For Clients & Friends of The Gualco Group, Inc.
IN THIS ISSUE – “The economic challenges California faced in 2023 will be key issues for lawmakers and governor in 2024.”
CalMatters on the state’s emerging fiscal crisis
- Happy 2024, California – A Year of Economic Challenges
- State Tax Revenue 40% Below Forecast for October & November
- California Population Decline Continues – May Cost Federal Funds & Congress Seats
- Water Board OKs Historic Wastewater Recycling Rule
- Warehouse Construction Boom Busts
Capital News & Notes (CN&N) harvests California policy, legislative and regulatory insights from dozens of media and official sources for the past week. Please feel free to forward this unique client service.
FOR THE WEEK ENDING DEC. 22, 2023
OUR FINAL ISSUE FOR 2023 – Happy New Year & We’ll Be Baaaack 1/24
Happy 2024, California – A Year of Economic Challenges
CalMatters
California is ending the year facing a multitude of economic challenges, including a budget deficit, flat tax revenue, sluggish job growth and massive unemployment insurance debt.
The state’s budget surplus turned into a $32 billion deficit in 2023 — a result of its heavy reliance on personal income taxes, which are tied to the ups and downs of the stock market.
The governor revised the budget in May, shifting money around and delaying spending commitments. In October, the Legislative Analyst’s Office provided an updated outlook, saying the state could see a $9.5 billion boost in revenue due in part to increased income-tax withholding and an improving stock market.
But the office still foresees flat revenue from personal income, corporate and sales taxes for the next three years, and a projected $68 billion deficit for the 2024-25 budget.
The state’s unemployment rate, which started the year at 4.2%, had climbed to 4.8% as of October, among the highest in the nation, compared with the U.S. unemployment rate of 3.9%.
Job growth slowed, with the legislative analyst pointing out that as of September, the state had added less than 10,000 jobs four months in a row. The last time that happened was during the Great Recession.
The types of jobs being added and subtracted are key in a state that depends on income-tax revenue. California’s vaunted tech industry continued to shed typically high-wage jobs, with at least 78,000 Golden State-based tech workers laid off for the year, according to Layoffs.fyi, which tracks that information.
The jobs that actually grew in the state were in the health sector and in accommodations and food services, with the Public Policy Institute of California noting that those typically pay lower wages.
Another revenue source that has historically helped fill California’s coffers is the initial public offering, which can create immense — and taxable — wealth for executives and employees of newly public companies.
After 119 IPOs in the state in 2020 and 195 in 2021, public offerings dropped drastically to 31 last year and 25 this year, according to data from PitchBook, which says the venture capital market remains “under considerable stress” due to economic and geopolitical uncertainty.
One delayed spending commitment as a result of the budget deficit involved addressing the unemployment insurance fund’s $20 billion debt, which ballooned because millions of the state’s residents lost their jobs during the beginning of the pandemic.
The debt could compound the state’s financial problems for the next decade, potentially costing $3 billion to $7 billion in interest payments over several years, the legislative analyst projects.
The debt also means that employers in California are facing higher required payments into the unemployment insurance fund until it is paid off.
Any future instance of mass joblessness and demand for unemployment benefits would mean the state would most likely have to borrow from the federal government again.
California’s population — its labor force — has declined since the COVID-19 pandemic’s onset in 2020, with Wells Fargo economists forecasting that the state’s population probably fell 0.1% in 2023, compared with 0.3% in 2022 and 0.9% in 2021.
But in 2024, they expect a 0.2% rise due to increased international migration and people returning to work in the state as remote-work options dwindle.
Experts have varying levels of optimism about the state’s economy, but they agree that California is in for a downturn — a “weak” 2024, as Jerry Nickelsburg, senior economist for the UCLA Anderson Forecast, told CalMatters in October.
Nickelsburg noted in a presentation about his forecast, though, that the state’s job growth is weak in certain regions but strong in others, and that despite layoffs, the tech industry is still adding jobs.
Wells Fargo economists, who have been mostly upbeat about the state’s economy, said if there is a nationwide recession next year, the “resilient” state will likely experience a contraction.
The economic challenges California faced in 2023 will be key issues for the state’s lawmakers and governor in 2024. The forecasted budget deficit, flat tax revenue and massive unemployment insurance debt are financial headaches with no quick political cures.
