas finally see the long awaited improvement in the employment picture. Figure 5 shows the sectors which most heavily contributed to this growth in employment. Professional and Business Services employment has seen significant improvement since last summer but so have other sectors such as Leisure and Hospitality, and Trade, Transportation, and Utilities, which includes logistics. Even Manufacturing has contributed now to the job growth, while Construction, and financial activities continue to see declines in employment. Construction and manufacturing, two of the biggest beneficiaries of the previous expansion and the two sectors that have suffered most in the current recession, have seen their sectoral share decrease from 9.3 percent to 7.7 percent (manufacturing, a 1.5 percentage point drop) and 8.9 percent to 5.1 percent (construction, a 3.8 percentage point decline). However, it is hard to see further bloodletting in construction and manufacturing, given the already low levels of employment in both sectors. FIGURE 5: CONTRIBUTION OF EMPLOYMENT GROWTH BY SECTOR SINCE JULY 2011

Unfortunately, the dark cloud in the employment growth data is that an increase in government jobs accounts for a quarter of the total growth. Given the current budget picture, this cannot last much longer. We expect reductions in both spending and employment by this sector to become a significant drag in the near future, which will have to be made up by the private sector if the recent improvements are to continue. The fact that Government currently employs almost 20 percent of the labor force in the Inland Empire, up from less than 18 percent during the peak of economic activity, does not help. It is the second largest sector of employment in the Inland Empire (see Figure 6).

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The Bigger Picture Taken together, we feel more optimistic about the recovery now than we did last summer, given the most recent data. This is especially the case for the Inland Empire. Moreover as a result of the development in the Inland Empire, we are also more optimistic about the recovery in the Greater Los Angeles area, California, and the U.S. as a whole. This is consistent with the general feeling expressed in the popular press that the worst is finally and clearly behind us. There are some caveats to this statement which raise concern: the continuing (but somewhat diminishing) fear of the European debt crisis escalating, gas prices perhaps reaching $5.50 at the pump, a further fall in housing prices beyond the current 6-year decline, a continuing mismatch between workers who have lost their jobs in construction and manufacturing and the current demand for workers with a different skill set, the onset of inflation as banks finally start lending out a multiple of the reserves created by the Fed, etc. However, we do not think that these are significant enough to darken our rosy economic outlook for the future. There is concern raised by some that the picture was similarly optimistic towards the end of 2010, only to see a sobering adjustment during the first half of 2011. However, we will argue here that the current economic situation is different from a year ago and that we are not experiencing another false start. As a result, we have chosen the label “optimistic” without qualification to classify the current outlook. It deserves a more positive label than the one chosen recently by the Los Angeles County Economic Development Corporation, which was “cautiously optimistic.” In what follows, we will explain how we arrived at this conclusion.


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Let’s start by looking at the current picture from a longer run perspective. Figure 7 shows employment losses for the U.S., California, and the Inland Empire starting from July 2007, when overall employment levels peaked in the Inland Empire. The fact is that employment levels have not returned to pre-recession levels in any of the three regions, not even for the U.S., where employment levels peaked somewhat later (January 2008). By comparison, output finally returned to its pre-recession peak during the third quarter of 2011. It is, however, still 10% below the level we would expect it to be had the U.S. economy grown along its long term average of 3 percent a year since the fourth quarter of 2007. FIGURE 7: PERCENTAGE CHANGE IN NON-FARM PAYROLLS, JULY 2007 TO FEBRUARY 2012: CHANGE IN NON-FARM PAYROLLS (JULY 2007 = 0)

There is more to the graph than the rather depressing news that even after the recent improvements, employment levels in the Inland Empire are still roughly 12 percent below the peak. The analysis would look even more glum if we took into account that the labor force and population grow over time, although there may have been some outmigration for the Inland Empire. We think that it is useful to analyze the above graph in five distinct phases: • • • • •

Phase I: July 2007 to September 2009 Phase II: October 2009 to May 2010 Phase III: June 2010 to September 2010 Phase IV: October 2010 to June 2011 Phase V: July 2011 to February 2012

During Phase I, employment fell in all three regions, by between roughly 6 percent to close to 13 percent. This fall in employment is astounding, given that pre-recession unemployment

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rates were as low as 4.4 percent in the U.S. (May 2007), 4.9 percent in CA (January 2007), and 5.2 percent in the IE (March 2007). During Phase I, the IE and CA magnify the employment decline for the U.S. as a whole. Note that until the fall of Lehman Brothers in September 2008, employment declines in the U.S. and California were rather small, resembling the experience during the previous two recessions in a period referred to the Great Moderation (there were long periods of economic expansion interrupted by mild recessions since the 1980s).



