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02-05-2020 Investment Adviosry Committee Agenda
MEETING OF THE INVESTMENT ADVISORY/OVERSIGHT JOINT COMMITTEE MEETING Wednesday, February 5, 2020 3:00 p.m. - 4:00 p.m. Finance Conference Room Meeting called by: Robert Foley, Chair Facilitator: Robert Foley Type of meeting: Quarterly Meeting Minutes taken by: Diane Hornsby Attendees: Robert Foley, Larry Sallinger (IAC) Richard Rohm, Rick Otto, Will Kolbow (IOC) Josephine Chan, Diane Hornsby (Staff) Please read: The attached Please bring: The attached Agenda Topics 1. Call to Order Robert Foley 2. Approval of Minutes, Meeting of November 6, 2019 Robert Foley 3. Rate Summary December 2018 - December 2019 Josephine Chan 4. Investment Portfolio Update Josephine Chan 5. Treasurer's Investment Reports for October, November, & December 2019 Josephine Chan 6. Discussion of Proposed Changes to the Investment Policy Josephine Chan 7. Sales Tax Update Receive and file 8. i) Chapman Economic & Business Review ii) California Forecast: Sales Tax Trends and Economic Drivers Will Kolbow 9. City Update Rick Otto 10. Next Meeting Date - Wednesday, May 6, 2020 Robert Foley 11. Public Comment 12. Adjournment Robert Foley MINUTES INVESTMENT ADVISORY (IAC) COMMITTEE INVESTMENT OVERSIGHT (IOC) COMMITTEE Wednesday, November 6, 2019, 3:00 p.m. - Finance Conference Room PRESENT: IAC COMMITTEE IOC COMMITTEE (non-voting) Robert Foley, Chair Richard Rohm, City Treasurer (absent) Larry Sallinger, Member Will Kolbow, Assistant City Manager! Vacant Administrative Services Director STAFF Josephine Chan, Investment/Revenue Officer Diane Hornsby, Executive Assistant 1. Call to Order Chairman Robert Foley called the meeting to order at 3:03 p.m. 2. Approval of Meeting Minutes of August 7, 2019. Mr. Foley moved to approve; Mr. Sallinger seconded; motion carried. 3. Rate Summary A report of the highs and lows for various investments during period of September 2018 through September 2019. Action: Received and filed. 4. Investment Portfolio Update A report showing City's portfolio investment percentages in various areas as of October 25, 2019. Action: Received and filed. 5. Treasurer's Investment Reports for July, August, and September 2019 Explanation of disbursements, investment activity, and sales tax revenue by month. Action: Received and filed. 6. Sales Tax Update A review of quarterly sales tax receipts of the eight major business groups showed a significant increase in fuel dollars, a 31.2% increase over the same sales period last year. Action: Received and filed. 7. California Forecast: Sales Tax Trends & Economic Drivers - It was predicted that the economy would continue to be strong, with a possible dip in 2021. Action: Received and filed. DATE OF ITEM NO. Z PAGE.. / METINGI. Minutes of the Joint Meeting of the Investment Advisory and Investment Oversight Committees, November 6, 2019 & City Update: The City Council adopted district maps (awaiting second reading), and the City looks forward to four new City Councilmembers after the November 2020 election. It was further mentioned that the Council approved the long range project with Sully Miller. 9. Next meeting date Wednesday, February 5, 2020, at 3:00 p.m. in the Finance Conference Room. 10. Public Comment - Mr. Foley commended the City's fine job in the sales tax area, but suggested that the subject is beyond the mission and responsibility of the IAC/IOC. He moved that the committee consider sales tax as an informational item only; Mr. Sallinger seconded the motion; motion carried. 11. Adjournment - The meeting adjourned at 3:25 p.m. Robert Foley, Chair Richard Rohm, City Treasurer Investment Advisory Committee Investment Oversight Committee Distribution: Mayor and City Council City Manager, IOC Investment/Revenue Officer Assistant City Manager! Administrative Services Director, IOC City Treasurer, IOC City Clerk Investment Advisory Committee 2 RATE SUMMARY December 2018 to December 2019 Month Ending U.S. Treasury Yield LAIF Yield 3 month 6 month 2 year 3 year 5 year Dec-18 2.45% 2.56% 2.48% 2.46% 2.51% 2.29% Jan-19 2.41% 2.46% 2.45% 2.43% 2.43% 2.36% Feb-19 2.45% 2.50% 2.52% 2.50% 2.52% 2.39% Mar-19 2.40% 2.44% 2.27% 2.21% 2.23% 2.44% Apr-19 2.43% 2.46% 2.27% 2.24% 2.28% 2.45% May-19 2.35% 2.35% 1.95% 1.90% 1.93% 2.45% Jun-19 2.12% 2.09% 1.75% 1.71% 1.76% 2.43% Jul-19 2.08% 2.10% 1.89% 1.84% 1.84% 2.38% Aug-19 1.99% 1.89% 1.50% 1.42% 1.39% 2.34% Sep-19 1.88% 1.83% 1.63% 1.56% 1.55% 2.28% Oct-19 1.54% 1.57% 1.52% 1.52% 1.51% 2.19% Nov-19 1.59% 1.63% 1.61% 1.61% 1.62% 2.10% Dec-19 1.55% 1.60% 1.58% 1.62% 1.69% 2.04% 3.00% 2.50% 2.00% 1.50% 1.00% 1 I I I I I Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 -3month -4-6month --2year -è-3year --5year --LAIF DATE OF ITEM NO. PAGE / MEETING Investment Portfolio Update As of 1-28-20 Instruments - - Book % of (Days to Maturity) Value Portfolio LAI F - Treasury Sweep $ 23,200,000 2,159,369 17.0% 1.5% Money Market Mutual Fund Medium Term Note 1 year 10,000,000 7.3% 2 year 2,000,000 1.5% 5 year 9,312,045 6.8% 21,312,045 15.6% Federal Aqency 1 year 24,999,595 18.3% 2 year 32,997,216 24.1% 3 year 8,000,000 5.9% 4 year 10,998,606 8.0% 5 year 13,000,000 9.6% Total 89,995,417 65.9% Total $ 136,666,831 100.0% / DATE OF MEETING ITEM NO. '7' PAGE (1) LU >(•) C0 aJ.m0 0 0 uZZ oZU.ZZI aIIIQ)LL 0 0 LIL0 uJ U) CD co CD C- CD CD CD CD CD co 0 0) M 0) <LU I F- N ('4 ('4 N N N (N N N ('4 ('4 ('4 0 0< N- 0o LO ix CDO D N0)C'40)o, 2 0. — 0 E 0 U) 0 .C.0 CD C, CD U) - 0. 0 0 CDOO it C) N CDR RCl) CL a. in 0) C) 0)M Cl) C) C) C') CD E 0 0 U) C!(U) U)U)U) WU)(h (flUCU) Wd)2) CD (l) N C') o o C) C) C) C.) 0 C.) 0 0 0 LU o WU)W wU)a) WW Cl)c/) U)U)U) OO(l) (l)U)(l) .2.2.2.2 000 000 000 000 (CC CCC CCC CCC CUU)CO m M ca ((5( CC CCC CCC CCC co IM 0000 U- CL CL CL it ititii LL LL it N- - N - LL LL =U)U)U)co(O (n in 0000 4, 4, <<M M M ca 00 4z M M M M M M 2 3' U) U) U) to M en - CD Q C') CD ('4 N- C') C) CD 0) CC) C') CD x 0) N- 0 CD CD U) E E E E U) U) co CD 0 ('4 N N N N N N N N N N N N C'.) N N U) E E E E C) U) N- CD CD CD CD IC) CD C-- N- N. x CD CD 0) CD CD C) fl .0 0 N N N N ('4 N N N N ('4 ('.4 ('4 X 4 N N N N .E . .0 (C (C (C X -- CL 0 E0.00 0) U) C CC - .2. — 2 — .2.2 C -- OCCCC 00000 E Mm a, (C) 00000 O' 0 0 0 0000 z z z — 0 0 0 0 (1) U) I)) Cl 0 C') N- 4, N N zzzz C) (1) I- F- I- EEEEE ((C w >.>'>.E >-E >'C)Q 0000000 Q 00 D 0 E E E E E CCCCCCCCC— CCC- C• XXXXX - 0 0 0 0) 0) 0) 0) 0) 0) 0) 0) 0) C) C') (1) U) U) U) U) C CL M C') 0 C U) o U) CC) . .0 U) IC) C ((C U _ C)OV-NC')'CDCDN-CDC)OC--NC')C)CDCDN-CD C N N N N N N N N N • CD- CO 0 C0.E 0 . — I- 0 _i U)U)(C)U) C •-.W 00U) IILLZ °- ((C N C') U) wa,ww 9222 U-0CEO WC)WC) - ('I C') I- _J 4 2 0 LI. U. U LI. an 1. Investment Report for October 2019 p DATE OF ITEM NO. ' PAGE / MEETING (D) Pursuant to the agreement, does the City retain authority to make investment decisions? Yes No (E) Pursuant to the agreement, are the investments deposited with the City's custodian? Yes No 7. Maturity Limits (A) Does the City currently own any security with a maturity date in excess of five years? Yes No X (B) Does the City currently hold at least 15% and no more than 50% of its portfolio in securities at time of purchase with maturities equal to or less than 365 days? Yes No (C) Does the City currently hold no more than 50% of its portfolio in securities at time of purchase with maturities between 366 days and 730 days? Yes No (D) Does the City currently hold no more than 35% of its portfolio in securities at time of purchase with maturities between 731 days and 1095 days? Yes No (E) Does the City currently hold no more than 30% of its portfolio in securities at time of purchase with maturities between 1096 days and 1460 days? Yes No (F) Does the City currently hold no more than 30% of its portfolio in securities at time of purchase with maturities between 1461 days and 1825 days? Yes No 8. Issuer Limits Does each issuer of Money Market Mutual Funds continue to meet the following requirements? (i) Is each issuer registered with the Securities and Exchange Commission under the Investment Company Act of 1940? Yes No N/A X (ii) Does the fund of each issuer carry the highest rating of at least two of the three largest national rating agencies? Yes No N/A X (iii) Has each issuer retained an investment adviser registered with the Securities and Exchange Commission with not less than five years' experience managing money market mutual funds with assets under management in excess of $500 million? Yes No N/A X DATE OF ITEM NO PAGE'S .MEETING Prepared By: Josehin Chan Investment/Revenue Officer Audited By: RZZ Guzman Accountant We hereby certify that for the month of October 2019, the investment actions of the City of Orange comply in all respects with the requirements of the California Government Code and the City's current Investment Policy and that there is sufficient cash flow to cover the next six months' expenditures barring any catastrophic natural disasters. Market values are obtained through ICE Data Pricing and Reference Data, the State Treasurer's Office, U.S. Trust and U.S. Bank. Certified By: Verified By: ,4-720iL /// / /T'- William M. Kolbow Assistant City Manager Administrative Services Director DATED: January 27, 2020 Richard A. Rohm City Treasurer DATE OF ITEM NO. PAGE MEETING BANK I BROKER LU CL RATE YIELD DESCRIPTION (I) LOCAL AGENCY INVESTMENT FUND (LAIF (0 0 0.0 0 <I-0 (0 N- 0) 000 N N N U) 0)0 (00) U) CR Cl) Co 0 0 C', Co C', co C) C) C" 0 0 0 0 0 0 0 0 C') U) OR C') 0 0 0 Cl) (0 Cl) 11, IC) U) 0) C) (N 0 0 0 0 0 0 0 0 Cl) 0 )L) C') N 0 (N In 0) U) 0 LL U- 0) Z N C) 0 0. 0 C-) UI h LU LU LI- > C', OR U, U) C') N 0 0 U) N U) 0) 0) U) co 0) 0) N- N 0 0 0 0 0 0 0 0 co ('I 00*- 00 ('1 000) 000 00(1) 00(0 000) (N 0 N 000 000 000 000 1)00 U) 00 000 1)0(0 ION- 119,178,938.92 123,240,176.23 123,445,723.79 119,269,883.82 119,309,386.86 123,486,058.69 Portfolio total 0 z I- U) >_ LU I- U) 0 z h LU z 0 > - Portfolio total (ON- 000(0 00000 ('IN 'INN N-0 ,N-(O(0N-r- NI) _N 04 C'IC'ICN j U)LflLt)N- C-) 0 U) UBS Financial Services UBS Financial Services C)o 0 N () U) N N 0 0O L()(0 -0).t 000 0)0) N- N U) IT 0) N- 000 C) to N- 0)0) U) q 0o N 0 N- N- C) (0 I-. 000 -N() 00)NN 000 N- 0 N- 90)0)0)0) CC')N 0)00) 0)0)0)0)0) (00)U) (ON- C. U) 00 C')LC) r ,- 0 00 N- 0 N- 00090 000 00000 000 N- ON- 000N0 000 -0- 000(00 odo OD 0 Go dOO CF) O 000 0)00) 0000)0 C)c)N Cqo 0000)0 (0 OD In cor- co (0U)0)C)(0 000 000 00000 coo coo ocooc 000 000 00000 000 000 00000 000 000 00000 000 000 00000 000 000 00000 0) C) (N 000 00000 (0 0) (C) N- N- Nr CO U) (7) (0 00 (0 U) 000 N- 0 0) 0) - N U) U) 00 U) -- U).- 'tr-U)r-U) ('IN .—N 00 0(1) 00000 0) 0) 0 N LI) LO 00 LO U),.. -LC)U)L() ('IN .C'I '-('I ('IN 04 04 00 000 0 C14 C14 04 ('IN N4N N-U) U)NN- >< U)0) 00 rrzzzzz LL LL UULLLLU U) 0) (0 U) N N- C) - ()N- N 0) 0 (0 N- 0) 00) 0 oC)- c . ,. U) C') 0) 000 N-0O (3) 000 0) 000 (0000 cdood 0) 000 0) 000 - (DC 0000 0000 0000 0000 0000 0000 0000 U) (0 Cl) 0) (C) 00 N CD c0( Cl) o - - ,- N 0 U) 00 (N (N CD (0(0 Cl) 0 N co ca m m 0000 U U LL U LL LL LL U C') N- (0 C') U) N- 0) 0) C') 0 (N U) 0) 0) 0) 0) Cl) 0 0 0 0 0 0 0 0 0 October 2019 PURCHASES I DEPOSITS $11,231,738.86 $ 11,231,738.86 $5,226,836.71 5,226,836.71 Sweep Account Various dates Various dates ci: z z co C.1 C) (0 co C C'4 C) Co CALLABLE DESCRIPTION SETTLEMENT DATE $10,113,469.44 0 0 $9,526,836.41 $10,113,469.44 0 0 0 $9,526,836.41 z z z MATURITIES I WITHDRAWALS I CALLS co 0 0 CJ 0) 0 (C 17 ll~ C'.) co C C ('.1 0) 0 Sweep Account Various dates 0) C ('4 (0 C..) C Various dates 0 0 C; 0 0 0 0 d C 0 CALLABLE DESCRIPTION SETTLEMENT DATE Portfolio Performance Measures Rate of Return: Portfolio Yield to Maturity: weighted-average yield to maturity (or call date, if applicable) for entire portfolio; in the case of coupon investments, includes an adjustment to the face rate for any premium paid or discount received. Portfolio Effective Rate of Return: interest earnings (not receipts) for period divided by average daily balance for period, annualized (multiplied by quotient of 365 divided by days in period). Portfolio Effective Rate of Return - for Fiscal Year-to-date Portfolio Yield to Maturity at 10/31/2019 Portfolio Effective Rate of Return - for October Total Rate of Return: cc - oc ON a) CC > 0) C CC U) a) -c 0 C 0 0 0. . 0 co U)0. (Ca) Eo 0 o •C C -Q .2 CC3 o CC 0. > a) CD a)o . 0 C 0 1) (CO _C . o_C cr- > • .0 0 C CO 0 (D 0 -c 2 0. CC 0 a-v a) a)a) c. C v 0 a) (CO. 0 > C a) . g V -C C 0 CC a) •9) cc o UJ.0 2 cu CC CD U) . .2 Cc CC9-. 4. U) oi 00 U) F- - The Modified Dietz Method assumes a constant rate of return on the portfolio during the period and is not based on daily valuations. .Cco LZ C It) M LL Ci a) '- C--'- 0 u a) >- C) 4-' 0 zo e co It) 0. C) ' 0.1- .2C'4a) /\ o 00 o o 0 CD I'- o q o 0 0 D 0 0 o o 0 0 0 U) 0 0 0 6 0 0 0 0 0 q o 0 0L 0 co 0 0 0 6 0 q 0 0 0 0 o 0 q 0 69 &* $80,000,000 Maturity Aging Schedule 0 Weighted-average years to maturity for portfolio Co LQ City of Orange Reconciliation of Total Cash and Investments to General Ledger As of October 31, 2019 Treasurer's Operating Cash and Investments Checking, Payroll & PMA - Wells Fargo 235,909 Treasurer's Investments 119,269,884 Accrued Interest on Investments 4,604 Cash in transit (313,693) 119,196,704 Imprest Cash 12,200 Fiscal Agent Cash and Investments 3,209,654 Total Cash & Investments 122,418,558 Total Cash and Investments per General Ledger 121,087,479 Plus Outstanding Checks 1,331,079 Total Cash & Investments 122,418,558 DATE OF ITEM NO. PAGE MEETING 1 Includes adjustment for month-end timing differences. GL Cash.4 Attachmen( V City of Orange Fiscal Agent Investments As of October 31, 2019 Carrying Value Market or Contract Value Fiscal Agent Cash and Investments Assessment District 95-1 1996 Limited Obligation Improvement Bonds - U.S. Bank 332 332 First American Government Obligation Fund (1.75%) Community Facilities District 91-2 2013 Special Tax Refunding Bonds - U.S. Bank 1,566,908 1,566,908 First American Government Obligation Fund (1.75%) Federal National Mortgage Association (1.25%) Successor Agency 2008A Merged & Amended Tax Allocation Bonds - U.S. Bank 2,473 2,473 First American Government Obligation Fund (1.75%) Successor Agency 2008B Merged & Amended Tax Allocation Bonds - U.S. Bank 677 677 First American Government Obligation Fund (1.75%) Community Facilities District 06-1 2015 Special Tax Refunding Bonds - U.S. Bank 1,637,601 1,637,601 First American Government Obligation Fund (1.75%) US Treasury Bond (4.375%) Successor Agency 2014A Merged & Amended Tax Allocation Refunding Bonds - U.S. Bank 1,563 1,563 First American Government Obligation Fund (1.75%) Successor Agency Refunding Bonds 2018A - U.S. Bank 100 100 First American Government Obligation Fund (1.75%) Total Fiscal Agent Cash and Investments 3,209,654 3,209654 01 DATE OF ITEM NO. ' PAGE F ' MEETING 4z 2. Investment Report for November 2019 DATE OF A. 100, ITEM NO. PAGE. /J MEETING MONTHLY SUMMARY COMPLIANCE CERTIFICATE November 2019 Note: All concentration restrictions were obtained from Sections 53601 and 53635 of the Government Code or the City's Investment Policy as of June 11, 2019, whichever was the more stringent. 