Ongoing layoffs and slowdowns in the tech industry and IPOs could also continue to weigh on the state’s bottom line — and so could the possibility that people keep moving out of state. Affordability issues such as rising home and auto insurance premiums, as well as housing costs, are bound to play a role in whether the state’s residents stay.
https://calmatters.org/economy/2023/12/california-economy-2023/
State Tax Revenue 40% Below Forecast for October & November
Dept of Finance
This Finance Bulletin issue reports October and November cash results combined due to the tax deadline delays that shifted various personal income tax (PIT) and corporation tax deadlines to November 16, including the late extension announced on October 16. Preliminary General Fund agency cash receipts were $25.218 billion, or 39.9 percent, below the 2023 Budget Act forecast of $63.192 billion in October and November combined due to PIT and corporation income tax falling significantly below projections.
The 2023 Budget Act forecast assumed around $42 billion in PIT and corporation tax receipts would shift from January through September to October due to the initial extension of various payments and filing deadlines for most Californians to October 16. Cash results through the end of November, which capture all shifted payments, indicate the size of the actual shift was much smaller than assumed in the 2023 Budget Act forecast. Since April when the Budget Act revenue forecast was finalized, General Fund agency cash receipts were cumulatively $23.338 billion below the 2023 Budget Act forecast.
STATE REVENUE
Personal income tax cash receipts were $18.327 billion, or 42.8 percent, below the forecast of $42.854 billion in October and November combined. Non-withholding payments, which include estimated payments, final payments, and other payments, were down $17.421 billion in October and November combined and down $17.559 billion cumulatively since April, reflecting weakness in payments related to tax years 2022 and 2023.
PIT refunds were $1.837 billion higher than projected in October and November combined. Delayed PIT deadlines included January estimated payments and April final and extension payments related to tax year 2022 as well as April, June, and September estimated payments related to tax year 2023.
Corporation tax cash receipts were $8.113 billion, or 57.5 percent, below the forecast of $14.107 billion in October and November combined. Pass- Corporate tax refunds were $394 million higher than projected in October and November combined and were $1.167 billion higher cumulatively since April. Net corporation tax revenues were down $3.624 billion relative to the forecast in October and November combined and down $4.585 billion cumulatively since April.
Sales and use tax cash receipts were $787 million, or 15.5 percent, above the forecast of $5.091 billion for October and November combined. A significant portion of this overage is likely related to timing and will be offset in December as actual processing of transactions is faster than assumed in the Budget Act forecast. Sales and use tax receipts were $759 million above the forecast cumulatively since April.
GDP
U.S. real GDP grew at a 5.2-percent seasonally adjusted annualized rate (SAAR) in the third quarter of 2023, revised up from 4.9 percent. This followed 2.1-percent growth in the second quarter. The third quarter growth was driven by consumption, which contributed 2.4 percentage points (ppt), and inventory accumulation (1.4 ppt).
California real GDP grew at 2.8 percent (SAAR) in the second quarter of 2023, following growth of 4 percent (revised) in the first quarter, and was 6.3 percent above its pre-pandemic 2019 fourth quarter level.
California personal income increased by 4.7 percent (SAAR) in the second quarter of 2023. Growth was driven mainly by wages and salaries, although all components contributed. California’s share of U.S. personal income was 13.7 percent, down from 14.1 percent in 2020 and 2021 and just below the 2019 average of 13.8 percent.
JOBS
The U.S. unemployment rate decreased 0.2 percentage point to 3.7 percent in November 2023 as U.S. civilian household employment increased by 747,000 while unemployment decreased by 215,000. The labor force increased by 532,000 people, bringing the labor force participation rate up 0.1 percentage point to 62.8 percent, still 0.5 percentage point below its February 2020 rate. The U.S. added 199,000 nonfarm payroll jobs. Eight of the eleven major sectors added jobs: private educational and health services (99,000), government (49,000), leisure and hospitality (40,000), manufacturing (28,000), other services (12,000), information (10,000), financial activities (4,000), and construction (2,000). Trade, transportation, and utilities lost 35,000 jobs followed by professional and business services (-9,000), and mining and logging (-1,000).
California’s unemployment rate rose 0.1 percentage point to 4.8 percent in October 2023. California civilian unemployment increased by 17,700, civilian household employment decreased by 28,800, and 11,100 people dropped out of the labor force. The state’s labor force participation rate remained unchanged from September at 62.3 percent. California added 40,200 nonfarm payroll jobs driven by gains in private educational and health services (13,200), followed by trade, transportation, and utilities (6,900), leisure and hospitality (5,100), construction (4,500), manufacturing (3,400), professional and business services (2,500), government (2,400), other services (2,000), information (400) and mining and logging (100). Financial activities was the only sector that shed jobs (-300).