Phase II shows a rather slow and, when compared to previous post-WW II recoveries, disappointing recovery from the trough. Unemployment rates in the U.S. peak at 10.1% at the beginning of this phase. The pattern is very similar for the three regions. This is followed by Phase III, when the economic outlook worsened and the fear of a double dip recession mounted. Note that the decline is more severe in the Inland Empire than for the U.S. and California. Phase IV is different from the previous phases in that the Inland Empire uncouples from the path in the U.S. and California: while there is a slow improvement in the employment picture for California and the U.S., the Inland Empire sinks further. It is only in Phase V that the outlook for the Inland Empire improves (the minor decrease for the December 2011 to 2012 notwithstanding; this may be due to our method of seasonal adjustment). This is, of course, the period that is shown in Figure 4. What can we learn from relative employment behavior during these phases? We know that roughly one third of the labor force in the Inland Empire commutes to jobs in the Greater Los Angeles area or to San Diego County. The reason why these commuters do not live in Los Angeles, Orange County, or San Diego County is that they cannot afford to reside in the relatively more expensive areas closer to the coast. Surely these residents would not undertake costly commutes if they had the option of living closer to their jobs. As a matter of fact, it is safe to assume that commuters who live further away from the respective county line will, on average, have lower skills than comparable workers who live closer. Not surprisingly, unemployment rates in Chino Hills, Rancho Cucamonga, Upland, and Temecula are among the lowest city unemployment rates in the Inland Empire; these cities are located less than 20 miles from the county line. Unemployment rates in San Bernardino, Hesperia, and Victorville are considerably higher (the Coachella Valley should be excluded from this analysis, since it is a fairly self-contained area with little to no commuting into the rest of Riverside County). As a result, we would expect the commuters to be laid off earlier in an economic downturn, and this is exactly what happened (see Figure 1 above). Given that the Current Population Survey (CPS) conducted by the Department of Labor/Bureau


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of Labor Statistics (BLS) measures unemployment rates by residency, this argument suggests that Inland Empire unemployment rates should predict unemployment rates in the relatively wealthier areas of Los Angeles, Orange, and San Diego County in a downturn, rather than the other way around. This, perhaps to some, surprising result stems from workers with lower skills being laid off first. Correspondingly, the same workers will be hired last in an upturn: “first out, last in.” As an analogy, consider a lake that is freezing slowly. The areas closest to the lake shore will freeze first before the area towards the center sees ice, and they will thaw last and much later after we can see water in the areas further off shore. However, when the lake shore areas finally thaw out, you can be sure that the offshore areas have seen open water for some time, with some chunks of ice perhaps still floating around somewhere (Nevada). Much of the observed unemployment rate increases in the earlier phase of the Great Recession were jobs lost in the Greater Los Angeles and San Diego County areas. Given that the CPS tracks unemployment rates by residency, many of these job losses were attributed to the Inland Empire, even though it would have been more appropriate to attribute them to the coastal areas. However, the employment numbers in Figure 5 come from a different survey: the Establishment Survey, also conducted by the BLS. This survey looks at employment changes as reported by employers, not by households/workers. While the two surveys often show different employment changes even at the national level, these differences are to be magnified when you look at geographical areas which have a large number of commuters residing in one area, but working in another location. As a result, the Establishment Survey gives a dramatically different employment picture for the Inland Empire than the CPS.


Next consider the two-thirds of the labor force of the Inland Empire that does not commute but resides here. On average, the jobs that the local workers hold should be less skilled and pay less than those held by commuters. If that were not the case, there would be no incentive to commute. (The observed pattern would also be plausible if the local labor force filled jobs that required advanced skills while the work in the Greater Los Angeles/San Diego area consisted of low skilled jobs. However, we do not consider this to be a plausible scenario.) Many of these jobs, e.g. in construction and retail sales, depend on the commuters being willing to spend money in their area of residency. As long as these commuters keep their jobs, the local area will flourish. It is when the commuters lose their jobs and default on their house payments that local employment (construction, retail sales, etc.) will suffer. Eventually the coastal areas recover and the commuters start to find jobs again. Unemployment rates peaked in November and December 2010 in the Greater Los Angeles

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area and the Inland Empire respectively, more than a full year after their peak in the U.S. as a whole (October 2009). After that, employment statistics should first show an increase in the coastal areas before employment increases in the Inland Empire. This is exactly what we observed in the CPS employment growth figures last summer. It is only when commuter employment in the coastal areas recovers that we see expenditures in the inland areas increase, resulting in local employment increases in the Establishment Survey. This is exactly what has happened since last July as can be seen in Phase V. The bottom line is that the last piece of the recovery has fallen in line: employment as measured by the Establishment Survey in the Inland Empire finally shows solid gains. In the past, people inquired about “green shoots” or signs that the recovery was under way. The answer was hard to find. Typically some reference was made to the booming stock market (recall that the Dow Jones only broke through the 9,000 level in the summer of 2009). The recent employment uptick in areas such as the Inland Empire and Stockton is a very good sign indeed. It finally looks like the ‘Not So Great Recovery’ in the Inland Empire, and indeed in California and the U.S., is gathering some steam and is generating consistently positive numbers. We expect the solid employment growth numbers to continue in the near future with coinciding falling unemployment rates. “The economy is strong with this one.”