1. U.S. Agencies (A) Total amount (book value) of U.S. Agency securities owned by the City = $77,995,178. (B) Total amount allowed (75% of portfolio book value) of all City investments = $91,725,512. Is (A) less than (B) at time of purchase? Yes X No 2. Money Market Mutual Funds (A) Total amount (book value) invested in money market mutual funds by the City = $9,639,554. (B) Total amount allowed ($15 million or 20% of portfolio book value, whichever is less) of all City investments = $15,000,000. Is (A) less than (B)? Yes X No 3. LAW (A) Total amount (book value) invested in LAIF by the City = $19,700,000. (B) Total amount allowed (35% of portfolio book value) of all City investments = $42,805,239. Is (A) less than (B)? Yes X No 4. Medium-Term Notes (A) Total amount (book value) invested in medium-term notes by the City = $14,966,151. (B) Total amount allowed (20% of portfolio book value) of all City investments = $24,460,137. Is (A) less than (B) at time of purchase? Yes X No 5. Excluded Investment Vehicles (A) Are any securities excluded by the Statement of Investment Policy currently included in the City's portfolio? Yes No X 6. Investment Management Agreements (A) Does the City have any investment manager or advisor agreements? Yes No X (if no, skip to number 7) (B) If so, was the agreement approved in advance by the City Council? Yes No (C) Has the City examined the methods and past performance of the investment manager? Yes No / DATE OF ITEM P40. -s PAG MEETUS Zo (D) Pursuant to the agreement, does the City retain authority to make investment decisions? Yes No (E) Pursuant to the agreement, are the investments deposited with the City's custodian? Yes No 7. Maturity Limits (A) Does the City currently own any security with a maturity date in excess of five years? Yes No X (B) Does the City currently hold at least 15% and no more than 50% of its portfolio in securities at time of purchase with maturities equal to or less than 365 days? Yes No (C) Does the City currently hold no more than 50% of its portfolio in securities at time of purchase with maturities between 366 days and 730 days? Yes No (D) Does the City currently hold no more than 35% of its portfolio in securities at time of purchase with maturities between 731 days and 1095 days? Yes No (E) Does the City currently hold no more than 30% of its portfolio in securities at time of purchase with maturities between 1096 days and 1460 days? Yes No (F) Does the City currently hold no more than 30% of its portfolio in securities at time of purchase with maturities between 1461 days and 1825 days? Yes No 8. Issuer Limits Does each issuer of Money Market Mutual Funds continue to meet the following requirements? (i) Is each issuer registered with the Securities and Exchange Commission under the Investment Company Act of 1940? Yes No N/A X (ii) Does the fund of each issuer carry the highest rating of at least two of the three largest national rating agencies? Yes No N/A X (iii) Has each issuer retained an investment adviser registered with the Securities and Exchange Commission with not less than five years' experience managing money market mutual funds with assets under management in excess of $500 million? Yes No N/A X DATE OF ITEM NO. PAGE, / MEETING Prepared By: Audited By: E Cç C,.CK.- Josohin Chan Rosai4'o Gtlzman Investment/Revenue Officer Accountant We hereby certify that for the month of November 2019, the investment actions of the City of Orange comply in all respects with the requirements of the California Government Code and the City's current Investment Policy and that there is sufficient cash flow to cover the next six months' expenditures barring any catastrophic natural disasters. Market values are obtained through ICE Data Pricing and Reference Data, the State Treasurer's Office, U.S. Trust and U.S. Bank. Certified By: Verified By: 0-~-a (1~ A:,'-,4.,j 47~4-, Richard A. Rohm City Treasurer DATED: January 27, 2020 William M. Kolbow Assistant City Manager Administrative Services Director le DATE OF ITEM NO. > PAGE /' MEETING A . 0 R 0 0 0 0 0 N 0) 00 C', (0 N (0 C) C) N. N N qT CL) 03 C) C) N N 0 CC) 0 C' 0) IL) 00 N co C) 0000)Q '-'-'-N 0 CC) 00 (N N co C) (0(0 Cl? 0 -'-'-N C') N 0 (N LI•) 0) N ('4 co ' 0 No (N 0 N zz cli rl- C) 0 QC, 0) (ON (0 000 (N N N LO (I) LOCAL AGENCY INVESTMENT FUND (LAIF BANK/BROKER 00 00 00 00 00 00 Cli 00 0) C') C') 00 17 17 ('JC\I 00 00 . 0) 0 0 0 0 Q d 0 0 0 0 6 0 0 r- 0 03 0 0 Ir N 0 N N N N 0 N IT N 0 N 0 N 0 03 N 0) 00 00 03 00 dd 00 00 00 00 66 0)Cl) 00 0) C) 0 '-C', C') -• 0 'I- 4_I 4.1 00 .0 .0 H (ONC) 000 ('C N N (00)0 (00) 00 0 0 0 0 0 0 I- 0) 0 C) 0 0) 000 1000 N N 000 (0011) (00 N N- 'CC 0) CNN N- CD 10 CC) N (1) 10 N- 0)0) Co 0, 0, 0) co to •l 0)0) 00 (N 000) 00 00CC) 00- 00(0' 00(0 00Cl) (N 0 (N 000 000 000 000 000 666 000 000 NOC') 122,126,155.49 119,178,938.92 119,269,883.82 122,300,883.06 122,339,554.24 119,309,386.86 In U CO mt C) 0) N It N N. In (0 C) C) N 0 0 0 0 0 0 0 0 C', 000 N 0 IC) IC) 00 LI) IC) N IL) 00000 IC) It) 00 IL) It NCC)CC z z z z z LI. U. LL U. U. (0(0(0(0(0 00000 Z N N C-4 N N N (D Cc N F-. -N N (N N N Co Stifel Nicolaus & Co Inc. 0 0 0 0 00000 q0000 0 00000 0 00000 0 00000 o 00000 0 00000 0 000Q0 I'- (0L00)C0 co U.; N 0) 0 IL) 0) 0) C', Co I.- IC) 'I, 0) 0) Cl C) C', 0 0 0 0 0 0 0 0 0 03030303 0000 LL LL IL LL U_ U. LL LI. I- WUJ RATE YIELD DESCRIPTION 0 C) 000,- 0 000•coq O 00 N 0 000 CC) 0 000(00 6o 60)0 0000)0 0000) 0 0000 00.0.c 0000 0000 0000 0000 0000 0000 LO 1q, (D c 1- (0 (0 N (0 0) 0) CO r-- C\! N 03 0) C) CO 0 0 C) 0 0 0 0 0 co 0 0 CD 0 0 0 R. (0 N N C') cc (0 N (0 C) (0 N (ci N to 0) (0 (0 N CD N C" U, F-. C) I-N N Ct IC) C') IT 0) C) (N November 2019 LU 0 CALLABLE DESCRIPTION SETTLEMENT DATE $15,791,237.05 $10,000,000.00 $ 15,791237.05 $ 10,000,000.00 PURCHASES I DEPOSITS 0 ('j) 0) 0 (.'J 0 C) 0 Sweep Account Various dates Various dates November 2019 SETTLEMENT DATE DESCRIPTION CALLABLE a. w C.) CD w CD $5,500,000.00 $7,000,000.00 $10,264,947.40 $5500000.00 7,000,000.00 $10,264,947.40 Sweep Account MATURITIES / WITHDRAWALS I CALLS Various dates 11/26/2019 Various dates U) a) a) V C 0)0)0) WWW WWW .0.0.0 E E E WWW >>> 000 ZZZ 'IIV U) 0) I-I-I CCL. o EE —a) C CC WI .0I E>• a)0) ZN I.. I 00 4-4— CC 9-9- 00 Wa) -- 1.-I.- x x WW .E.E (A U) Wa) LL. Wa) >>. Portfolio Performance Measures 0 CL C) 0 W I.. .E wE C> CCO F ITEM NO PAGE .2.2 ° 00 00 I'- C) CO ) .2 V C.) C .0 I.- UM 0C) (C , a) 0.10 0 >-. a) a)tV o E 2o a)0.c >a) F' CO t'. ' CO 0) 1- ' o cli c;0;c . j, g m o 0 V 9-5 .0 trf a) a) ° .c o >.c no. . aV -c Mn fl - )92 c V .2 E 0 E E V (C 0 U) 0 £2 0 cn .CC .2 E c V (I) .0>. 42 > U - C 0 — -' CC) ZIØ) 0 C • 0 Oo 0.2.20 a).5 g.0 U) a)' .O' WOOL. Ea CL CL C.) -c 0) 9-9- WW WW >>o UU ww> .2.2.2 000 a- Qa- ZN 00 . 4-9— -Il ww 0 9-s- 00 n- 000 I- s- I-. 0CC 0>> LOWa)L. '0w OQ.LL. Rate of Return: 7 (0 0 0 rR a- 4-. a) II C) 0 z I 0 It 0 a) C) a) d 2 w o o 0 0 0 0 C. 0 0 o o 0 0 0 0 0 00 o R 0 0 O q 0 0 0 o o o o 0 0 0 o o o o 0 0 0 0 0 0 0 o 0 q q 0 0 q q q 6 6 o o o o o o 0 F 0) wN 0 u) C) C'1 (0131 69 9 & 69 0 '4 0 0 0 0 0 Weighted-average years to maturity for portfolio .2 0 It () N o —Q ON- >C)C) le C 0co 'It Tl- t- LO L- c c,) (o )C) C\ILO Q C C) cc cc C 0 co C\J Cs.J 4- 0 C.) Maturity Aging Schedule City of Orange Reconciliation of Total Cash and Investments to General Ledger As of November 30, 2019 Treasurer's Operating Cash and Investments Checking, Payroll & PMA - Wells Fargo 135,730 Treasurer's Investments 122,300,883 Accrued Interest on Investments 4,604 Cash in transit (2,549,513) 119,891,704 Imprest Cash 12,200 Fiscal Agent Cash and Investments 3,219,649 Total Cash & Investments 123,123,553 Total Cash and Investments per General Ledger 1 122,515,897 Plus Outstanding Checks 607,656 Total Cash & Investments 123,123,553 DATE OF ITEM NO. C PAGE MEETING ' ° 1 Includes adjustment for month-end timing differences. GL Cash 5 Attachment V City of Orange Fiscal Agent Investments As of November 30, 2019 Carrying Value Market or Contract Value Fiscal Agent Cash and Investments Assessment District 95-1 1996 Limited Obligation Improvement Bonds - U.S. Bank 333 333 First American Government Obligation Fund (1.55%) Community Facilities District 91-2 2013 Special Tax Refunding Bonds - U.S. Bank 1,576,674 1,576,674 First American Government Obligation Fund (1.55%) Federal National Mortgage Association (1.25%) Successor Agency 2008A Merged & Amended Tax Allocation Bonds - U.S. Bank 2,477 2,477 First American Government Obligation Fund (1.55%) Successor Agency 2008B Merged & Amended Tax Allocation Bonds - U.S. Bank 678 678 First American Government Obligation Fund (1.55%) Community Facilities District 06-1 2015 Special Tax Refunding Bonds - U.S. Bank 1,637,822 1,637,822 First American Government Obligation Fund (1.55%) US Treasury Bond (4.375%) Successor Agency 2014A Merged & Amended Tax Allocation Refunding Bonds - U.S. Bank 1,565 1,565 First American Government Obligation Fund (1.55%) Successor Agency Refunding Bonds 2018A - U.S. Bank 100 100 First American Government Obligation Fund (1.55%) Total Fiscal Agent Cash and Investments 3,219,649 3,219,649 DATE OF ITEM NO. PAGE 2 MEETING 3. Investment Report for December 2019 1 DATE OF le ITEM NO. ' PAGE 21S MEETING ' MONTHLY SUMMARY COMPLIANCE CERTIFICATE December 2019 Note: All concentration restrictions were obtained from Sections 53601 and 53635 of the Government Code or the City's Investment Policy as of June 11, 2019, whichever was the more stringent. 1. U.S. Agencies (A) Total amount (book value) of U.S. Agency securities owned by the City = $85,995,417. (B) Total amount allowed (75% of portfolio book value) of all City investments = $97,281,617. Is (A) less than (B) at time of purchase? Yes X No 2. Money Market Mutual Funds (A) Total amount (book value) invested in money market mutual funds by the City = $3,801,360. (B) Total amount allowed ($15 million or 20% of portfolio book value, whichever is less) of all City investments = $15,000,000. Is (A) less than (B)? Yes X No 3. LAW (A) Total amount (book value) invested in LAIF by the City = $18,600,000. (B) Total amount allowed (35% of portfolio book value) of all City investments = $45,398,088. Is (A) less than (B)? Yes X No 4. Medium-Term Notes (A) Total amount (book value) invested in medium-term notes by the City = $21,312,045. (B) Total amount allowed (20% of portfolio book value) of all City investments = $25,941,765. Is (A) less than (B) at time of purchase? Yes X No 5. Excluded Investment Vehicles (A) Are any securities excluded by the Statement of Investment Policy currently included in the City's portfolio? Yes No X 6. Investment Management Agreements (A) Does the City have any investment manager or advisor agreements? Yes No X (if no, skip to number 7) (B) If so, was the agreement approved in advance by the City Council? Yes No (C) Has the City examined the methods and past performance of the investment manager? Yes No DATE OF ME NO. -5- PAGE 04 MEETING (D) Pursuant to the agreement, does the City retain authority to make investment decisions? Yes No (E) Pursuant to the agreement, are the investments deposited with the City's custodian? Yes No 7. Maturity Limits (A) Does the City currently own any security with a maturity date in excess of five years? Yes No X (B) Does the City currently hold at least 15% and no more than 50% of its portfolio in securities at time of purchase with maturities equal to or less than 365 days? Yes No (C) Does the City currently hold no more than 50% of its portfolio in securities at time of purchase with maturities between 366 days and 730 days? Yes No (D) Does the City currently hold no more than 35% of its portfolio in securities at time of purchase with maturities between 731 days and 1095 days? Yes No (E) Does the City currently hold no more than 30% of its portfolio in securities at time of purchase with maturities between 1096 days and 1460 days? Yes No (F) Does the City currently hold no more than 30% of its portfolio in securities at time of purchase with maturities between 1461 days and 1825 days? Yes No 8. Issuer Limits Does each issuer of Money Market Mutual Funds continue to meet the following requirements? (i) Is each issuer registered with the Securities and Exchange Commission under the Investment Company Act of 1940? Yes No N/A X (ii) Does the fund of each issuer carry the highest rating of at least two of the three largest national rating agencies? Yes No N/A X (iii) Has each issuer retained an investment adviser registered with the Securities and Exchange Commission with not less than five years' experience managing money market mutual funds with assets under management in excess of $500 million? Yes No N/A X DATE OF ITEM NO. PARE '7 MEET1NG12i!0 Prepared By: Audited By: Rosafio Guzman Accountant Ca- Joephine Chan Investment/Revenue Officer We hereby certify that for the month of December 2019, the investment actions of the City of Orange comply in all respects with the requirements of the California Government Code and the City's current Investment Policy and that there is sufficient cash flow to cover the next six months' expenditures barring any catastrophic natural disasters. Market values are obtained through ICE Data Pricing and Reference Data, the State Treasurer's Office, U.S. Trust and U.S. Bank. Certified By: Verified By: - A-i Richard A. Rohm City Treasurer DATED: January 27, 2020 William M. Kolbow Assistant City Manager Administrative Services Director C. ITEM NO. _c PAGE MEETING ICC In CD F F-- 0) I-N 0) N CD (0 (0 0) 0) I-N 0 0 0 0 0 0 0 (0 N 2,985,066.36 N00)(OF CF) (7) (0'C'C'IcC)'-F N:CNN- UN 00 C).-14)N0) (D co 'CO'C'O)(0 0) 10 (S0)01(0) .- C) CV) N- Cl) CO) 00 C)C) Cy) (ON (00) (0 (0 N (N 00 (N IL) N. 0)0) 01 0o'C(Oc F CO 00(0.—CD 00 0 00'C0IV (0(0 (0 COt -COO (4)10 co 00(0 to N F-. O 00(0 00 0) 00 lc) C4)(4) 0) 00 N N 0 (N (0,- (4) (4) .- N 000 0 0 0 0)0) R 00•0q0 17 o 00000 00 0 00000 co co 0 (4)10• 0 00000 FF 0 00000 00 0 00000 (0 (0 0i O1000(0- COO) N 0 c,j 0 to 0 c'j 000 (N 1000 'C• IL0.