HOUSING
Year-to-date through October 2023, California permitted 111,200 housing units (SAAR), down 1.7 percent from September 2023 and down 7.8 percent from a year ago in October 2022. October permits consisted of 55,500 single-family units (down 0.1 percent from September, and down 13.5 percent year over year) and 55,700 multi-family units (down 3.4 percent from September, and down 1.3 percent year over year).
The statewide median sale price of existing single-family homes decreased to $840,360 in October 2023, down 0.4 percent from September but up 4.9 percent from October 2022. Sales of existing single-family homes in California increased slightly to 241,770 (SAAR) in October 2023, up 0.3 percent from September and down nearly 12 percent from October 2022.
https://storymaps.arcgis.com/stories/a45b84c232184afea0c34b47365a6c70
California Population Decline Continues – May Cost Federal Funds & Congress Seats
East Bay Times & Dept. of Finance
For the third consecutive year, the Golden State’s population continued to shrink in 2023, even as 42 other states grew this past year, many reversing population declines during the COVID pandemic, according to figures from the U.S. Census Bureau released.
Losing residents can be costly to states, as they can suffer drops in tax revenue and even political representation in Congress. The 2020 Census cost California, still the most populous U.S. state, a seat in the House of Representatives. It now has 52 House districts.
If this trend continues – other states growing while California shrinks – the Golden State could lose another 4 seats in Congress, after dropping one in 2020.
Overall nationally, the U.S. gained more than 1.6 million people this past year, growing by 0.5% to 334,914,895, the Census reported, with more states seeing population growth in 2023 than in any year since the start of the pandemic. While national population growth remains historically low, the U.S. saw a slight uptick from the 0.4% increase in 2022 and the 0.2% increase in 2021.
The Census said population trends are returning to pre-pandemic growth rates as international immigration returns and death rates continue to drop.
“Although births declined, this was tempered by the near 9% decrease in deaths,” said Kristie Wilder, a demographer in the Population Division at the Census Bureau. “Ultimately, fewer deaths paired with rebounding immigration resulted in the nation experiencing its largest population gain since 2018.”
California’s population shrank by 75,423 residents in 2023 to 38,965,193, a drop of 0.2% from 2022. But the California exodus is slowing. The drop is less than the 0.3% annual decline in 2022 from 2021, and the 0.9% yearly drop in 2021 from 2020, when 39,503,200 called the Golden State home.
But while California’s population shedding is slowing, it remains among few states still losing residents. Others were New York, Louisiana, Hawaii, Illinois, West Virginia, Oregon and Pennsylvania. And California’s population decline since 2020 remains the fourth largest in the U.S., behind New York, Illinois and Louisiana.
Dept. of Finance Census demographic report:
https://dof.ca.gov/wp-content/uploads/sites/352/2023/12/PressRelease_July2023.pdf
Water Board OKs Historic Wastewater Recycling Rule
CalMatters
In a milestone for creating a major new source of drinking water, California has approved its first standards for turning sewage into potable water supplies delivered to homes and businesses.
The State Water Resources Control Board, in a unanimous vote Tuesday, outlined for the first time how water suppliers can treat recycled water and send it directly to taps. Currently recycled water is mixed into aquifers or used for irrigation and other non-drinking purposes.
The new rules — which have been more than a decade in the making and were mandated by a state law — outline a slew of requirements aimed at ensuring that germs and chemicals are scrubbed from treated sewage.
MUCH MORE:
Warehouse Construction Boom Busts
Wall Street Journal excerpt
Higher interest rates are choking off construction of warehouses that feed America’s growing e-commerce appetite, putting an end to a building boom that remade vast swaths of the country.
Over the past decade, warehouses became an investor darling as investors such as Blackstone and Singapore sovereign-wealth fund GIC bought up vast portfolios. During the pandemic, developers plastered cities and suburbs with logistics facilities to profit from surging rents and seemingly insatiable demand from Amazon.com and other e-commerce companies.
Now, many large investors are cutting back. Industrial property construction starts tumbled 48% in the first nine months of the year compared with the same period in 2022, according to data company CoStar. That was the largest drop for that period since 2009.
The dollar volume of industrial real estate sales fell by 45% in the third quarter from a year earlier, according to MSCI Real Assets.
“It was unsustainable, but no one knew how long this party was going to last,” said Vince Tibone, managing director at analytics firm Green Street.
Higher debt costs and slowing leasing demand are the main culprits. The rates on many types of commercial mortgages have roughly doubled over the past year, and land prices haven’t fallen enough to make up for that, brokers say, making it harder to pay for construction.