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Councils of Government: Effective in the IE


o the average American, the term “Council of Governments� sounds more like a redundancy than an actual governing body. After all, there are nearly 90,000 distinct government organizations in the United States, among them some 19,000 municipal governments responsible for planning and managing cities all across the country. With so many different organizations, overlap and dysfunction is inevitable, and California is no stranger to perils of bureaucracy. Although California boasts less than 500 municipal governments (by comparison, government-averse Texas has more than 1,200 municipalities), the Golden State is also home to roughly 3,300 special districts. These special districts, typically created to manage issues like irrigation or transportation, often weave through multiple city boundaries and can represent thousands of people. As a result, for California businesses, city officials, and residents, navigating local government can be a bureaucratic nightmare. At the same time that the California bureaucracy has grown drastically over the past few decades, the fiscal insolvency of the state government has had broad consequences for individuals, businesses, and governments across the state. Healthcare benefits, employee compensation, and government jobs have been slashed across the board. Funding for elementary, secondary, and higher education has been cut, and in-state tuition has increased dramatically for University of California and California State University students. Statewide austerity efforts have hit local governments as well. Massive cuts in funding from Sacramento have left local governments strapped for cash. Statewide program cuts have forced local authorities to compensate with increases in support for local programs. Forced to do more

Page 13 with less, local governments have become increasingly creative in their cost cutting efforts. While no California government has escaped the impacts of the recession and budget crisis, cities involved in Councils of Governments (COGs) have demonstrated that joint efforts by smaller municipalities can drastically reduce costs and improve efficiency by coordinating authority between disparate and overlapping agencies. A COG is an agency that works on behalf of local authorities to manage certain programs for the region as a whole. Typically, COGs help to plan and manage issues like transportation, environmental protection, and economic development that are best addressed from a regional perspective. A single COG may represent numerous governmental organizations. Elected officials from represented cities and counties serve as the COG’s governing board, ensuring that the organization answers to local interests even while considering problems from a broader perspective. When they work best, COGs successfully combine the resource of large groups with the responsiveness of smaller bodies.


The Inland Empire is no stranger to COGs. In an attempt to coordinate the actions of the cities and special districts in the region, elected officials from all across Southern California came together to form the Southern California Association of Governments (SCAG) in the 1960s. SCAG, the largest COG in the nation, represents nearly 200 cities and more than 18 million residents from six different counties. As Southern California has grown larger, several sub-regional COGs have emerged to focus on local interests in an increasingly large organization. Among the most successful are the Western Riverside Council of Governments (WRCOG) and the Coachella Valley Association of Governments (CVAG). Each agency is responsible for millions of dollars of transportation and economic development projects in the Inland Empire, and serves as a unique intermediary between local and statewide authority. While their exact responsibilities differ at the margins, both organizations provide valuable planning and policy services to the Inland Empire, including the Coachella Valley. Western Riverside Council of Governments The massive population surge in Southern California over the past half century has created a number of sub-regions defined by their own unique interests and concerns but few organizations to meet their needs. Riverside County, the fastest growing county in the state, as WRCOG Executive Director Rick Bishop is quick to point out, is one such place, with a number of specialized needs of its own—needs that the COG model is uniquely suited to meet. Although his organization represents more than twenty unique local governments (including 17 cities, the County of Riverside, and two water districts) Bishop notes that WRCOG is actually “very fast as far as government agencies are concerned.” While state authorities are inhibited by their distance from local authorities, COGs are able to respond quickly to “whatever issue arises” in a local community with the resources of a larger agency.


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Bishop points to the success of WRCOG’s Home Energy Renovation Opportunity (HERO) Program, an energy and water efficiency program, as an ideal example of how a COG can meet the needs of its community when cities lack the ability to do so. The HERO program, designed to provide local homeowners with financing for energy and water efficiency products like solar panels and insulation, came to be as a result of both state and local measures. In 2008, Governor Schwarzenegger signed into a law a bill to allow cities to participate in the financing of solar panel retrofitting programs, and later signed a 2010 bill to authorize participation in water efficiency financing. “The problem with the law was that cities, because of the economic circumstances they were in, did not have the staff or the time or the money to invest in a program like that,” says Bishop. While city officials were in favor of the program, the economic recession made local implementation financially infeasible. With the resources of a regional agency, Bishop and WRCOG were able to step in, and offer the program to the region. The value of backing low-risk investments in infrastructure was not lost on local businesses, and WRCOG was able to attract $325 million worth of private sector investment to finance the project upfront. Such a program, designed to promote economic development along with other issues like energy and environmental protection, Bishop believes, is the “model for how we [at WRCOG] approach other issues.” As a program with regional support, substantial economic and environmental benefits, and little cost to local taxpayers, the HERO program, now the largest energy-retrofit program in California, is a perfect example of how COGs like WRCOG have been able to navigate successfully the complex, often conflicting policies pursued by state and local governments. Transportation issues are also commonly addressed by COGs. Public transportation projects can be expensive and may reach across many local jurisdictions, making PHOTO: TOM KIRK it advantageous for regional agencies to consider the issue from a broad CVAG EXECUTIVE DIRECTOR perspective. WRCOG coordinates with the Riverside County Transportation Commission (RCTC) to fund highway interchanges, bridges, railways, and roads each year. Much of this funding comes from Riverside County’s Transportation Uniform Mitigation Fee (TUMF), a fee levied on property developers. At its height, the Riverside County TUMF program amounted to more than $4 billion each year, making it the largest of its kind in the country. While transportation remains WRCOG’s biggest issue, the economic recession took a massive toll on the program. “Our TUMF funding is 10% of what it was 5 years ago,” Bishop observes. It’s not all bad news though. Although the economic recession has slashed the size of WRCOG’s TUMF program, it has also driven down construction costs by as much as 50 percent. A silver lining, Bishop acknowledges, but with declines in revenue and economic activity, his organization’s budget still ends up “a long way from even-steven.” Despite the repercussions of the economic recession, Bishop remains hopeful and confident that WRCOG and Riverside County have a bright future ahead. “Western Riverside is right in the middle of the formative years of what it’s going to become. The issues that cities and