—.. F (N (N N 0000 U') C) (00 lOON- U .- N .- (4) 0 co 'C.. 0 CO 0 z FL LU (Ti CO 0 LL LL U- Cl) (0 0 0 > 122,126,155.49 129,517,606.78 122,300,883.06 129,708,822.52 122,339,554.24 129,401,360.19 2.985.066.36 (N (4) (ci 0 (0 (0 C) C) N 0 0 0 0 0 0 0 0 C,, xW MATURITY DESCRIPTION BANK I BROKER uJ O (I) LOCAL AGENCY INVESTMENT FUND (LAIF Co o 0 N- (0 Cl) F- CO 0 I) (0 (0 0 0•00 Oc 0•COC co 00 Lo 0 0 0 0) 0) N F U5 (00(0 ' 0 IC) U 000 (00)0 (OCNQO)C000 .-CO0)N 000 (N (0 0) 0)(0(00 CD COO) N-.- 000 0)00 F'- N (0 0) C).- LO 0) 00 LO 000 CD CD C) C) C) C) C) F'- 0) C) C) I) (0N CO ('00) C) C) C) C) C) 01 C) C) C) C) (N 00 CO OD C)C)U) 0) (0 (0 N F 10 000 N- 0 F- 000 03 (0 C) 000 000 10.- 000(00(0 .-000 000 CD 0 00ONro le N:dd 000 0 0000)00 (0000 000 (0010 000(00(0 (0000 000 co C) (0 000000 00000 000 0)00 000000 0)000 'C' (N (0 0)00) 000 0) 00) 0000 (DNOD (0C) qe (D(00(0(00) 'C(0(0 (4) 000 000 000000 0000 000 000 000000 0000 000 000 dddddo 0 dd 000 000 000000 0000 000 000 000000 0000 000 000 000000 0000 000 000 000000 0000 N CD 000 000000 0000 (ON (0 N- OD in (0(00) 'C COO (0 (0 (4) (00) (0(X) 000 N- 0 0) (000 .— N- (0(X) 00 LO 'C (N (00 00 tX) 'CN-(X)N-tO cOcOcOO N (N r F r r r N (4)0) 0 to 00000 0 (000 'C' 'C 0 N. (0(000(0 N (N (00 00 (0 OR 'CN-(X)LOtZ) (0(0(')0 NN (4) NNNN(NN (N04 00 000(N0 0 0 0 0 NN ('4(N(N-.(N (N izz N.— (N (N (N -...(N i??N- m 0 0 22222 0000 II ZZZZZ ULLLLLL LL LL U. LL U. U. LL U. U.. LL U. (0 (0(0(0(0(0 (0 N- C0 00000 CN 04 04 04 C Z (N £N -N-(0(ON-N- — N N N N OX (N.—.- ui CD 0(0 OU)U)0CI) (0(0(0 CC) CC)C.)CQ) m.9 0.2.9.9 .22 R Y 7 C) C) O.) U) WC)WQ) CI)OörJ) (0Q)(0 _I, 4 'ru zi 5 0 — 5 t5 Z5 — C — CC—C C C C 8cC 8CCCC8CC C5 0-C 1Zu ZZ LT- Z co U) U) (0 W (1)0) M 0)COm m mm COD LU uJ 0 0 0 UJ U. LL LL. > UBS Financial Services December 2019 PURCHASES / DEPOSITS nvestment Transactions $16,500,000.00 $ 16500,000.00 $8,000,000.00 8,000,000.00 $21,654,896.59 $ 21,654,896.59 $6,446,633.33 6,000,000.00 Sweep Account Various dates 12/16/2019 Various dates CI) CI) C) z z >- >- C C) N 14) 00 Nr N. Q c c'J C Cl) C LU OD C N- C L C"J C') D ITEM NO. PAGE w C.) CALLABLE DESCRIPTION SETTLEMENT DATE CALLABLE DESCRIPTION LU I- SETTLEMENT DATE $17,600,000.00 $27,497,622.43 $17,600,000.00 $27,497,622.43 Sweep Account MATURITIES I WITHDRAWALS I CALLS Various dates Various dates 0 t 0 — 1 1 F Portfolio Performance Measures Rate of Return: CO V- 0 0 0 ii U - V .2 CM we C CC 4-- > 00 wow 0)0)0) 00 :2 wow -- V ow 60(0 I- (0 - wow a 2 E E E 00 C wow F-I-- (D • C wow 0)0 U) CC > V .— (0 (flU)U)0 C (fl U) :. C woo .2 i E -o o °. > -- - - - .2:2v >. CC (CCC 00 0(D ca EE >> — U) O.0 C)C) C C CCa, 0 Cl) CD • CD 0 0 Eo 0 (I) 5 oCr CD CC a 0 . >- 2 •m CD 75 CL cC)CD OE 2 co CL cc 0C o I--CD 14CC0 .I4 CD .0 a Ccv) C C)C)CD T CD a, m 0 C) r o :s a . > .0 > 0. o.0 .0 . W E 0 w c', Ech D 0 E a, 4- CU (C •0 C" .2 N a,- '- I. C V U) a, 0 -.g E> OOe '1) a, CCE M 04 -. E )- a, C 0 V C V 4- _ a, C) F- 0 0 -- a, 0 .0 00 l-'4-'. oo . 00 CC ww www >>o 00-0-U) 4) 4) U)U)>.c CD eQ -a 00) a,a,C WUJ (D 0) .2.2.2 w m 0>> .22 0 cc 0 W19 w 000 000 00(00 00 00 OG.0. 1-F-I-. a. 0. coi- c,J A U- 4' 6 6 aD 0) $70,000,000 $50,000,000 $40,000,000 $30,000,000 $80,000,000 C) C) C) aft C) C) C) C) C) cD R c C) C) q C) aD (N a aft C) C) C) C) C) CD 6 CD C) C) tD Maturity Aging Schedule Weighted-average years to maturity for portfolio N cc City of Orange Reconciliation of Total Cash and Investments to General Ledger As of December 31, 2019 Treasurer's Operating Cash and Investments Checking, Payroll & PMA - Wells Fargo 194,571 Treasurer's Investments 129,708,823 Accrued Interest on Investments 101,438 Cash in transit 544,257 130,549,088 Imprest Cash 12,200 Fiscal Agent Cash and Investments 3,219,869 Total Cash & Investments 133,781,157 Total Cash and Investments per General Ledger 1 133,379,675 Plus Outstanding Checks 401,482 Total Cash & Investments 133,781,157 ITEM NO. ( PAGE -3S. DATE OF - MEETING ''20 1 Includes adjustment for month-end timing differences. GL Cash.6 A5achrnert V City of Orange Fiscal Agent Investments As of December 31, 2019 Carrying Value Market or Contract Value Fiscal Agent Cash and Investments Assessment District 95-1 1996 Limited Obligation Improvement Bonds - U.S. Bank 333 333 First American Government Obligation Fund (1.49%) Community Facilities District 91-2 2013 Special Tax Refunding Bonds - U.S. Bank 1,576,698 1,576,698 First American Government Obligation Fund (1.49%) Federal National Mortgage Association (1.25%) Successor Agency 2008A Merged & Amended Tax Allocation Bonds - U.S. Bank 2,480 2,480 First American Government Obligation Fund (1.49%) Successor Agency 2008B Merged & Amended Tax Allocation Bonds - U.S. Bank 679 679 First American Government Obligation Fund (1.49%) Community Facilities District 06-1 2015 Special Tax Refunding Bonds - U.S. Bank 1,638,012 1,638,012 First American Government Obligation Fund (1.49%) US Treasury Bond (4.375%) Successor Agency 2014A Merged & Amended Tax Allocation Refunding Bonds - U.S. Bank 1,567 1,567 First American Government Obligation Fund (1.49%) Successor Agency Refunding Bonds 2018A - U.S. Bank 100 100 First American Government Obligation Fund (1.49%) Total Fiscal Agent Cash and Investments 3,219,869 3,219,869 , )cL)r - ITEM NO. PAGE MEETING 2 Discussion on Proposed Changes to the Investment Policy . Staff requests input from the Committee for any proposed changes to the investment policy for FY 20-21. . Staff recommends the following changes: 1. Revise the 1 year or less investment maturity category at time of purchase from at least 15% and no more than 50% to at least 15%. Section 3.3 Mitiqating Risk in the Portfolio (b)(2): (See p.8 of SIP attached) Portfolio maturities shall be managed to avoid undue concentration at time of purchase in any specific maturity sector with at least 15% of the portfolio must be invested from one to 365 days and no more than 50% in this maturity sector, no more than 50% of the portfolio be invested from 366 days to 730 days, no more than 35% of the portfolio be invested from 731 days to 1095 days, no more than 30% of the portfolio be invested from 1096 days to 1460 days, and no more than 30% of the portfolio be invested from 1461 days to 1825 days. 2. Increase the maximum LAIF % of the portfolio from 35% to 45%. In addition, adjust the LAIF % limit from 40% to 50% of the portfolio when there is an influx of large deposits from called bonds. Section 3.1 Investments Authorized (4): (See p.6 of SIP attached) State of California Local Agency Investment Fund (LAIF) is permitted, with the knowledge that the fund may invest in some vehicles allowed by statute but not otherwise authorized by the City Council in this SIP. The Treasurer shall obtain from the State Treasurer, no less than quarterly, reports providing sufficient detail to adequately judge the risk inherent in the LAIF portfolio, and shall inform the City Council immediately of any risks noted that may warrant reconsideration of this investment vehicle. (Limits: Maximum concentration 35% 45% of total portfolio for all accounts. This maximum limit is increased to '10% 50% of total portfolio when there is an influx of large deposits resulting from called bonds. The '10% 50% limit is allowed for the next 30 days after the bonds are called so that the City can purchase other investments to bring the allowable percentage back to the 3% 45%.) DATE OF ITEM NO. PAGE / MEETING 's The portfolio was out of compliance in the one year or less maturity sector and in the LAIF balance as listed below. FY 19-20 FY 20-21 April 2019 May 2019 June 2019 August 2019 Portfolio Total 142,143,968 152,733,961 151,810,441 114,889,822 Maturity of 1 Year or Less 84,148,202 94,738,032 95,814,879 58,893,843 LAIF Balance 45,600,000 55,900,000 57,200,000 26,500,000 % Maturity of 1 Year or Less 59% 62% 63% 51% % Over the 50% Maximum Limit 9% 12% 13% 1% $ Over the 50% Maximum Limit 13,076,218 18,371,052 19,909,659 1,448,932 % LAIF Balance 32% 37% 38% 23% % Over the 35% Maximum Limit N/A 2% 3% N/A $ Over the 35% Maximum Limit N/A 2,443,114 4,066,346 N/A DATE OF ITEM NO. PAGE 2- MEETING Dated: June 11, 2019 CITY OF ORANGE STATEMENT OF INVESTMENT POLICY Fiscal Year 2019-20 1.0 INVESTMENT POLICY OVERVIEW 1.1 POLICY It is the policy of the City of Orange ("City") to invest public funds in a manner which will provide foremost for the safety of principal while meeting the short- and long-term cash flow demands of the City and conforming to all statutes governing the investment of City funds. Annually, in accordance with California Government Code ("CGC") Section 53646, the Treasurer will render to the City Council a Statement of Investment Policy for consideration and approval at a public meeting. Any investment currently held at that time that does not meet the guidelines of this policy, as changed from time to time by the City Council, shall be exempt from the requirements of this policy. However, at the investment's maturity or liquidation, such funds shall be reinvested only as provided by this policy. 1.2 PURPOSE This Statement of Investment Policy ("SIP") is set forth by the City for the following purposes: a) To establish a clear understanding for the City Council, Investment Committees, City management, responsible employees, citizens and third parties, of the objectives, policies and guidelines for the investment of the City's idle and surplus funds. b) To offer guidance to investment staff, brokers and any external investment advisors on the investment of City funds. 1.3 INVESTMENT OBJECTIVES Within the overriding requirement of compliance with all Federal, State and local laws governing the investment of moneys under the control of the Treasurer, and as specified in the CGC SectiOn 53600.5, when investing, reinvesting, purchasing, acquiring, exchanging, selling and managing public funds, the primary objectives, in priority order, of the investment activities shall be: a) Safety: Safety of principal is the foremost objective of the investment program. Investments of the City shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. DATE OF ITEM NO. ' PAGEI 3 -.MEETING b) Liquidity: The investment portfolio will remain sufficiently liquid to enable the City to meet all operating requirements which might be reasonably anticipated. c) Return on Investments: The investment portfolio shall be designed and managed with the objective of attaining a market rate of return throughout budgetary and economic cycles, taking into account the investment objectives, authorized investments and the cash flow needs of the City. The Treasurer's monthly reports shall include benchmark reporting to define "a market rate of return ", which shall be one of the indices published in a financial journal of wide circulation that are most comparable to the Treasurer's portfolio. The benchmark shall be used solely as a reference tool. The Treasurer shall not add additional risk to the portfolio in order to attain or exceed the benchmark. 1.4 PRUDENCE Investments shall be made with judgment and care, under circumstances then prevailing, which persons of prudence, discretion and intelligence exercise in the management of their own affairs; not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived. The standard of prudence to be used by investment officials shall be the "prudent investor" standard (CGC Section 53600.3) and shall be applied in the context of managing an overall portfolio. The Treasurer and other investment employees, acting within the intent and scope of the SIP and other written procedures, and exercising due diligence, shall be relieved of personal responsibility for an individual security's credit risk or market price changes, provided deviations from expectations are reported in the immediately following Treasurer's Report and appropriate action is taken to control adverse developments. When a deviation poses a significant risk to the City's financial position, the City Council shall be notified immediately. 1.5 ETHICS Elected officials, City officers and employees and any other individuals involved in the investment operations are prohibited from personal business activity that could conflict with the proper execution of the investment program, or which could impair their ability to make impartial investment decisions, or which could give the appearance thereof. Furthermore, these same individuals are prohibited from undertaking personal investment transactions with any individual with whom business is conducted on behalf of the City. 2.0 OPERATIONS AND PROCEDURES 2.1 SCOPE a) This SIP applies to all financial assets of the City. These funds are accounted for in the Comprehensive Annual Financial Report (CAFR) and include: General Fund, Special Revenue Funds, Debt Service Funds, Capital Project Funds, Enterprise Funds, and Internal Service Funds. b) This SIP specifically exempts and does not apply to the following financial assets and investment activities of the City: (1) The City's Deferred Compensation Plan is excluded because it is managed by a third party administrator and invested by individual plan participants. 2 (2) Proceeds of City or other debt issues in possession of a trustee or fiscal agent are not considered to be part of the financial assets covered by this policy. These bond proceeds shall be invested in accordance with the requirements and restrictions outlined in the bond documents. 2.2 DELEGATION OF AUTHORITY a) The City Council's authority to manage the investment program is derived from CGC Sections 53600 et seq. b) In accordance with the City of Orange Municipal Code Chapter 2.26, management responsibility for the investment program is hereby delegated to the Treasurer, who shall establish written procedures for the operation of the investment program consistent with this SIP. Under the provision of CGC Section 53600.3, the Treasurer is a trustee and a fiduciary subject to the prudent investor standard. c) The Treasurer may delegate all, or a portion of, his/her investment authority to a Deputy City Treasurer. Prior to the delegation of the investment authority to a Deputy City Treasurer, the City Treasurer shall notify the City Council and request confirmation of the delegation. Delegation of investment authority will not remove or abridge the Treasurer's investment responsibility. d) The City Council may engage the services of one or more external investment managers to assist in the management of the City's investment portfolio in a manner consistent with the City's objectives and in accordance with this SIP. Such external managers may provide advice and effectuate trades upon specific authorization for each transaction. Such managers must be registered under the Investment Advisors Act of 1940 and must have not less than five years' experience investing in the securities and obligations authorized by the CGC Section 53601, and with assets under management in excess of five hundred million dollars ($500,000,000). The Treasurer shall review Form ADV of any investment advisor prior to engagement by the City Council. This Section does not preclude the Treasurer from retaining portfolio consultants within existing authority. 