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counties are facing are way beyond just transportation, just schools, just water, they all blend together, and a COG is in a great spot to deal with them.” Coachella Valley Association of Governments


Seventy miles east, the Coachella Valley Association of Governments, situated in Palm Desert, deals with many of the same issues as its counterpart in Riverside. One big focus for CVAG is its Coachella Valley Multiple Species Habitat Conservation Plan (MSHCP). CVAG Executive Director Tom Kirk points out that his agency evolved out of opposition in the early 1970s to a proposed refinery in the Banning Pass. The Coachella Valley MSHCP, administered by CVAG’s sister agency, the Coachella Valley Conservation Commission, is funded much like TUMF programs: through a fee levied on developers meant to account for the impact of construction on the local environment. WRCOG has a MSHCP program of its own, but it is dwarfed in size by CVAG’s $50 million MSHCP, which conserves over 240,000 acres of open space and protects 27 different plant and animal species. Just as it has for WRCOG, the recession has taken a toll on the revenues dedicated to the program, but simultaneously driven down construction and land acquisition costs. Kirk sees both challenges and opportunities. “When we have ten bidders [for a construction project], and none of them are able to make a profit on the project, that’s not ultimately sustainable.” With such little construction occurring in the region, developers are desperate—to a point that they will take a loss just to get work. On the positive side, when it comes to purchasing land, “the recession has provided us with the opportunity to stretch our dollars further and be much more efficient with our resources.” Like WRCOG, CVAG also administers a number of transportation programs with RCTC. Unlike WRCOG’s TUMF, CVAG gets the bulk of its transportation funding through Measure A, a sales tax approved by voters in 1988. Using this revenue, CVAG (and RCTC) have supported major infrastructure projects, such as the Bob Hope I-10 Interchange, a $25.5 million project which opened in the fall of 2011 after two years of construction. The Bob Hope Interchange project, located off Ramon Road near the Agua Caliente Resort Casino, added an eight-lane overcrossing and extension on Bob Hope Drive and Varner Road, created a new interchange west of the current Ramon Road Interchange, added a six-lane bridge going over the Union Pacific Railroad, and modified ramps on westbound and eastbound I-10. While WRCOG and CVAG are both instrumental in developing Southern Californian infrastructure, as Kirk points out, the roads CVAG builds are being used for an entirely different purpose than most in the Inland Empire. “Less than 2 percent of our trips leave the Coachella Valley, so we are not tied into the commuter market in LA.” COGs like WRCOG may have to consider how their actions fit into the larger Los Angeles-based community. But as a result of its geographic and economic isolation (the Coachella Valley economy is driven


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by tourism) from the Inland Empire, “there’s a sense of community in the Coachella Valley, more so than in a lot of places. That has benefited an organization like mine, where I think people generally think highly of regional organizations like CVAG.” Kirk goes on, “There’s a reasonably strong sense of regionalism, despite the fact that there are nine cities here.” It’s because of CVAG’s coherent regional identity that the organization has been able to branch out and pursue a number of unique programs, including a street sweeping program and a regional homeless shelter, among others. Most COGs receiving funding from their member cities, which are often reluctant to sign off on the distribution of those funds to their neighbors. Not so with CVAG, according to Kirk. The ability of CVAG members (including Blyth, Cathedral City, Coachella, Desert Hot Springs, Indian Wells, Indio, La Quinta, Palm Desert, Palm Springs, Rancho Mirage, Aqua Caliente BCI, Cabazon BMI, and the County of Riverside) to agree on priorities and allow for action has been impressive, Kirk boasts. “The system has worked incredibly well. We set priorities regionally no matter where the money is coming from.” Perhaps that explains why COGs like CVAG and WRCOG are growing so quickly. Kirk notes that “we had one typewriter and two staff people for ten years, and that was about it.” But when asked if he thinks CVAG will continue to grow, Kirk hesitates. “It’s both grown and shrunk in scope. Programs have been spun off, and our focus has shifted.” In Riverside, Kirk’s counterpart at WRCOG sees it as a choice. “If you take a look at the history of California governance, less is usually seen as more…but if the city can’t do it, and your choice is a COG run by a board of elected officials, or the state, what would you rather have? All of the sudden, the regional side doesn’t look that bad.” Whichever way you cut it, both Kirk and Bishop seem to be right: successful COGs like WRCOG and CVAG are here to stay. Their varied goals and unique structure have made them integral and indispensable agencies for Californians throughout the Inland Empire. With their regional focus and scope, they offer a compelling middle ground between state and local governments. In a subsequent issue of the Inland Empire Outlook, we will examine the role of several other major COGs shaping, stimulating, and supporting the Inland Empire.

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Will Professional Football Return to SoCal?



outhern California is still a few years away from hosting a Super Bowl, but bringing football back to Los Angeles is not as far off as some may think. The National Football League insists that it wants to be back in LA under the right circumstances and two competing groups say they are up to the task. Anschutz Entertainment Group and Majestic Realty Co. have put forward competing proposals for building top of the line stadiums in the LA basin. Stadium Financing Each stadium plan is unique, with different political considerations, costs, and construction concerns. Both projects, however, share a hefty price tag, with cost estimates running close to a billion dollars for each project. In order to cover the massive price tags of new sports arenas, many real estate developers partner with local governments to access some public money. For example, the new Yankee Stadium financed $300 million of its $1.5 billion construction cost using bonds and public funds. Similarly, a proposed new arena in Seattle, will finance $200 million of its $450 million construction cost through city and county funds. Typically, a city issues municipal bonds in order to finance new stadium projects. A bond is a debt security. It is a formal contract to repay borrowed money with interest at fixed intervals. Bond financing is the most common mechanism used by government entities to borrow money. Taxpayers, however, are often wary of assuming the repayment obligations incurred by issuing bonds. Many object to bond financing for projects like stadiums that are rarely INLANDEMPIREOUTLOOK.COM | 17

profitable. A 1997 study by the Brookings Institute found that cities usually end up having to pay a large portion of stadium costs from public funds or increased taxes. Additionally, citizens and politicians are often loath to tie up valuable and scarce public funds in public-private joint ventures at a time when governments across the board are running deficits. In Seattle, for instance, public outcry has centered on the fact that funds could be better put towards defraying Seattle’s multimillion dollar deficit.

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Many modern stadiums and arenas are designed as mixed-use development, coupling the sports aspect of a stadium or arena with retail and commercial spaces. The St. Louis Cardinals’ Busch Field, for instance, is completing work on Ballpark Village that will include everything from restaurants to residential spaces. That being said, these mixed-use developments are not automatic financial successes. The original design for Busch Field Ballpark Village, for instance, has been scaled back 80% due to lower than anticipated demand, and will open in 2013, rather than the planned 2011. Potential investors like mixed-use developments because they greatly expand a stadium’s revenue streams. Creating these villages allows for a continuous monetization of the space with shops and restaurants open every day, rather than the intermittent usage typical of stadiums.

Another common financing tool is the sale of Personal Seat Licenses, or debentures. Personal Seat Licenses, or PSLs, give ticket holders the rights over specific seats in a stadium. The PSL holder can choose either to renew the license each season, or sell it. PSL holders who fail to do either forfeit their licenses back to the team. PSLs are common and highly lucrative way for venues to recoup many of the sunk costs associated with the construction of the arena. Personal Seat Licenses have been a great success in the NFL, where 14 of the league’s 32 teams employ them. The licenses often sell for thousands of dollars, and can net a team or venue hundreds of millions of dollars. The new Giants Stadium, for instance, made around $150 million from the sale of PSLs, defraying about 10% of construction costs. Much of the stadium debate, however, is framed around the question of economic benefits. Studies by the Brookings Institute and the Cato Institute find that stadiums actually end up costing far more money than they bring in, and are indeed just white elephants and points of pride for a city. The Brookings study found that many stadiums claim an annual federal tax loss of over a million dollars.

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Indeed, some economists see any family spending on games and events at stadiums and arenas as money that would otherwise have been spent on other forms of entertainment. They argue that families have an “entertainment budget,” where money that is spent on a game would otherwise have gone into the local economy to pay for movies or local restaurants. Similarly, they argue that hotel taxes may not increase revenue. Taxes collected on hotel rooms is money that out-of-town visitors would otherwise have available to spend at local restaurants, attractions, and on souvenirs. Proponents argue that mixed-use stadiums could be a simple solution for this issue. Sports by their nature are sporadic and decentralized income generators. Football stadiums, for instance, only make money one day a week, staying empty and incurring heavy maintenance costs for each of the other six days. Even by expanding the stadium’s use to other sports, such as MLS soccer, as in the case of CenturyLink Field in Seattle and Gillette Stadium in Massachusetts, the stadium remains empty on most days of the week. By expanding the scope of the stadium area to include retail and commercial space, stadiums and arenas can generate revenue every day of the year. Retail stores, residential areas, and concert venues, as anticipated in the St. Louis Ballpark Village, have the potential to generate additional revenues for the stadium and arena owners, as well as additional taxes for state and local governments. This argument assumes that the revenues from these mixed use developments supplement existing local business revenues, rather than replace them. Proposed LA Stadium Projects There are currently two competing proposals for NFL stadiums in LA and they could not be more different. Farmers Field Farmers Field is the plan put forth by AEG, the same company that developed L.A. Live. The stadium would be located next to Staples Center and L.A. Live at the current Los Angeles convention center. In fact, part of the convention center will have to be torn down and rebuilt to accommodate the design. The $1.1 billion dollar project will be designed by the architectural firm Gensler and will be paid for through a combination of sponsorships and over $200 million in city-issued bonds. The city insists, however, that AEG will be responsible for this debt, and that the developer, not the taxpayer will be assuming most of