2.3 INVESTMENT OVERSIGHT COMMITTEE a) Chapter 2.50 of the Orange Municipal Code establishes an Investment Oversight Committee (IOC). The terms and provisions of said Chapter 2.50 are incorporated into this SIP by reference as though fully set forth herein. The IOC consists of the Treasurer, the City Manager or designee, and the Director of Finance. The Treasurer is required to act as Chair of the IOC, with the City Manager as Vice Chair. The IOC is required to act by majority vote. b) The IOC shall, at least annually and more often if directed by the City Council or agreed by a majority of the bC, review the City Council's adopted SIP and report to the City Council its recommendations for any changes, additions or deletions to the SIP. 3 c) The IOC shall monitor the implementation of the City Council's adopted SIP and annually submit a compliance report to the City Council. d) The IOC shall review reports to the City Council from the Investment Advisory Committee and prepare responses as required. e) The IOC shall meet and report quarterly to the City Council summarizing the IOC meetings and the recommendations of the Investment Advisory Committee. Such report shall contain an unedited copy of the Investment Advisory Committee's recommendations. 2.4 AUTHORIZED FINANCIAL INSTITUTIONS AND DEALERS a) Institutions eligible to transact investment business with the City shall include only the following: (1) Primary government dealers as designated by the Federal Reserve Bank; (2) Nationally or state-chartered banks; (3) The Federal Reserve Bank; and (4) Direct issuers of securities eligible for purchase by the City. b) Selection of financial institutions and broker/dealers authorized to engage in transactions with the City shall be at the sole discretion of the City Treasurer. The Treasurer will maintain a list of financial institutions authorized to provide investment services to the City. C) The City Treasurer shall obtain information from qualified financial institutions to determine if the institution makes markets in securities appropriate for the City's needs, can assign qualified sales representatives and can provide written agreements to abide by the conditions set forth in the City of Orange SIP. Investment accounts with all financial institutions shall be standard non- discretionary accounts and may not be margin accounts. d) All financial institutions which desire to become qualified bidders for investment transactions must supply the Treasurer with the following: (1) Audited financial statements for the institution's three most recent fiscal years; (2) At least three references from California local agencies whose portfolio size, investment objectives and risk preferences are similar to the City's; (3) A statement certifying that the institution has reviewed the CGC Sections 53600 et seq. and the City's SIP, and that all securities offered to the City shall comply fully and in every instance with all provisions of the Code and with this SIP; and, (4) Completed Broker/Dealer Questionnaire. e) The Treasurer shall conduct an annual review of the financial condition of qualified institutions. In addition, a current financial statement is required to be on file for each qualified institution. 4 Public deposits shall be made only in qualified public depositories within the State of California as established by State law. Deposits shall be insured by the Federal Deposit Insurance Corporation (FDIC) or, to the extent the amount exceeds the insured maximum, shall be collateralized with securities in accordance with State law. 2.5 COLLATERAL REQUIREMENTS CGC Sections 53652 and 53667 require depositories to post certain types and levels of collateral for public funds on deposit above the FDIC insurance amounts. The collateral requirements apply to bank deposits, both active (checking and savings accounts) and inactive (non-negotiable time certificates of deposit). 2.6 SAFEKEEPING AND DELIVERY a) To protect against fraud, embezzlement, or losses caused by collapse of individual securities dealers, all securities owned by the City shall be held in safekeeping by the City's custodial bank, a third party bank trust department, acting as agent for the City under the terms of a custody agreement, and shall be evidenced by safekeeping receipts. b) All security transactions entered into by the City shall be conducted on a standard delivery-versus-payment (DVP) basis, which ensures that securities are deposited with the third party custodian prior to the release of funds. All securities purchased or acquired shall be delivered to the City by book entry, physical delivery or by third party custodial agreement as required by CGC Section 53601. Investments in the State Pool or money market mutual funds are undeliverable, and are not subject to delivery or third party safekeeping requirements. C) On a daily basis, investment trades shall be verified against the bank transactions and broker confirmation tickets to ensure accuracy. On a monthly basis, the custodial asset statement is reconciled with the month end portfolio holdings. On an annual basis, the external auditor confirms investment holdings. 3.0 PERMITTED INVESTMENTS AND RISK MANAGEMENT 3.1 INVESTMENTS AUTHORIZED The City, as empowered by CGC Sections 53601 et seq. and 16429. 1, hereby authorizes the City Treasurer to select investments from among the following: (1) United States Treasury notes, bonds, bills or certificates of indebtedness, or those for which the faith and credit of the United States are pledged for the payment of principal and interest. (Limits: Maximum maturity at purchase 5 years; no other limits.) (2) Obligations issued by banks for cooperatives, federal land banks, federal intermediate credit banks, the Federal Home Loan Bank, the Tennessee Valley 5 Authority, the Federal National Mortgage Association, or other instruments of, or issued by, a federal agency or a United States government-sponsored enterprise. In every case, any issue purchased must be frilly guaranteed as to principal and interest by the full faith and credit of the United States, or the issuing federal agency. (Limits: Maximum maturity at purchase 5 years; maximum concentration 75% of portfolio at time of purchase with no more than 35% of total portfolio in any single agency and excluding completely Government National Mortgage Association bonds; i.e., GNMA's.) (3) Shares of beneficial interest issued by diversified management companies that are Money Market Mutual Funds, registered with the Securities and Exchange Commission under the Investment Company Act of 1940 investing in the securities and obligations authorized by CGC Sections 53601(b) and (e) only (i.e., U.S. Government issues only). Such Funds must either carry the highest rating of at least two of the three largest national rating agencies, or such funds must have retained an investment adviser registered with the Securities and Exchange Commission with not less than five year's experience managing money market mutual funds with assets under management in excess of five hundred million dollars ($500,000,000). (Limits: maximum 90 days Weighted Average Maturity; maximum concentration $15 million, or 20%, of portfolio, whichever is less.) (4) State of California Local Agency Investment Fund (LAW) is permitted, with the knowledge that the fund may invest in some vehicles allowed by statute but not otherwise authorized by the City Council in this SIP. The Treasurer shall obtain from the State Treasurer, no less than quarterly, reports providing sufficient detail to adequately judge the risk inherent in the LAIF portfolio, and shall inform the City Council immediately of any risks noted that may warrant reconsideration of this investment vehicle. (Limits: Maximum concentration 35% of total portfolio for all accounts. This maximum limit is increased to 40% of total portfolio when there is an influx of large deposits resulting from called bonds. The 40% limit is allowed for the next 30 days after the bonds are called so that the City can purchase other investments to bring the allowable percentage back to the 35%.) (5) Investment in new Government sponsored pools will be subject to due diligence. A thorough investigation of the pool is required prior to investing, and on a continual basis. (6) Funds held under the terms of a Trust Indenture or other contract or debt issuance agreement may be invested according to the provisions of those indentures or agreements. (7) Certificates of Deposit approved by the California AD 2011 are permitted. (Limits: The bill allows investment up to January 1, 2021; a maximum concentration 30% of total portfolio.) 6 (8) Commercial Paper of prime quality having the highest ranking or the highest letter and number rating provided by a national rating agency issued by a domestic corporation having assets in excess of $500,000,000 and having an "A" or better rating on its debt other than commercial paper as provided by a national rating agency. (Limits: Maximum maturity of 270 days or less; maximum concentration 20% of portfolio and no more than 5% of the book value of the portfolio funds to a single issuer at time of purchase.) (9) Medium-term notes issued by corporations organized and operating within the United States or by depository institutions licensed by the United States or any state and operating within the United States. (Limits: Maximum maturity at purchase 5 years; must be rated "A" or better by a nationally recognized rating agency; maximum concentration 20% of portfolio and no more than 5% of the book value of the portfolio funds to a single issuer at time of purchase.) 3.2 PROHIBITED INVESTMENT VEHICLES AND PRACTICES The City Treasurer is prohibited from the following: a) Borrowing for investment purposes ("Leverage") is prohibited. b) Buying or selling securities "on Margin" is prohibited. C) Investing in any instrument, which is commonly known as a "derivative" instrument (options, futures, swaps, caps, floors, collars, U.S. Treasury zero coupon bonds, U.S. Treasury strips, interest only bonds, interest-only strips derived from mortgage pools), or any investment that may result in a zero interest accrual, even if held to maturity, is prohibited. d) Under the provisions of CGC Sections 53601.6 and 53631.5, the City shall not invest any funds covered by this SIP in instruments known as Structured Notes (e.g. inverse floaters, leverage floaters, structured CD's, range notes, equity-linked securities). Any such investments are prohibited. e) Trading securities for the sole purpose of speculating on the future direction of interest rates is prohibited. f) State law notwithstanding, any investments not specifically described herein under Subsections 3.1 a) through 3.1 c) are prohibited. 3.3 MITIGATING RISK IN THE PORTFOLIO a) Credit Risk: (1) The City will diversify its investments in accordance with the limits set forth in Subsection 3.1 of this SIP to diminish the credit risk resulting from concentrations. 7 (2) The City, on occasion, may sell a security prior to its maturity (recording a gain or loss) in order to improve the risk structure, liquidity and yield of the portfolio in response to market conditions. (3) If securities owned by the City that are rated by a major national rating agency are downgraded by either Moody's, S&P or Fitch, it shall be the City's policy to review immediately the credit situation and make a determination as to whether to sell or retain such securities in the portfolio. If a decision is made to retain a downgraded security in the portfolio, its presence in the portfolio will be reported to the IOC and the City Council and be monitored on a continuous basis. b) Market Risk: While the City recognizes that longer term portfolios achieve higher returns, longer term portfolios have higher volatility of total return. The City will limit market risk by limiting the concentrations, volume and duration of its longer term investments, as well as limiting them to funds which are not needed for current year cash flow purposes. (1) Maturities selected shall provide for stability of income and liquidity, and shall not exceed 5 years from the date of purchase. The City shall structure its investment portfolio as a maturity ladder. Funds not required for purposes of meeting cash flow needs shall be invested in permitted securities so that selected percentages of the portfolio mature each year to a maximum of five years. (2) Portfolio maturities shall be managed to avoid undue concentration at time of purchase in any specific maturity sector with at least 15% of the portfolio must be invested from one to 365 days and no more than 50% in this maturity sector, no more than 50% of the portfolio be invested from 366 days to 730 days, no more than 35% of the portfolio be invested from 731 days to 1095 days, no more than 30% of the portfolio be invested from 1096 days to 1460 days, and no more than 30% of the portfolio be invested from 1461 days to 1825 days. (3) The City may, on occasion, sell a security prior to its maturity (recording a gain or loss) in order to diminish the portfolio's exposure to market risk. 4.0 REPORTING, REVIEW AND AUDITS 4.1 MONTHLY REPORTS a) The Treasurer shall submit three monthly investment reports to the City Council, and they shall be submitted within 45 days following the end of the quarter. The monthly reports shall include a complete description of the portfolio, the type of investments, the issuers, maturity dates, par and dollar amounts invested on all securities, the current market values of each component of the portfolio, the source of the portfolio valuation, investments and moneys held by the City, and shall additionally include a description of any of the City's funds, investments, or 8 programs, that are under the management of contracted parties, including lending programs. b) The report shall also include performance measures as recommended by the Association for Investment Management and Research (AIMR). These shall include a presentation of Total Return using accrual accounting, and a Time- weighted Rate of Return using a monthly valuation and one of the AIMR approved methods of calculation. The report shall also include a presentation of Yield to Maturity. C) The report shall also include the performance of the benchmark described in Subsection 1.3 c) of this SIP as a basis of comparison for the City's portfolio. d) The report shall also include the following certifications: (1) All investment actions executed since the last report have been made in full compliance with the SIP. (2) The City will meet its expenditure obligations for the next six months is required by CGC Sections 53646(b) (2 ) and (3). 4.2 INTERNAL CONTROLS The Treasurer is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the City are protected from loss, theft or misuse. The internal control structure shall be designed to provide reasonable assurance that these objectives are met. Internal controls shall be in writing and shall address the following points: separation of transaction authority from accounting and record keeping, safekeeping of assets and written confirmation of telephone transactions for investments and wire transfers. 4.3 ANNUAL AUDIT The Treasurer shall insure that the City's annual process of independent review by an external auditor will include an appropriate investment review to assure compliance with this policy and acceptable internal controls. The audit shall be presented to the City Council upon its completion. 4.4 SPECIAL AUDITS The City Council may at any time order an audit of the investment portfolio and/or the Treasurer's investment practices. 5.0 INVESTMENT POLICY ADOPTION The SIP shall be reviewed annually by the City Council for consistency with the City's overall investment objectives regarding preservation of principal, liquidity, return, relevance to current law as well as to current financial and economic trends. Any modifications necessary must be approved separately by the City Council. The SIP shall then be adopted in its entirety, as amended, within 120 days of the fiscal year end by resolution and vote of the City Council at a public meeting. 5.1 INVESTMENT POLICY CERTIFICATION The 1999-2000 version of this investment policy was certified by the Municipal Treasurer's Association of the United States and Canada, in June 2000. Recommended changes have been incorporated. In the event of any significant changes in legislation that will require significant changes to the SIP, the City will resubmit the new policy for re-certification. 10 GLOSSARY AGENCIES: Federal agency securities ASKED: The price at which securities are offered. BANKERS' ACCEPTANCE (BA): A draft or bill or exchange accepted by a bank or trust company. The accepting institution guarantees payment of the bill, as well as the issuer. BENCHMARK: A segment of the securities market with characteristics similar to the subject portfolio. It is used to compare portfolio performance to the performance of the appropriate segment of the market. (e.g. 1-Year T-Bill rate) BID: The price offered by a buyer of securities. (When you are selling securities, you ask for a bid.) See Offer. BROKER: A broker brings buyers and sellers together for a commission. CERTIFICATE OF DEPOSIT (CD): A time deposit with a specific maturity evidenced by a certificate. Large-denomination CD's are typically negotiable. COLLATERAL: Securities, evidence of deposit or other property, which a borrower pledges to secure repayment of a loan. Also refers to securities pledged by a bank to secure deposits of public moneys. COMMERCIAL PAPER: Short-term, negotiable unsecured promissory notes of corporations. COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR): The official annual report for the City of Orange. It includes five combined statements for each individual fund and account group prepared in conformity with GAAP. It also includes supporting schedules necessary to demonstrate compliance with finance-related legal and contractual provisions, extensive introductory material, and a detailed Statistical Section. COUPON: (a) The annual rate of interest that a bond's issuer promises to pay the bondholder on the bond's face value. (b) A certificate attached to a bond evidencing interest due on a payment date. DEALER: A dealer, as opposed to a broker, acts as a principal in all transactions, buying and selling for his own account. DEBENTURE: A bond secured only by the general credit of the issuer. DELIVERY VERSUS PAYMENT: There are two methods of delivery of securities: delivery versus payment and delivery versus receipt. Delivery versus payment is delivery of securities with an exchange of money for the securities. Delivery versus receipt is delivery of securities with an exchange of a signed receipt for the securities. 11 DISCOUNT: The difference between the cost price of a security and its maturity when quoted at lower than face value. A security selling below original offering price shortly after sale also is considered to be at a discount. DISCOUNT SECURITIES: Non-interest bearing money market instruments that are issued a discount and redeemed at maturity for full face value; e.g., US Treasury Bills. DIVERSIFICATION: Dividing investment funds among a variety of securities offering independent returns. FEDERAL CREDIT AGENCIES: Agencies of the Federal government set up to supply credit to various classes of institutions and individuals; e.g., S&L's, small business firms, students, farmers, farm cooperatives, and exporters. FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A Federal agency that insures bank deposits, currently up to $250,000 per deposit. FEDERAL FUNDS RATE: The rate of interest at which Federal funds are traded. This rate is currently pegged by the Federal Reserve through open-market operations. FEDERAL HOME LOAN BANKS (FHLB): The institutions that regulate and lend to savings and loan associations. The Federal Home Loan banks play a role analogous to that played by the Federal Reserve Banks vis-à-vis member commercial banks. FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA): FNMA, like GNMA, was chartered under the Federal National Mortgage Association Act in 1938. FNMA is a federal corporation working under the auspices of the Department of Housing and Urban Development (HUD). It is the largest single provider of residential mortgage funds in the United States. Fannie Mae, as the corporation is called, is a private stockholder-owned corporation. The corporations' purchases include a variety of adjustable mortgages and second loans. In addition to fixed-rate mortgages. FNMA's securities are also highly liquid and are widely accepted. FNMA assumes and guarantees that all security holders will receive timely payment of principal and interest. FEDERAL OPEN MARKET COMMITTEE (FOMC): Consists of seven members of the Federal Reserve Board and five of the twelve Federal Reserve Bank Presidents. The President of the New York Federal Reserve Bank is a permanent member, while the other Presidents serve on a rotating basis. The committee periodically meets to set Federal Reserve guidelines regarding purchases and sales of Government Securities in the open market as a means of influencing the volume of bank credit and money. FEDERAL RESERVE SYSTEM: The central bank of the United States created by Congress and consisting of a seven member Board of Governors in Washington, DC, 12 regional banks and about 5,700 commercial banks that are members of the system. 12 GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA or Ginnie Mae): Securities influencing the volume of bank credit guaranteed by GNMA and issued by mortgage banks, commercial banks, savings and loan associations, and other institutions. Security holder is protected by full faith and credit of the U.S. Government. Ginnie Mae securities are backed by the FHA, VA or FMI-IM mortgages. The term "pass-throughs" is often used to describe Ginnie Maes. LIQUIDITY: A liquid asset is one that can be converted easily and rapidly into cash without a substantial loss of value. In the money market, a security is said to be liquid if the spread between bid and asked prices is narrow and reasonable size can be done at those quotes. LOCAL AGENCY INVESTMENT FUND (LAW): A pooled investment vehicle for local agencies in California sponsored by the State of California and administered by the State Treasurer. MARKET CYCLE: A market cycle is defined as a period of time which includes a minimum of two consecutive quarters of falling interest rates followed by a minimum of two consecutive quarters of rising interest rates. MARKET VALUE: The price at which a security is traded and could presumably be purchased or sold. MATURITY: The date upon which the principal or states value of an investment becomes due and payable. MONEY MARKET: The market in which short-term debt instruments (bills, commercial paper, bankers' acceptances, etc.) are issued and traded. NEGOTIABLE CERTIFICATE OF DEPOSIT: A large denomination certificate of deposit which can be sold in the open market prior to maturity. OFFER: The price asked by a seller of securities. (When you are buying securities, you ask for an offer.) See Asked and Bid. PORTFOLIO: Collection of securities held by an investor. PRIMARY DEALER: group of government securities dealers who submit daily reports of market activity and positions and monthly financial statements to the Federal Reserve Bank of New York and are subject to its informal oversight. Primary dealers include Securities and Exchange Commission (SEC)-registered securities broker-dealers, banks, and a few unregulated firms. PRUDENT INVESTOR STANDARD: Governing bodies of local agencies or persons authorized to make investment decisions on behalf of those local agencies investing public funds pursuant to CGC Sections 53600 et seq. are trustees and therefore fiduciaries subject to the prudent investor standard. When investing, reinvesting, purchasing, acquiring, exchanging, 13 selling, and managing public funds, a trustee shall act with care, skill, prudence, and diligence under the circumstances then prevailing, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the agency. Within the limitations of the CGC Sections 53600 et seq. and considering individual investments as part to an overall strategy, a trustee is authorized to acquire investments as authorized by law. QUALIFIED PUBLIC DEPOSITORIES: A financial institution which does not claim exemption from the payment of any sale or compensating use or ad valorem taxes under the laws of this state, which has aggregated for the benefit of the commission eligible collateral having a value of not less than its maximum liability and which has been approved by the Public Deposit Protection Commission to hold public deposits. SAFEKEEPING: A service to customers rendered by banks for a fee whereby securities and valuables of all types and descriptions are held in the bank's vaults for protection. SECONDARY MARKET: A market made for the purchase and sale of outstanding issues following the initial distribution. SECURITIES & EXCHANGE COMMISSION: Agency created by Congress to protect investors in securities transactions by administering securities legislation. TIME CERTIFICATE OF DEPOSIT: A non-negotiable certificate of deposit which cannot be sold prior to maturity. TOTAL RATE OF RETURN: Represents growth (or decline) in the value of a portfolio, including both capital appreciation and income, as a proportion of the starting market value. TIME-WEIGHTED RATE OF RETURN: A modified measurement of Total rate of Return which eliminates the effect of the timing of funds flows to and/or from a security or portfolio. TREASURY BILLS: A non-interest bearing discount security issued by the U.S. Treasury to finance the national debt. Most bills are issued to mature in three months, six months, or one year. TREASURY BOND: Long-term U.S. Treasury securities having initial maturities of more than 10 years. TREASURY NOTES: A non-interest bearing discount security issued by the US Treasury to finance the national debt. Most bills are issued to mature in one, two, three, five or ten years. YIELD: The rate of annual income return on an investment, expressed as a percentage. YIELD TO MATURITY is the calculated rate of return based upon the present value of the cash flow from each interest payment, plus the present value of the cash flow from the investment's redemption value at maturity vs. the purchase price 14 3rd Quarter 2019° I Business Building and and Industry Construction I Restaurants and Hotels 0 %X LLO .-oz Food < LU and Drugs County and State Pools w (9 a z LU REVENUE COMPARISON One Quarter - Fiscal Year To Date (03) 2018.19 2019.20 Point-of-Sale $11,648.59! $9,693,154 County Pool 1,579.732 1p506,102 State Pool 5,978 3.833 Gross Receipts $13,234,301 $11,203,090 I Fuel and Autos General Service and Consumer Stations Transportation Goods City of Orange Sales Tax Update Fourth Quarter Receipts for Third Quarter Safes (J - September2019) Orange SALES TAX BY MAJOR BUSINESS GROUP In Brief 53500000 3rd Quarter 2018° (.,)range's receipts from July through September were 15.3% below the third sales period in 2018. However, this comparison is skewed due to the CDTFAs transi- tion to a new reporting system in the prior year when additional payments were received by the City. Excluding reporting aberrations, actual sales were up 12.0%. Recent business additions provided a significant boost in revenue from the fuel-service station sector. The business-industry group reported a strong sales quarter, however, ongo- ing concerns about tariffs with China are beginning to depress consumer spending and undermine the econ- omy. A business closure negatively im- pacted receipts from autos-trans- portation, while a one-time account- ing adjustment caused a temporary decline from general consumer goods. New dining options and an upgraded entertainment venue helped to push up totals from restaurants-hotels. I he City's allocation from the countywide use tax pool increased 8.7% over the same period in the prior year. Net of aberrations, taxable sales for all of Orange County grew 3.3% over the comparable time period; the Southern California region was up 2.8%. S3 .000 000 $2,500,000 $2,000,000 $1,500,000 - $1 ,000,000 $500,000 -. $0 Best Buy Cardlock Fuels System Chevron Claflin Medical Equipment David Wilsons Ford David Wilsons Villa Ford DMG Corporation Elite Roofing Supply Enterprise Rent A Car Foundation Building Materials Home Depot L&WSupply MS International NIKE Factory Store Ralphs SC Fuels Sears Selman Chevrolet Source North America Stadium Nissan Target Thompson Building Materials Toyota Scion of Orange Verco Decking Walmart •Aikc.?o,, ab,.tjoo, h.o. b..o .4otod to r..ot ,I., othoIt Top 25 PRODUCERS IN ALPHABETICAL ORDER Published by by HdL Companies in Winter 2020 Li www.hdlcompanies.com 1 888.861,0220 03 03 16 19 SALES PER CAPITA* $8,000 $6,000 $4,000 $2,000 $0 - 03 16 03 17 Orange County California h.' b.. o,,t.dto RIvINuF B' Bt:sr"t:ss GROti' Orange This Quarter* Autos/Trans. 