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15 miles 15 miles

5 miles 5 miles

the costs and risks. The Memorandum of Understanding (MOU) between AEG and the City of Los Angeles lays out some of the details of this financing. The City of Los Angeles will help cover the cost of the reconstruction of the convention center, and the NFL will help cover the cost of the stadium, hence the group’s claim that no public financing will be used for the stadium itself. The downtown location has an estimated capacity of 68,000 seats for most events, although that number could be expanded to as much as 78,000 for special events such as the Super Bowl or NCAA Final Four games. Project supporters project some $410 million in new revenue for the city over the next 30 years. They estimate it will likely create between 20,000 and 30,000 new direct and indirect jobs, including everything from construction to stadium operations and added convention center positions. The developer estimates that this 1,700,000 square foot building could be ready for the 2016 football season. Governor Jerry Brown has been supportive of the AEG proposal. Senate Bill 292, which passed the California legislature this past fall, helps to expedite Farmers Field’s construction. The bill does not provide any exemptions from environmental regulations, but rather limits the length of legal challenges to 175 days. The Senate Bill was passed in conjunction with a more general bill, Assembly Bill 900, which provides these types of benefits to all large

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“leadership projects” such as stadiums. These provisions are intended to speed up the litigation process and help such projects move forward. Farmers Field is currently in a state of limbo. Last summer, AEG’s Tim Leiweke was reportedly engaged in talks with five NFL teams. However, the NFL did not make Los Angeles a priority, during the season and has shown little support for the proposal since the Super Bowl. While the AEG team still puts the stadium’s expected opening date at 2016, the lack of progress luring a team suggests that may be optimistic. Grand Crossing Grand Crossing is the competing stadium proposal. Located in the City of Industry, it sits at the intersection of the 57 and the 60 freeways. The plan put forth by Majestic Realty Co. is located almost exactly in the geographic center of Southern California. Two and a half miles from San Bernardino County, five miles from Orange County, 12 miles from Riverside County, and situated in the eastern part of Los Angeles County, the stadium is within an hour drive for over 15 million people. Sprawling across 600 acres, the stadium would be sunk into a hillside with a projected capacity of 75,000 fans. The overall plan includes 25,000 parking spaces, beach volleyball courts, clubs, and retail developments to make it a destination spot for tailgaters. “We are trying to create an experience that you can’t have by watching it on television,” says John Semcken, Vice President of Majestic Realty Co. If anyone knows how to get sports arenas built in Los Angeles, it’s Semcken. The naval academy graduate was instrumental in building Staples Center, and firmly believes that Grand Crossing is the right answer for Los Angeles. With ample parking, easy access from all directions and a Metrolink stop on the site, Grand Crossing’s strength is its proximity to the people. In contrast to Farmers Field, which is located in the heart of downtown LA, Semcken points out that “by moving the building inland a little bit, you’re now the same distance from Newport Beach as you are from Beverly Hills.” The plan would be financed with one hundred percent private dollars, even with an $800 million dollar price tag. This is largely possible due to backing from Ed Roski, the billionaire tycoon who serves as the president, CEO, and chairman of the board for Majestic. Roski has agreed to give the land for the stadium to any team in exchange for the right to purchase a quarter of the team at the market price. The overall economic impact of the stadium is projected to create 18,000 jobs and $762 million in annual revenue for the region. Majestic proudly insists Grand Crossing will be one of the ‘greenest’ stadiums ever built. Its sunk-in design decreases the amount of steel necessary for construction, and its concourses are outside, capitalizing on the spacious property as well as Southern California’s warm weather. The developer’s economic impact study estimates over $21 million in tax revenue for local governments in the region, although the study did not break the impact down by county. Majestic’s bid also received special support from the State of California. In 2009, Governor Schwarzenegger signed a bill exempting the stadium from many provisions of the California Environmental Quality Act in an effort to eliminate some of the ‘red tape’ of government regulation. INLANDEMPIREOUTLOOK.COM | 21

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Semcken believes that the stadium’s impact will be not only economic, but also psychological. By building the stadium farther inland, he believes that the ‘center’ of Southern California will also move east. “Football is the catalyst,” says Semcken, but the real benefit, he insists, is in the increased awareness and appreciation for the Inland Empire that will come as a result of this project. “Everywhere, people underestimate the economic strength of the Inland Empire, both San Bernardino and Riverside counties.” Majestic and its team have already acquired all the necessary permits and licensing, and construction could begin tomorrow if a team agreed to relocate. Roski believes the new stadium could be ready for the 2014 season if that happens.