14% Cons,Goods 14% Fuel Pools 12% 25% Bus./Ind Food/Drug _J 11% 3% Restaurants Building 10% 10% 'AUoejo., h* b..,, o r*l I.l b5' County Change -2.5% -0.3% -15.9% 2.3% -2.2% 2.3% 1.7% 7.8% 14.2% -4.2% -15.8% 36.8% 2.6% -0.7% -2.7% Orange Q319* Change -0.1% -3.6% 13.4% -CONFIDENTIAL - 215.5 CONFIDENTIAL- 215.5 -0.7% 333.3 1.0% 215.3 2.2% 216.7 16.6% 215.8 11.6% 1,223.2 -6.7% 202.5 26.4% -CONFIDENTIAL -CONFIDENTIAL - 4.0% 8.2% -1.3% 816.8 518.1 347.5 445.6 445.6 691.6 209.3 0.7% 16.7% 3,3% 12.5% 8.6% 12.0% 10,933.1 1,446.5 12,379.6 HdL State Change 0.1% 2.4% 2.6% 2.8% -3.1% 1.5% 1.8% 2.2% 6.6% -7.2% -8.8% -3.5% 2.6% -1.5% -1.7% 0.3% 149% 2.3% Q3 2019 City of Orange Sales Tax Update Statewide Results The local one-cent share of statewide sales and use tax from sales occurring July through September was 2.2% high- er than the summer quarter of 2018 after adjusting for accounting anomalies. The bulk of the increase came from the countywide use tax allocation pools and is due to the acceleration in online shop- ping where a large volume of the orders are shipped from out-of-state. Online shopping also produced gains in the business-industrial group with in-state industrial zoned logistics cen- ters filling orders previously taken by brick and mortar retailers. Purchases to support healthcare, food processing, logistics/warehouse operations and in- formation/data technology also helped offset declines in other business-related categories. With the exception of some discount and value-oriented retail, most categories of general consumer goods were down. New cannabis related start-ups offset declines in the food and drug group while a softening in building-construc- tion receipts was consistent with recent declines in the volume and value of new building permit issuances. Overall growth in restaurant receipts continued to soften with a shift toward lower cost dining establishments and takeout meal options. Reports of labor shortages and the impact of homeless- ness on customer traffic in metropolitan areas were reportedly factors in the de- cline in tax revenues from higher price, fine dining establishments. Despite a slight uptick in used auto and auto lease receipts, the auto related group was significantly down due to a drop in new car and RV sales. Previously propped up by a 23% subprime rated customer base and six- and seven-year financing, loan delinquencies have re- cently surged back to levels last seen in 2009. Additional Tax Districts Approved Voters approved eight of the nine sales tax measures on the November 2019 ballot adding six new districts and ex- tending two others. This brings the total number of lo- cal transactions and use tax districts (TUT's) to 325 with 62 that are lev- ied countywide and 263 imposed by individual cities. The number of local districts have close to tripled over the last decade as agencies deal with rising costs and service needs. TUT's have been a favorable option as visitors contribute to the tax and a collection system is already in place that minimizes administrative and monitoring costs. California's basic rule is that the rate for all local TUT's combined, shall not exceed 2.0% or a total of 9.25% includ- ing the state levy. However, the state legislature has authorized higher caps in some jurisdictions with the highest voter-approved, combined state/local rate now at 10.5%. Thirty-five or more additional local TUT measures are currently being considered for the March 2020 ballot. 'In thousands of dollars Business Type Building Materials Casual Dining Contractors Discount Dept Stores Electronics/Appliance Stores Family Apparel Grocery Stores Light Industrial/Printers Medical/Biotech New Motor Vehicle Dealers Office Equipment Petroleum Prod/Equipment Quick-Service Restaurants Service Stations Shoe Stores Total All Accounts County & State Pool Allocation Gross Receipts ORANGE Tor 15 BUSINESS Accounting aberrations such as late payments, fund transfers, and audit adjustments have been adjusted to reflect the Quarter in which the sales occurred A. GARY ANDERSON CENTER FOR ECONOMIC RESEARCH TIlE GEORGE E. ARCYROS SCI 1001 OF [U SI NI SS & ECONOMICS [)lE\1B11 2Ol ECONOMIC &BUSINESS OVERVIEW CONTENTS Dean's Message Review of Forecast Accuracy 2 2020 U.S. Forecast Slower Growth 4 U.S. Variables, Tables 1-6 6 2020 California Forecast California Loses its Moxie 12 California Variables, Tables 7-10 14 2020 Orange County Forecast O.C. Job Growth Continues to Slide 18 Orange County Variables, Tables 11-14 20 A Faulty Report Leads to Faulty State Policy 24 The Wealth Tax Proposal Not Ready, But Already in Prime Time 26 Acknowledgements 28 The Economic & Business Review, published semiannually by the A. Gary Anderson Center for Economic Research, is owned and provided as an educational service by Chapman University. Contents reflect the views and opinions of the contributors and do not necessarily represent those of The Argyros School of Business & Economics or Chapman University. The economic forecasts in this Review are prepared and written by Dr James Doti and Dr Raymond Sfeir. The editorial board invites the submission of manuscripts from Chapman faculty, administrators, students, alumni and guest lecturers. Inquiries regarding manuscript submission and subscriptions to the Review may be emailed to acer(djchapman. edu, or telephone (714) 997-6693. Copyright © 2019 by the A. Gary Anderson Center for Economic Research. Copying for other than personal use or internal reference without express permission of the copyright owner is expressly prohibited A. GARY ANDERSON CENTER FOR ECONOMIC RESEARCH James L. Doti, Ph.D. President Emeritus and Professor of Economics Raymond Sfeir, Ph.D. Director of the Anderson Center for Economic Research A. Gary Anderson Chair of Economic Analysis Marc Weidenmier Research Fellow Linda Corcoran Research Associate Dorothy Farol Research Associate Laura Neis Research Assistant Katharine Buliga Student Research Assistant ADVISORY BOARD Michelle Aguirre County of Orange Lee Ann Canaday Canaday Group Deborah Stickley Diep Center for Demographic Research California State University, Fullerton Maritza Gamboa Employment Development Department State of California Jerry Holdner Kidder Mathews -:;---- :-- - - DEAN'S MESSAGE It's been another incredible year for the Argyros School. We have once again welcomed the largest freshman class in our history. Our faculty have now been cited over 150,000 times by other scholars. In accounting, 89% of our undergraduates and 100% of our Masters students accepted jobs before graduation. The year's highlight was our 20th Anniversary Gala celebrating the naming of the Argyros School of Business and Economics featuring President George Bush. The event raised over $15 million —including a surprise $10 million gift from the Argyros Family. This wonderful generosity will fund scholarships, attract world famous faculty, build our alumni network, expand our finance and real estate center, and propel us towards becoming one of the Top 50 business schools in the world. We are particularly excited about the new MS in Real Estate launching fall 2020. This program will partner our renowned network of real estate leaders with the leading real estate scholars in Southern California to provide a rigorous and elite experience for our students. Behind all the recent successes is a continued commitment to our distinctive combination of outstanding faculty, influential business leaders, and dedicated alumni working together to provide unparalleled individualized attention to each and every student. In all these efforts we are humbled by the continued support of the Argyros family and all of our supporters that have invested confidence in us. Through them we are inspired to "Dream Big, Act Boldly, Serve Others, and Celebrate Free Enterprise." Thomas Turk, Dean U.S. FORECAST REVIEW OF FORECAST ACCURACY CHAPMAN RANKS #1 CHAPMAN'S U.S. FORECAST Two years ago, an analysis of real GDP forecasts emanating from our Anderson Center for Economic Research (see Review, Volume 36, No. 1, pp- 2 - 3) showed that Chapman ranked number 1 in its forecasts of real GOP between the 2004 - 2016 period. Chapman also ranked number 1 in the forecasts for a wider set of national variables. These rankings compared our forecast to forecasts issued by 20 other forecast agencies participating in the Blue Chip Survey during those years. We recently updated the ranking analysis through 2018. The results of that updating, as shown in Table 1 on the following page, indicate that Chapman and UCLA tied for number 1 with a mean error of 0.40 for the forecasts of real GOP. The 0.40 mean error for Chapman points to a mean (average) error of 0.40èach year over tjiç 15-year period (2004 2018). Notice that Chapman and UCLA outperformed the highly regarded "Blue Chip Consensus" forecast (mean error of 0.48) and the "Conference Board" forecast (mean error of 0.66). As we have done in previous ranking analyses, we also measure forecast accuracy for a wider set of variables that includes not only real GDP but also the unemployment rate, GDP price deflator, and housing starts. Because these four variables are measured in different units, it is necessary to construct relative z values to compare forecast accuracy, with more negative z values denoting higher forecast accuracy. It also should be noted that we give equal weight to each of the four variables. The resulting z values, reported in Table 2, reveal that Chapman repeated its number I ranking in forecast accuracy for an unweighted average of these economic variables. In this ranking, Chapman outperformed UCLA as well as the "Blue Chip Consensus" forecast and that of the "Conference Board." It's interesting to note that except for UCLA, the top 5 in forecasting real GOP also ranked in the top 5 in forecasting the wider set of variables. A comparison of Chapman's real GDP versus actuals is presented below. REAL GDP FoRFtAsr ACrUAL FORACAST1ARE 10R THM ISU4p1NFfOVEMBERv.ECEMER OFP4JOR).AR '13 '14 '15 '16 '17 '18 19e It looks like a near bull's eye for our real GDP forecast for 2019. The following table compares our forecasts with current estimates for key U.S. variables. We correctly called the direction of change in six of the nine variables shown. Our most significant error was missing the sharp decline in the 10-year Treasury bond. This forecast error, in turn, led us to be overly pessimistic about home building and prices. U.S. VARIABLES D,c. 2018 I., c..t 1. (urrva) I sti,i,atc Real GDP (%Change) 2.9 2.4 2.3 Jobs (%Change) 1.7 1.2 1.5 Unemploymmt Rare 3.9 3.6 3.7 Oil (S/Banel) 64.9 60.3 56.5 Single Family Mousing Souls (Thousands) 1.249 1.048 1.251 Housing Appreciation. Single Family 4.8 3.1 4.9 Federal FundsRate 1.8 2.7 2.2 Teasury Bond Rate. 10-Ycas 2.9 5.2 2.1 Interest Race Spread 1.1 0.8 .0.1 Although the housing sector in 2019 was stronger than our forecast, the manufacturing sector was weaker-largely as a result of the trade war with China. These forecast errors on our part were largely offsetting, thereby allowing our aggregate real GOP forecast to be close to the mark. Annual % Change 4 -2 -4 '09 '10 '11 '12 ECONOMIC & BUSINESS REVIEW TABLE 1 TABLE 2 ACCURACY RANKING FOR ACCURACY RANKING FOR FORECASTS OF REAL GDP FORECASTS OF FOUR VARIABLES' 2004 THROUGH 2018 2004 THROUGH 2018 Organization Mean Error Rank Organization Z Score Rank Chapman's Anderson Center 0.40 Chapman's Anderson Center 4.57 1 UCLA Business Forecasting Proj . .... 0.40 Northern Trust Company -3.38 2 BMO Capital Markets 0.46 3 BMO Capital Markets -3.34 3 Northern Trust Company 0.46 3 Consensus -2.52 4 Consensus 0.48 5 Goldman Sachs & Company -2.44 5 Econoclast 0.49 6 Morgan Stanley -2.37 6 Morgan Stanley 0.50 7 Eaton Corporation -1.87 7 Inforum-University of Maryland 0.50 7 Turning Points (Micrometrics) -1.48 8 Goldman Sachs & Company. 0.52 9 SOM Economics, Inc -1.47 9 National Home Builders Assoc. 0.54 10 Inforum-University of Maryland.... -1.16 10 Nomura Securities - 0.56..., 11 Nomura Securities -0.74 11 Swiss Re 0.57 12 Comerica -0.66 12 Eaton Corporation 0.57 12 National Home Builders Assoc -0.31 13 Georgia State University 0.57 12 Econoclast -0.29 14 Turning Points (Micrometrics) 0.57 12 UCLA Business Forecasting Proj.....0.46 15 SOM Economics, Inc. 0.58 16 Federal Express Corp 0.95 16 Ford Motor Company 0.58 16 Wells Capital Management 1.69 17 General Motors Corporation 0.58 16 Ford Motor Company 2.07 18 Credit Suisse 0.60 19 U.S. Chamber of Commerce 2.09 19 Wells Capital Management 0.62 20 General Motors Corporation 2.65 20 Comerica 0.63 21 Georgia State University 2.94 21 Federal Express Corporation 0.64 22 Conference Board 3.20 22 U.S. Chamber of Commerce 0.64 22 Swiss Re 3.24 23 Conference Board 0.66 24 Naroff Economic Advisors 4.94 24 Naroff Economic Advisors 0.75 25 The organizations listed provided forecasts for all variables for all years. 2 Lower mean error values denote a higher level of forecast accuracy. Higher negative z values denote a higher level of forecast accuracy. The four forecast variables include: Real GDP, Unemployment Rate, GDP Price Deflator, Housing Starts. DECEMBER 2019 3 '80 '85 '90 '95 '00 '05 '10 '15 1.0 0.0 -1,0 -2.0 -3.0 Yr/Yr % Change 2.0 1-09.116T ,- '98 '00 '02 '04 '06 '08 '10 '12 '14 16 '18 2.0 0.0 -2.0 -4.0 -6.0 Yr/Yr % Change 4.0 BUT NO RECESSION The current expansion which began in June 2009, is now 46 quarters old or ten and a half years old. It is the longest expansion in the history of the U.S., surpassing the 40-quarter or 10-year expansion from 1991 to 2001. STRENGTH OF ECONOMIC EXPANSIONS Cumulative % Growth in Real GDP 60 50 40 30 20 10 0 0 4 8 12 16 20 24 28 32 36 40 Qtiarters In spite of its longevity, the cumulative growth in real GDP is still lower than that achieved during the 1991-2001 expansion. So, the current expansion may still have legs. Several key indicators, however, indicate the current expansion is stalling. Perhaps most telling is the slowdown in job growth. Since peaking at 1.9 percent growth in January 2019, it has since declined to 1.4 percent. Generally, year-over-year growth of one percent or lower is a reliable recession indicator. But job growth in October was 1.4 percent, higher than the one percent recessionary signal. Other variables that we have found to be JOB GROWTH leading recessionary indicators are also trending downwards. Rather than cherry-picking particular variables, our Center for Economic Research has formulated an indicator series that incorporates year-to-year percentage changes in the following variables that we have found lead economic cycles: • Jobs • New Auto Sales • Building Permits • Consumer Sentiment • Interest Rate Spread • Purchasing Managers Index As shown in the following figure, the Chapman Indicator Series shows that after reaching a cyclical high of 0.4 in August 2018, the series incorporating the above variables has declined steadily to a recent low of -0.2 through September 2019, marking six consecutive months that the series has been in negative terrain. CHAPMAN INDICATOR SERIES The Chapman Indicator Series has always turned negative prior to recessionary periods. But in every recession since 1980, the series dropped further than the recent decline, with an average decline to -0.07 before the start of a recession. In addition, there were two times when the series turned negative and no recession occurred, most notably 1995 and 2016 (see circled periods in the above figure). We have therefore concluded its premature to make a recessionary call for 2020. The current slowdown has not been deep or broadly based 202() (J., R)1 Ci\S'J S LOWE B,._ G ROWT H ECONOMIC & BUSINESS REVIEW 4 NAHB Index Months Supply 80 16 MARKET INDEX 60 - 40 20 0 '90 '93 '96 '99 '02 '05 '08 'II '14 '17 12 8 4 0 enough to provide a clear recessionary signal. In addition, the expansionary policies currently in place are similar to the growth-oriented monetary policies in 1995 and 2016 that helped skirt recessions during those periods when the indicator series turned negative. Two areas of particular strength during the current cycle should stave off a recession next year. Although job growth has declined, it's still strong enough to help keep consumer spending on a positive path. In addition, the consumer will be buoyed by relatively low consumer debt levels. CONSUMER DEBT Percent 6.8 6.3 5.8 53 4.8 *00 '02 '04 '06 '08 '10 '12 '14 '16 '18 But the most important trend that will help buttress the economy in 2020 is a strong construction sector, particularly homebuilding. The beneficial impact of historically low mortgage rates is telling. The National Association of Home Builders (NAHB) housing market index is now at a cyclical high while the tight supply of unsold housing currently on the market augers well for homebuilding. NAHB HOUSING MARKET INDEX AND SUPPLY OF UNSOLD HOUSING TOTAL HOUSING STARTS Millions of Units 1.4 +6.2% 1.33 '.3 1.25 1.25 121 1.2 1.18 1.11 1.1 1.0 '15 '16 '17 1 18 '19e '20f Greater builder confidence, coupled with a tight supply of existing homes for sale will propel total housing starts forward from 1.25 million to 1.33 million units, an increase of 78,000 units or 6.2 percent. The strong housing sector we are forecasting for 2020 will add about one percent to real GDP growth in 2020. While that will help avert a recession in 2020, the negative effects of lower business investment and a weak global economy will place downward pressure on real GDP. Our forecast calls for a decline in Real GDP growth from 2.3 percent in 2019 to 1.9 percent next year. While lower, this is still high enough to avert a recession in 2020. REAL GDP Yr/Yr % Change 4.0 3.0 2.0 1.9 1.0 0.0 'IS '16 '17 1 18 '19e '20f U.S. FORECAST TABLES Tables 1 to 6 present details of Real GDP, Employment, Monetary Aggregates, Price Indexes, Existing Homes and Housing Starts, and Interest Rates. Tables 1 and 2 present annual levels and rates of change; Tables 3 and 5 present quarterly levels; Table 4 presents year-to-year percentage changes on a quarterly basis; Table 6 presents quarter-to-quarter percentage changes, compounded at annual rates. 2.9 2.9 - 2.4 1.6 2.3 DECEMBER 2019 [I. . VA R I r\ R I I [A R [F I ANNUAL HISTORY AND FORECASTS: 2015-2020 LEVELS 2015 2016 2017 2018 2019e 2020f Details of GDP (S Billions): GDP 18,224.8 18,715.1 19,519.4 20,580.3 21,418.8 22,206.3 Real GDP (2012 Dollars).. 17,403.9 17,688.9 18,108.1 18,638.2 19,061.2 19,424.9 Total Consumption 11,921.2 12,247.5 12,567.0 12,944.6 13,277.1 13,605.4 Gross Private Investment 3,104.3 3,064.0 3,198.9 3,360.5 3,443.1 3,482.6 Nonresidential Investment 2,408.2 2,425.4 2,531.2 2,692.3 2,759.7 2,814.9 Residential Structures 555.3 591.2 611.9 602.9 594.0 612.7 Change in Inventories 132.4 23.0 31.7 48.2 82.4 55.0 Total Government Purchases 3,091.8 3,147.7 3,169.6 3,223.9 3,294.8 3,352.4 Federal Government Purchases 1,182.7 1,187.8 1,197.1 1,232.2 1,275.0 1,310.0 State and Local Government Purchases 1,907.5 1,957.9 1,970.6 1,990.1 2,018.8 2,042.4 Net Exports -721.7 -783.7 -849.8 -920.1 -976.5 -1,015.4 Total Exports 2,376.5 2,376.1 2,458.8 2,532.9 2,533.8 2,612.6 Total Imports 3,098.1 3,159.8 3,308.5 3,453.0 3,510.3 3,628.0 Employment: Total Nonfarm Payroll Jobs (Millions) 141.8 144.3 146.6 149.1 151.3 153.3 Unemployment Rate ,,- 5.3 4.9 4.4 3.9 3.7 3.6 Monetary Aggregates (S Billions): MI 3,021.9 3,248.9 3,524.5 3,677.9 3,829.6 4,025.0 M2 12,034.2 12,851.7 13,584.6 14,105.6 14,780.3 15,611.0 Real M2 11,493.6 12,146.3 12,601.1 12,770.7 13,152.7 13,655.3 Price Indicators: Consumer Price Index: All Items (1982-84'100) 237.0 240.0 245.1 251.1 255.5 260.4 Personal Consumption Expenditures Price Index: Less Food and Energy (2012100) 104.4 106.1 107.8 109.9 111.7 113.7 GDP Price Deflator (2012=l00) 104.7 105.8 107.8 110.5 112.4 114.3 Crude Oil ($/bbl) 48.7 43.1 50,9 64.9 56.5 54.0 Existing Homes: Sales, Single-Family & Condo (Thousands) 5,234.2 5,440.0 5,535.8 5,340.8 5,353.7 5,668.2 Median Price, Single-Family (S Thousands) 221.4 233.6 247.5 259.5 272.1 285.6 Price Index, Single-Family (2009=100) 128.3 135.5 143.5 150.4 157.7 165.6 Affordability Index, Single-Family . . 170.9 173.4 163.2 150.9 160.5 161.3 Housing Starts (Thousands): Total Housing Starts . 1,107.0 1,178.0 1,208.8 1,249.5 1,250.9 1,328.5 Single-Family Units 712.5 785.5 852.0 872.8 872.6 925.3 Units in Buildings with 2 Units or More 394.5 392.5 356.8 376.8 378.3 403.2 Interest Rates: Federal Funds 0.1 0.4 1.0 1.8 2.2 1.5 Treasury Bill, 90-Day 01 0.3 0.9 1.9 2.1 1.7 Prime 3,3 3.5 4.1 4.9 5.3 5.1 Treasury Bond, 10-Year 2.1 1.8 2.3 2.9 2.1 2.0 30-Year Fixed Mortgage 3.8 3.7 4.0 4.5 3.9 3.8 Interest Spread (10-Year T-Bond Less Fed Funds) 2.0 1.4 1.3 1.1 0.0 0.5 e= Estimate Forecast ECONOMIC & BUSINESS REVIEW 6 IARI[ 2 k J.S. VAR!1\R1 H ANNUAL HISTORY AND FORECASTS: 2015-2020 ANNUAL PERCENTAGE CHANGES 2015 2016 2017 2018 2019e 2020f Details of GDP: GDP 4.0 2.7 4.3 5.4 4.1 3.7 Real GDP (2012 Dollars) 2.9 1.6 2.4 2.9 2.3 1.9 Total Consumption 3.7 2.7 2.6 3.0 2.6 2.5 Gross Private Investment 4.9 -1.3 4.4 5.1 2.5 1.1 Nonresidential Investment 1.8 0.7 4.4 6.4 2.5 2.0 Residential Structures 10.2 6.5 3.5 -1.5 -1.5 3.2 Change in Inventories N/A N/A N/A N/A N/A N/A Total Government Purchases 1.9 1.8 0.7 1.7 2.2 1.7 Federal Government Purchases -.0.1 0.4 0.8 2.9 3.5 2.7 State and Local Government Purchases 3.2 2.6 0.6 1.0 1.4 1.2 Net Exports -25.0 -8.6 -8.4 -8.3 -6.1 -4.0 Total Exports 0.5 0.0 3.5 3.0 0.0 3.1 Total Imports 5.3 2.0 4.7 4.4 1.7 3.4 Employment: Total Nonfarm Payroll Jobs 2.1 1.8 1,6 1.7 1.5 1.3 Unemployment Rate - -15.0 -7.1 -10.8 -10.3 -5.8 -1.6 Monetary Aggregates: Ml 7.3 7.5 8.5 4.4 4.1 5.1 M2 5.8 6.8 5.7 3.8 4.8 5.6 Real M2 4.7 5.7 3.7 1.3 3.0 3.8 Price Indicators: Consumer Price Index: All Items 0.1 1.3 2.1 2.4 1.8 1.9 Personal Consumption Expenditures Price Index: Less Food and Energy 1.2 1.6 1.6 1.9 1.7 1.8 GDP Price Deflator 1.0 1.1 19 2.5 1.7 1.7 Crude Oil 47.8 -11.4 17.9 27.6 -13.0 -4.4 Existing Homes: Sales, Single-Family & Condo 6.3 3.9 1.8 -3.5 0.2 5.9 Median Price, Single-Family 6.9 5.6 5.9 4.8 4.9 5.0 Price Index, Single-Family 6.9 5.6 5.9 4.8 4.9 5.0 Affordability Index, Single-Family 1.0 1.5 -5.9 -7.5 6.4 0.5 Housing Starts: Total Housing Starts 10.7 6.4 2.6 3.4 0.1 6.2 Single-Family Units 10.3 10.2 8.5 2.4 0.0 6.0 Units in Buildings with 2 Units or More 11.4 -05 -9.1 5.6 0,4 6.6 Interest Rates: Federal Funds 51.4 N/A N/A 83.3 18.6 -31.0 Treasury Bill, 90-Day 61.5 N/A N/A 108.0 6.6 -20.2 Prune 0.3 7.7 16.6 19.8 8.1 -4.2 Treasury Bond, 10-Year -15.8 -13.9 26.5 25.0 -26.3 -9.1 30-Year Fixed Mortgage -7.8 -5.0 9.1 13.9 -13.9 -3.5 Interest Spread (10-Year T-Bond Less Fed Funds) N/A N/A N/A N/A N/A N/A e = Estimate f = Forecast DECEMBER. 2019 7 1. J,S, \'i\I\l; 1.1 N TABLE 3 QUARTERLY HISTORY AND FORECASTS 2019:1-2020:4 LEVELS 19:1 19:2 19:3 19:4f 20:11 20:21 20:3f 20:41 Details of GDP ($ Billions): GDP 21,098.8 21,340.3 21,525.8 21,710.3 21,830.6 22,125.2 22,306.1 22,563.5 Real GDP (2012 Dollars) 18,927.3 19,021.9 19,112.5 19,183.0 19,253.3 19,386.4 19,469.9 19,590.1 Total Consumption 13,103.3 13,250.0 13,343.7 13,411.3 13,420.4 13,574.6 13,677.3 13,749.2 Gross Private Investment 3,481.1 3,424.7 3,411.4 3,455.1 3,484.0 3,478.6 3,462.5 3,5051 Nonresidential Investment 2,765.6 2,758.5 2,737.8 2,776.8 2,820.9 2,819.2 2,795.3 2,824.0 Residential Structures 591.4 587.0 594,3 603.2 610.1 609.4 611.2 620.1 Change in inventories 116.0 69,4 69.0 75.0 53.0 50.0 56.0 61.0 Total Government Purchases 3,258.1 3,296.6 3,312.7 3,311.7 3,326.7 3,359.4 3,363.9 3,359.4 Federal Government Purchases 1,248.8 1,273.9 1,284.5 1,293,0 1,293.1 1,313.8 1,314.0 1,319.0 State and Local Government Purchases 2,007.9 2,021.4 2,027.1 2,018.7 2,033.6 2,045.6 2,049,9 2,040.4 Net Exports -943.9 -980.7 -986.3 .9950 -977,9 -1,026.2 -1,033.8 -1,023.7 Total Exports 2,554.4 2,517.5 2,522.2 2,541.1 2,610.8 2,5889 2,611.1 2,639.7 Total Imports 3,498.3 3,498,2 3,508.5 3,536.2 3,588.7 3,615.1 3,644.9 3,663.5 Employment: Total Nonfarm Payroll Jobs (Millions) 150.7 150.8 151.6 152.3 152.7 1528 153.5 154.2 3.9 3.6 3.6 3.6 3.6 3.6 3.6 3.6 Unemployment Rate - Monetary Aggregates (S Billions): Ml 3,742.1 3,798.9 3,868.2 3,909.1 3,931.1 3,992.0 4,0667 4,110.5 M2 14,466.9 14,647.6 14,940.5 15,066.1 15,260.3 15,465.2 15,786.3 15,932.4 Real M2 12,974.8 13,054.9 13,268.7 13,312.3 13,458,7 13,550.8 13,779.1 13,832.8 Price Indicators: Consumer Price Index: All Items (1982-84=100) 253.3 255.1 256.3 2573 258.0 259.9 261.2 262.4 Personal Consumption Expenditures Price Index: Less Food and Energy (2012=100) 110.9 111.4 112,0 112.5 112.8 113.4 114.0 114.6 GDP Price Deflator (2012'l00) 111.5 112.2 112.6 113.2 113.4 114.! 114.6 115.2 Crude Oil (S/bbl) 54.8 59.8 56.4 55.0 54.0 53.0 54.0 55.0 Existing Homes: Sales, Single-Family & Condo (Thousands, SAAR) 5,206.7 5,286.7 5,433.3 5,487.9 5,586.8 5,662.0 5,661.5 5,762.3 Median Price, Single-Family ($ Thousands) 254.9 279.5 280.2 273.7 270.2 294.6 293.1 2844 Price Index, Single-Family (2009'l00) 147.8 162.0 162.4 158.7 156.6 170.8 169.9 164.9 Affordability Index, Single-Family 159.5 153.2 161.3 167.9 169.5 155.0 157.2 163.5 Housing Starts (Thousands, SAAR): Total Housing Starts 1,213.0 1,256.0 1,282.0 1,252.6 1,309.5 1,3376 1,368.3 1,298.7 Single-Family Units 864.0 847.0 901.0 878.5 932.3 900.4 956.9 911.9 Units in Buildings with 2 Units or More 349.0 409.0 381.0 374.1 377.3 437.2 411.5 386.9 Interest Rates: Federal Funds 2.4 2.4 2.2 1.7 1.7 1.5 1.5 1.5 Treasury Bill, 90-Day 2.4 2.3 2.0 1.6 1.7 1 7 1.6 1.6 Prime 55 5.5 5.3 4.9 5.0 5 1 5.1 . 5.1 Treasury Bond, 10-Year 2.7 2.3 1.8 1.8 1.9 1.9 2.0 2.0 30-Year Fixed Mortgage 4.4 4.0 3.7 3.6 3.7 3.8 3.8 3.8 Interest Spread (10-Year T-Bond Less Fed Funds) 0.3 -0.1 -04 0.1 0.3 0.5 0.6 0.6 I = Forecast 8 EC(i)NOMIC & BUSINESS REVIEW I J.. \'ARI;\1I.l. QJARTERLY HISTORY AND FORECASTS: 2019:1-2020:4 YEAR-TO-YEAR PERCENTAGE CHANGES 19:1 19:2 19:3 19:41 20:1! 20:2f 20:3! 20:4f Details of GDP: GDP 4.6 4.0 3.7 3.9 3.5 3.7 3.6 3.9 Real GDP (2Ol2Dollars) 2.7 2.3 2.0 2.1 1.7 1.9 1.9 2.1 Total Consumption 2.5 2.6 2.5 2.6 2.4 2.5 2.5 25 Gross Private Investment 5.1 3.9 0.2 0.7 0.1 1.6 1.5 1.4 Nonresidential Investment 4.8 2.6 1.3 1.5 2.0 2.2 2.1 1.7 Residential Structures -3.4 -3.2 -1.0 1.7 3.2 3.8 2.9 2.8 Change in Inventories N/A N/A N/A N/A N/A N/A N/A N/A Total Government Purchases 1.8 2.3 2.3 2.4 2.1 1.9 1.5 1.4 Federal Government Purchases 2.5 3.6 3.7 4.1 3.5 3.1 2.3 2.0 State and Local Government Purchases 1.3 1.6 1.5 1.4 1.3 1.2 1.1 1.1 Net Exports -6.8 -15.3 -2.5 -1.2 -3.6 4.6 4.8 -2.9 Total Exports 1.2 -1.7 0.1 0.5 2.2 2.8 3.5 3.9 Total Imports 2.6 2.6 0.8 0.7 2.6 3.3 3.9 36 Employment: Total Nonfarm Payroll Jobs 1.8 1.4 1.4 1.5 1.3 1.3 1.3 1.2 Unemployment Rate 4.9 -7.7 -5.3 -5.5 -7.2 0.0 0.3 0.8 Monetary Aggregates: Ml 2.7 3.9 4.9 5.0 5.0 5.1 5.1 52 M2 4.1 4.3 5.3 5.4 5.5 5.6 57 5.7 Real M2 2.1 2.6 3.6 3,7 3,7 3.8 3.8 3.9 Price Indicators: Consumer Price Index: All Items 1,6 1.8 1.8 1.8 1.9 1.9 1.9 20 Personal Consumption Expenditures Price Index: Less Food and Energy 1.6 1.5 1.7 1.7 1.8 1.8 1.8 1.8 GDP Price Deflator 1.9 1.7 1.6 1.7 1.7 1.7 1.7 1.8 Crude Oil -12.8 -12.1 -19.2 -6.9 -1.5 -11.3 -4.2 0.0 Existing Homes: Sales, Single-Family & Condo -5.4 -2.2 2.4 6.7 7.3 7.1 4.2 5.0 Median Price, Single-Family 3.9 4.3 5.2 6.1 6.0 5.4 4.6 3.9 Price Index, Single-Family 3.9 4.3 5.2 6.1 6.0 5.4 4.6 3.9 Affordability Index, Single-Family -2.1 5.4 10.0 12.9 6.3 1.1 -2.6 -26 Housing Starts: Total Housing Starts -8.2 -0.2 4.0 5.7 8.0 6.5 6.7 3.7 Single-Family Units -3.2 -5.3 2.9 6.1 7.9 6.3 6.2 3.8 Units in Buildings with 2 Units or More -18.5 12.1 6.7 4.8 8.1 6.9 8.0 3.4 Interest Rates: FederalFunds 65.5 37.9 14.1 -23.4 -31.3 -39.6 -33.8 -14,7 Treasury Bill, 90-Day 53.2 25.0 -2.9 -31.0 -28.9 -26.1 -19.2 0.0 Prime 21.4 14.6 5.8 -7.2 -9.1 -7.3 -3.8 4.1 Treasury Bond, 10-Year -4.0 -20.2 -38.6 -40.6 -28.3 -18.5 11.1 11.1 30-Year Fixed Mortgage 2.3 -11.7 -19.9 -24.7 -15.3 -5.2 3.8 56 Interest Spread (10-Year 1-Bond Less Fed Funds) N/A N/A N/A N/A N/A N/A N/A N/A f = Forecast DECEMBER 2019 9 U.S. VARIABLES TABLE 5 QJARTEftLY HISTORY AND FORECASTS: 2019:12020:4 LEVELS 19:1 19:2 19:3 19:4f 20:lf 20:2f 20:3f 20:41 Details of GDP (S Billions): GDP 21,098.8 21,340.3 21,525.8 21,710.3 21,830.6 22,125.2 22,306.1 22,563.5 Real GDP (2012 Dollars) 18,927.3 19,021.9 19,112.5 19,183.0 19,253.3 19,386.4 19,469.9 19,590.1 Total Consumption 13,103.3 13,250.0 13,343.7 13,411.3 13,420.4 13,574.6 13,677.3 13,749.2 Gross Private Investment 3,481.1 3,424.7 3,411.4 3,455.1 3,484.0 3,478.6 3,462.5 3,505.2 Nonresidential Investment 2,765.6 2,758.5 2,737.8 2,776.8 2,820.9 2,819.2 2,795.3 2,824.0 Residential Structures 591.4 587.0 594.3 603.2 610.1 609.4 611.2 620.1 Change in Inventories 116.0 69,4 69.0 75.0 53.0 50.0 56.0 61.0 Total Government Purchases 3,258.1 3,296.6 3,312.7 3,311.7 3,326.7 3,359.4 3,363.9 3,359.4 Federal Government Purchases 1,248.8 1,273.9 1,284.5 1,293.0 1,293.1 1,313.8 1,314.0 1,319.0 State and Local Government Purchases 2,007.9 2,021.4 2,027.1 2,018.7 2,033.6 2,045.6 2,049.9 2,040.4 Net Exports -943.9 -980.7 -986.3 -995.0 977.9 -1,026.2 -1,033.8 -1,023.7 Total Exports 2,554.4 2,517.5 2,522.2 2,541.1 2,610.8 2,588.9 2,611.1 2,639.7 Total Imports 3,498.3 3,498.2 3,508.5 3,536.2 3,588.7 3,615.1 3,644.9 3,663.5 Employment: Total Nonfarm Payroll Jobs (Millions) 150.7 150.8 151.6 152.3 152.7 152.8 153.5 154.2 Unemployment Rate.,. 