Both plans are optimistic. Many in Los Angeles and the rest of the country are skeptical that either plan will succeed, at least in the near future. First, the obvious problem is that no team has committed to relocate. The NFL has said that it does not want to expand, which means that one or two teams would have to pack up and move to Southern California. According to CBS Los Angeles, the five teams considering a move are the Minnesota Vikings, San Diego Chargers, Oakland Raiders, St. Louis Rams and Jacksonville Jaguars. For a time, some even thought that the 49ers may be considering travelling south. But progress on the plans for a new stadium in Santa Clara make that possibility very unlikely. Other factors also stack up against professional football in Los Angeles. The NFL imposes huge relocation fees on teams that decide to move. Also, the LA Times reports that the NFL just signed new television contracts with FOX, NBC, and CBS in December, 2011, which lock in high revenues for 10 years. This significantly reduces the NFL’s incentives to try to raise revenue by expanding to the LA market.


Less quantifiable, but just as relevant are cultural concerns. Some argue that Los Angeles and the NFL just are not a good fit. Whatever the reason, whether it is the past departures of the Raiders or Rams, loyalty to successful college football programs at USC and UCLA, or simply LA’s habit of living without professional football, some say Angelenos are not dying for a team. And they cite statistics. Currently, only 67,643 people had supported Farmers Field online petition out of the 15+ million people living in the Los Angeles area. Los Angeles has been without professional football since 1995. Since then there have been many efforts to bring teams back to the City of Angels, but none have succeeded. Grand Crossing and Farmers Field have proceeded farther than any previous attempts. Both claim they can begin construction immediately. The result of each proposal’s dealings with the NFL, various teams, local governments, and the state will have a large impact of the future of the Inland Empire and the greater Southern California basin.

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Coachella Valley: Municipal Revenue Uptick


he Coachella Valley has been a hotspot for desert vacationing and resorts for decades, but the economic downturn starting in 2008 caused industries based on tourism and leisure to suffer. Local governments that depend on retail and hospitality to generate sales tax revenue, transient occupancy tax revenue, and utility user tax revenue saw a major decline in collections. The relationship between the recession and decreased spending is well understood. The climb back up, however, is crucial for local governments that now have the opportunity to redefine themselves as consumers become increasingly willing to spend money on leisure. Since disbanding redevelopment agencies this year, cities have been struggling to find new, effective strategies to increase revenue. In the years following the recession, local governments saw plummeting tax revenues from almost all sources. Most planned for the 2010-2011 fiscal year conservatively, rather than relying on a rebounding local economy. As of June, 2011, the end of the fiscal year for most cities, sales tax revenue is up in Coachella Valley cities as are transient occupancy tax revenues, reflecting an increase in the number of visitors to local hotels. The 2011-2012 adopted budgets for three cities in the Coachella Valley, Desert Hot Springs, Palm Desert, and Indio, reflect this good news as the cities account for an increase in sales and general fund, signs of improvement after the recession.


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Both state and local governments faced significant declines in tax revenues during the years of the recession. However, the recent findings released by the Conference Board suggest that consumer confidence had been on the rise since its low point in early 2009. The Consumer Confidence Index for March 2012 is at 70.2, up from 63.8 one year ago, and 25.3 in February 2009. This is good news for cities in the Coachella Valley that rely on tourism and leisure spending.

Desert Hot Springs At the beginning of FY 2008, Desert Hot Springs City Manager Rick Daniels announced in his budget overview that “The revenue forecasts are a mixed bag with an overall flat or deteriorating condition… The city has been very conservative in budgeting revenues annually. Staff takes into consideration actual amounts received to date for the year and considers the economic conditions in the City.” From FY 08-09 to FY 09-10, sales tax revenues, franchise tax revenues, property tax revenues and transient occupancy tax revenues saw a significant decline, the largest of which was property tax revenue dropping from $11,391,106 to $10,365,006. However, the recent increase in consumer confidence indicates that Desert Hot Springs, like its neighbors, will begin focusing on growth rather than on maintaining stability. Desert Hot Springs is in the process of drafting a General Plan which will focus on economic development, community safety, natural resource protection, and street improvements. The city’s webpage dedicated to explaining the general plan says: “With the inclusion of the city’s annexations south to I-10, the city will contain prime areas for future commercial and industrial center development. This is anticipated to be a potentially large increase in revenue for the city as well as creating additional jobs closer to city residents over time. While this area presents a great growth opportunity for the city, the existing businesses within the city should also be addressed to encourage their long term viability.” The city hopes to maximize revenue from the existing business in the area. However, since local businesses are still struggling the city is focusing on annexing new properties and encouraging physical growth.

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Desert Hot Springs’ retail and service industries saw a spike in employment in the 90s and early naughts, growing by 75.6 percent from 1991 to 2003. Hotel and amusement groups benefited from this expansion and continue to propel Desert Hot Springs’ economy. As a result of the expanding entertainment industry, the construction industry also saw some growth through 2003. Today, the retail sector has the highest number of firms of any industry in Desert Hot Springs at 19.8 percent, the construction industry has the second highest with 13.6 percent and services hold 14.2 percent. Palm Desert Palm Desert’s General Fund projects a 2 percent increase in tax revenues from FY 10-11 to FY 11-12, amounting to $896,000 in additional proceeds. The biggest increases in Palm Desert’s tax revenues are from the sales tax and transient occupancy tax (TOT), as the retail, hotel, and amusement industries are expected to rally. The graph shows Palm Desert’s Projected and Actual sales tax and TOT revenues from 2006 through 2012. As collections lagged projections starting in 2006 (sales tax) and 2007 (TOT), the city was forced to scale back its projected revenues. Now, as actual collections are edging back up, the city projections are also following suit. Already, between February 2011 and February 2012, Palm Desert resorts have seen figures reflecting the expected bounce back from the drop in occupancy and use of leisure services. The revenue per available room, or RevPAR, reflects a 14 percent increase. The RevPAR in 2012 for the fiscal year to date as compared to that of a year ago also shows a 14 percent increase, indicating that the trend is not a month-to-month anomaly but a long-term trend of rising consumption of leisure. $16,000,000 $14,000,000 $12,000,000 $10,000,000

Projected Sales Tax Revenue


Projected TOT Revenue

$6,000,000 Actual Sales Tax Revenue


Actual TOT Revenue

$2,000,000 $0 FY 06 - 07

FY 07 -08

FY 08 - 09

FY 09 - 10

FY 10 - 11

FY 11 - 12

However, City Manager John Wolmouth says that plans for development and growth will look beyond the next few years and plan conservatively, as Palm Desert has always done. Focus for the present include attracting new visitors. Conventions and conferences, a popular source of business for hotels in Palm Desert, are at a standstill since those planning the conventions for 2012 would have been doing so in the midst of the economic downturn.


According to Wolmouth, the city caters to a crowd driving in from L.A., a demographic that, thus far, has been seemingly unaffected by rising gas prices. Wolmouth says that the city will also have to adjust its retail focus. The city has found that specialty stores like the Apple Store and perennially popular clothing boutiques are seeing much more business than more generalized stores such as Best Buy.

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Since 2010, Palm Desert has seen an increase in sales tax revenues from $13.4 million to $18 million. Taxable sales account for a majority of tax revenue for Palm Desert, and the city government is making efforts to maintain the flow of that income. The city has taken over a Façade Enhancement Program first enacted by the City of Desert Hot Springs Development Agency in 2009 for businesses in the city center. Now, with the elimination of its redevelopment agency, Palm Desert and other cities will struggle to fill the gap, as developers look for assistance. Indio

Indio, one of Palm Desert’s neighbors in the Coachella Valley, is known for hosting a number of festivals. While it supports many visitors, it is not a city based on retail or hospitality to the same extent as Desert Hot Springs and Palm Desert. Its plans for development show a desire to launch into more consumer-friendly industries by expanding commercial areas and improving the experience of visiting Indio. Indio aims to expand the number of “commercial corridors” by revamping highly traveled, but non-commercial areas of town and building new attractions for visitors. Indio is expecting an increase in sales taxes, property taxes, and utility user taxes in its adopted budget for the 2012 fiscal year. The city also has a number of construction projects underway in the coming years, in addition to plans to purchase land and build a new police station. Indio also takes pride in its title, the “City of Festivals,” and has plans to develop “Old Towne Indio” into a more visited and popular area of town. Indio’s top employers include far fewer hotels and golf clubs than its neighbors, Palm Desert and Desert Hot Springs, but according to City Manager Dan Martinez, visitors to Indio gather around the WorldMark Club, Indio’s most popular golf course and club. Martinez also says that plans for growth in upcoming years include building more gas stations in Indio to stem the leakage of gas taxes, and building more parks for the large youth population. Indio’s new business with GoldenVoice, the company behind the Coachella and Stagecoach

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festivals, offers the city the opportunity to target a new crowd of commuters from the coast who are using Indio as a place to rest and as a home base during festival season. Martinez acknowledges the importance of these events and hopes to bring more visitors to Indio with welcoming hospitality and a revitalized scene that draws some attention from neighboring cities. The cautious optimism expressed by city officials is seconded by MuniServices, LLC, which helps municipalities across the country enhance and manage their revenue base. Douglas T. Jensen, Vice President of Client Services, notes that revenues are showing positive trends across the state. Auto sales account for a significant part of this upswing, as pent up consumer demand is thawing and replacing an old vehicle fleet. Higher gas prices also contribute to the increase in revenues since there is then a higher base for gasoline tax. This is especially beneficial for cities like Palm Desert that have built a large number of gas stations within their borders in order to capitalize on the fact that some of its neighbors like Indio have a disproportionately low number of gas stations. Restaurant revenues are also increasing; they are up 5 percent in the past year and now account for 13.5 percent of sales tax statewide. This is good news for cities in the Coachella Valley that rely heavily on tourism and leisure spending.



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 Editor Kathryn Yao Staff Katya Abazajian Jane Brittingham Will Dodds Nathan Falk Briana Losoya Yijing Shen Samuel Stone INLANDEMPIREOUTLOOK.COM INLANDEMPIRECENTER.COM

The Inland Empire Center 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. 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

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