3.9 3.6 3.6 3.6 3.6 3.6 3.6 3.6 Monetary Aggregates (S Billions): Ml 3,742.1 3,798.9 3,868.2 3,909.1 3,931.1 3,992.0 4,066.7 4,110.5 M2 14,466.9 14,647.6 14,940.5 15,066.1 15,260.3 15,465.2 15,786.3 15,932.4 Real M2 12,974.8 13,054.9 13,268.7 13,312.3 13,458.7 13,550.8 13,779.1 13,832.8 Price Indicators: Consumer Price Index: All Items (1982-84=100) 253.3 255.1 256.3 257.3 258.0 259.9 261.2 262.4 Personal Consumption Expenditures Price Index: Less Food and Energy (2012=100) 110.9 111.4 112.0 112.5 112.8 113.4 114.0 114.6 GDP Price Deflator (2012=100) 111.5 112.2 112.6 113.2 113.4 114.1 114.6 115,2 Crude Oil ($/bbl) 54.8 59.8 56.4 55.0 54.0 53.0 54.0 55.0 Existing Homes: Sales, Single-Family & Condo (Thousands, SAAR) 5,206.7 5,286.7 5,433.3 5,487.9 5,586.8 5,662.0 5,661.5 5,762.3 Median Price, Single-Family (S Thousands) 254.9 279.5 280.2 273.7 270.2 294.6 293.1 284.4 Price Index, Single-Family (2009=100) 147.8 162.0 162.4 158.7 156.6 170.8 169.9 164.9 Affordability Index, Single-Family 159.5 153.2 161.3 167.9 169.5 155.0 157.2 163.5 Housing Starts (Thousands, SAAR): Total Housing Starts 1,213.0 1,256.0 1,282.0 1,252.6 1,309.5 1.337,6 1,368.3 1,298.7 Single-Family Units 864.0 847.0 901.0 878.5 932.3 900.4 956.9 911.9 Units in Buildings with 2 Units or More 349.0 409.0 381.0 374,1 377.3 437.2 411.5 386.9 Interest Rates: Federal Funds 2.4 2.4 2.2 1.7 1.7 1.5 1.5 1.5 Treasury Bill, 90-Day 2.4 2.3 2.0 1.6 1.7 1.7 1.6 1.6 Prime 5.5 5.5 5.3 4.9 5.0 5.1 5.1 5.1 Treasury Bond, 10-Year 2.7 2.3 1.8 1.8 1.9 1 9 2.0 2.0 30-Year Fixed Mortgage 4.4 4.0 3.7 3.6 3.7 3.8 3.8 3.8 Interest Spread (10-Year T-Bond Less Fed Funds) 0.3 -0.1 -0.4 0.1 0.3 0.5 0.6 0.6 f = Forecast K 10 ECONOMIC & BUSINESS REVIEW I/\J1 I (o I I N \'\IUAl1 I QUARTERLY HISTORY AND FORECASTS: 2019:1-2020:4 QUARTER-TO-QUARTER PERCENTAGE CHANGES 19:1 19:2 19:3 19:4f 20:lf 20:2f 20:3f 20:4f Details of GDP: GDP 3.9 4.7 3,5 3.5 2.2 5.5 3.3 4.7 Real GDP (2Ol2Dollars) 3.1 2.0 1.9 1.5 1.5 2.8 1.7 2.5 Total Consumption 1.1 4.6 2.9 2.0 0.3 4,7 3.1 2.1 Gross Private Investment 6.2 -6.3 -1.5 5.2 3.4 0.6 -1.8 5.0 Nonresidential Investment 4.4 -1.0 -3.0 5.8 6.5 -0.2 3.3 4.2 Residential Structures -1.1 -2.9 5.1 6.1 47 -0.4 1.2 5.9 Change in Inventories N/A N/A N/A N/A N/A N/A N/A N/A Total Government Purchases 2.9 4.8 2.0 -0.1 1.8 4.0 0.5 0.5 Federal Government Purchases 2.2 8.3 3.4 2.7 0.0 6.5 0.1 1.5 State and Local Government Purchases 3.4 2.7 1.1 -1.6 3.0 2.4 0.8 -1.8 Net Exports 16.9 -14.7 -2.3 -3.5 7.1 -18.4 -2.9 4.0 Total Exports 4.2 -5.7 0.7 3.0 11.4 -3.3 3.5 4.5 Total Imports -1.5 0.0 1.2 3.2 6.1 3.0 3.3 2.1 Employment: Total Nonfarm Payroll Jobs 1.7 0.3 2.1 1.9 1.1 0.1 2.0 1.7 Unemployment Rate . 10.9 -27.4 0.0 -1.1 3.4 -2.2 1.1 1.1 Monetary Aggregates: Ml 1.9 6.2 7.5 4.3 2.3 6.3 7.7 4.4 M2 5.0 5.1 8.2 3.4 5.3 5.5 8.6 3.8 Real M2 4.2 2.5 6,7 1.3 4.5 2.8 6.9 1.6 Price Indicators: Consumer Price Index: All Items 0.9 2.9 1.8 1.6 1.1 3.0 2.0 1.8 Personal Consumption Expenditures Price Index: Less Food and Energy 1.1 1.8 2.2 1.8 1.2 1.9 2.3 1.9 GDP Price Deflator 0.7 2.5 1.4 2.1 0,7 2.6 1.5 2.2 Crude Oil -25.8 41.3 -20.9 -9.4 -7.1 -7.2 7.8 7.6 Existing Homes: Sales, Single-Family&Condo 5.0 6.3 11.6 4.1 7.4 5.5 0.0 7.3 Median Price, Single-Family -4.7 446 1.0 -8.9 -5.0 41.3 -2.0 -11.4 Price Index, Single-Family 4.7 44.6 1.0 -8.9 -5.0 41.3 -2.0 -11.4 Affordability Index, Single-Family 32.4 -14.8 22.9 17.3 3.9 -30.1 5.8 17.0 Housing Starts- tarts: TotalHousingStarts Total Housing Starts 9.8 15.0 8.5 -8.8 19.4 88 9.5 -188 Single-Family Units 18.6 -7.6 28.0 -9.6 26.8 -13.0 27.6 -17.5 Units in Buildings with 2 Units or More -8.7 88.6 -24.7 -7.0 3.4 80.4 -21.6 -21.9 Interest Rates: Federal Funds 36.6 0.0 -30.7 -63.7 -11.3 40.4 0.0 0.0 Treasury Bill, 90-Day 12.6 -14.2 -45.1 -57.4 27.4 0.0 -21.5 0.0 Prime 17.7 0.0 -13.8 -26.9 8.4 8.2 0.0 0.0 Treasury Bond, 10-Year 41.5 -40.2 -64.4 0.0 24.1 0.0 22.8 0.0 30-Year Fixed Mortgage -30.1 -29.1 -30.6 -6.4 11.6 11.3 0.0 0.0 Interest Spread (10-Year 1-Bond Less Fed Funds) N/A N/A N/A N/A N/A N/A N/A N/A f = Forecast DECEMBER 2019 11 15 '16 17 118 19e Annual % Change 3.5 3.0 2.5 2.0 1.5 1.0 2020 (Al II ()kNIA I ()Rl CALIFORNIA LOSES ITS MOXIE AS CALIFORNIANS VOTE WITH THEIR FEET Weighted down by the trade war with China and a sharp drop in residential construction during this first half of the year, job growth declined in California in 2019. It is now virtually in parity with job growth in the U.S. PAYROLL EMPLOYMENT Moving into 2020, things aren't looking much better. The forecasted decline in U.S. economic growth in 2020 will negatively impact California. In addition, job growth in Silicon Valley is slowing. Although the Valley will continue to create more jobs in high-value sectors like computer systems design and scientific research & development, its overall growth rate has slowed. The recent rash of failed startups isn't helping. One bright spot is the increasing likelihood that the trade war with China will be resolved soon. But even if there is some sort of agreement, it will take time before trade volume with China recovers from the $25 billion drop we estimated for 2019. CALIFORNIA TRADE WITH CHINA $ Billions 200 IEXPORTS S IMPOR rs '75 178 -25 '75 '57 160 153 150 125 100 '15 '16 '17 1 18 '19e Our analysis points to a loss of about 40,000 jobs in California in 2019 as a result of the trade war, predominantly in trade, transportation and business services job categories. This represents a loss in 2019 of about 0.2 percent in the state's job growth. Assuming some sort of deal is reached, the drag on the economy resulting from the trade war should be lessened in 2020. But as the deleterious impact of the trade war lessens, a new one is emerging. That problem, which will negatively affect California not only in the long run but the short run as well, is the increasing out-flight of Californians to other states. This net negative migration is cutting into the state's population growth rate. POPULATION GROWTH 0.3 '12 '13 '14 1 15 '16 '17 1 18 The fact that California's population growth is now lower than the U.S. is in part due to a slowdown in immigration from other nations. In addition, California's birth rate has declined while its death rate has increased. But these trends are also national in scope. The major reason for California's sharp decline in population growth relative to the U.S. is the fact that more people are moving to other states than those moving into the state. The data we have analyzed strongly suggests that the root cause of California's out-migration is its relatively high state and local taxes. Based on a newly released report that includes 2018 net migration data, we recently conducted a comprehensive study that compared net migration data for each state with that state's ranking in state and local taxes. Percent 1.2 0.9 0.6 ECONOMIC & BUSINESS REVIEW 12 '18 115 116 '17 90 80 70 60 50 40 30 20 '14 -45K In Thousands 50 0 -50 -100 -150 -200 -250 '14 115 '16 '17 '18 2.7 2.2 2.0 1.8 1.6 1. UCA SUS 1.6 1.5 1.5 1.3 1st Quartile 2nd Quartile 3rd Quartile 4th Quartile (States in the (Stalin in the highest tax lowest tax ranking) rsnking In Thousands 400 200 0 -200 -400 -600 -800 206 263 68 __________ -536 CALIFORNIA'S NET STATE-TO-STATE MIGRATION CALIFORNIA VERSUS TEXAS Thousands of People The significant relationship between tax rates and migration patterns is clearly shown by dividing states into quartiles based on each state's tax ranking. As shown in the figure below, states in the highest tax quartile experienced a net migration loss of 536,000 people in 2018. The three states that rank highest in taxes (New Jersey, California, and New York) also ranked highest in net out-migration. TOTAL NET MIGRATION It should be noted that similar findings to the above figure were observed when each state's migration was made relative to each state's total population. California's net loss in migration is greatest with Texas, a state with no state income tax and one that ranks number 13 in overall state and local taxes versus California's number 49 ranking. The recently released population report indicates that in 2018, the net migration loss to Texas increased sharply. These migration patterns suggest that people vote with their feet. But even more likely, businesses are voting with their feet in search of low state corporate and business taxes. As businesses migrate, so too do jobs. Those newly created jobs in lower cost states serve as a magnet for people. California's net out-migration will significantly affect the state's economy. One notable example is housing construction. Fewer people translates to fewer homes. Rather than there being a housing shortage in California as many people claim (see the article on page 26), it increasingly looks like the pendulum is swinging in the other direction. That may explain why housing construction in the state isn't showing much strength in spite of record-low mortgage rates. Overall, our 2020 forecast for job growth in California calls for weak growth that will roughly match 2019's pace. It should be noted, however, that forecasted job growth will be weaker in 2020 if no trade agreement is reached with China. PAYROLL EMPLOYMENT '16 '17 18 I9e '20f CALIFORNIA FORECAST TABLES Tables 7 to 10 present details of Payroll Employment, Personal Income, Taxable Sales, Existing Homes and Construction Activity. Tables 7 and 8 present annual levels and rates of change. Tables 9 and 10 present quarterly levels and year-to-year percentage changes on a quarterly basis. Annual % Change 3.0 2.5 2.0 1.5 1.0 13 DECEMBER 2019 (\IIlORNL\ \'A!I\Il I ii\RI! ANNUAL HISTORY AND FORECASTS: 2015-2020 LEVELS 2015 2016 2017 2018 2019e 2020f Payroll Employment (Thousands): Total Payroll Employment 16,052 16,481 16,837 17,175 17,452 17,720 Mining & Natural Resources 26 22 22 23 23 23 Construction 732 776 810 860 887 904 Manufacturing 1,303 1,309 1,311 1,325 1,338 1,352 Durable Goods 821 823 828 848 863 879 Nondurable Goods 482 486 483 477 475 473 Services 11,528 11,858 12,129 12,380 12,587 12,794 Trade, Transportation & Utilities 2,909 2,967 3,017 3,052 3,054 3,061 Wholesale Trade 691 693 696 699 697 697 Retail Trade 1,660 1,679 1,689 1,689 1,678 1,670 Transportation & Warehousing 500 536 574 607 622 636 Utilities 58 59 58 57 57 57 Financial Activities 801 821 831 836 838 842 Information 489 527 530 544 558 573 Professional & Business 2,493 2,534 2,584 2,664 2,734 2,795 Education & Health 2,465 2,553 2,651 2,727 2,803 2,883 Leisure & Hospitality 1,828 1,901 1,952 1,986 2,026 2,061 Other Services 544 554 564 572 575 579 Government....,. ' 2,463 2,516 2,564 2,587 2,616 2,648 Federal Civilian Government 244 248 248 246 247 248 State & Local Government 2,219 2,268 2,316 2,342 2,369 2,399 Personal Income (S Millions): Total Personal Income 2,171,947 2,263,890 2,370,112 2,514,129 2,641,857 2,763,780 Taxable Sales (S Millions): Total Taxable Sales 638,632 653,856 677,823 706,835 726,847 750,614 General Merchandising and Clothing 103,922 105,894 108,560 113,034 116,503 121,000 All Food and Drink 101,024 106,173 111,155 114,924 119,493 123,586 Motor Vehicles and Parts 80,347 84,226 86,983 89,697 91,113 94,093 Service Stations 48,203 43,273 47,435 54,302 52,792 53,049 All Other 305.137 314,291 323,691 334,878 346,946 358,886 Existing Homes: Sales, Single-Family &Condo 409,408 417.716 424,141 402,719 398,867 414,613 Median Price, Single-Family 475,668 502,166 537,275 571,088 587,065 610,094 Price Index (2009=100), Single-Family 171.9 181.5 1941 206.4 212.2 220 Affordability Index, Single-Family 85.8 87.3 82.9 76.9 86.5 88.6 Building Permits: Total Residential Permits 98,073 100,961 115,046 117,892 109.259 114,965 Residential, Single-Family 44,896 49,208 55,827 59,049 54,519 56,960 Residential, Multi-Family 53.177 51,753 59,219 58.843 54,740 58,005 Building Permit Valuation (S Millions): Total Building Permit Valuation 55,379 58,588 64,684 71.118 66,143 67,652 Total Residential Valuation 29,341 31,446 36,116 37,883 34,124 36,333 Residential, Single-Family 14,126 15,557 17,818 19,145 16.993 18,118 Residential, Multi-Family 8.494 8,803 10,833 11,019 10,000 10,944 Additions, Renovations 6.721 7,086 7,465 7,720 7,132 7,271 Total Nonresidential Valuation 26,038 27,142 28,568 33,235 32,018 31,319 e = Estimate fForecast ECONOMIC & BUSINESS REVIE 14 \R[ I '\I I I()RNI\ \':\RI;\1[.I " ANNUAL HISTORY AND FORECASTS: 2015-2020 YEAR-TO-YEAR PERCENTAGE CHANGES 2015 2016 2017 2018 2019e 2020! Payroll Employment: Total Payroll Employment 3.1 2.7 2.2 2.0 1.6 1.5 Mining & Natural Resources -9.7 -15.7 -1.3 4.0 0.8 -1.1 Construction 8.5 6.0 4.5 6.1 3.2 1.9 Manufacturing 1.8 0.5 0.1 1.1 0.9 1.1 Durable Goods 2.1 0.3 0.6 2.4 1.7 1.9 Nondurable Goods 1.3 0.9 -0.6 -1.2 -0.5 -0.4 Services 3.1 2.9 2.3 2.1 1.7 1.6 Trade, Transportation & Utilities 2.6 2.0 1.7 1.1 0.1 0.2 Wholesale Trade 1.1 0.3 0.4 0.4 -0.3 0.1 Retail Trade 2.0 1.1 0.6 0.0 -0.6 -0.4 Transportation & Warehousing 7.0 7.2 7.2 5.7 2.5 2.2 Utilities 0.2 1.8 -2.1 -2.0 0.4 0.3 Financial Activities 2.5 2.6 1.1 0.6 0.2 0.5 Information 5.4 7.8 0.6 2.6 2.6 2.7 Professional & Business 2.6 1.7 2.0 3.1 2.6 2.2 Education & Health 3.6 3.6 3.8 2.9 2.8 2,9 Leisure& Hospitality 4.1 4.0 2,6 1.8 2.0 1.7 Other Services 1.7 19 19 1.4 0.4 0.7 Government ' . . 2.0 2.1 1.9 0.9 1.1 1.2 Federal Civilian Government 0.8 1.3 0.3 -1.0 0.6 0.5 State &Local Government 2.2 2.2 2.1 1.1 1.2 1.3 Personal Income: Total Personal Income 7.5 4.2 4.7 6.1 5.1 4.6 Taxable Sales: Total Taxable Sales 3.7 2.4 37 4,3 2.8 3.3 General Merchandising and Clothing 3.4 1.9 2.5 4.1 3.1 3.9 All Food and Drink 7.3 5.1 4.7 3.4 4.0 3.4 Motor Vehicles and Parts 9.7 4.8 3.3 3.1 1.6 3.3 Service Stations -13.5 -10.2 9.6 14.5 -2.8 0.5 All Other 4.4 3.0 3.0 3,5 3.6 3.4 Existing Homes: Sales, Single-Family& Condo 7.0 2.0 1.5 -5.1 -1.0 3.9 Median Price, Single-Family 6.0 5.6 7.0 6.3 2.8 3.9 Price Index (2009=100), Single-Family 6.0 5.6 7.0 6.3 2.8 3.9 Affordability Index, Single-Family 1.9 1.7 -5.0 -7.2 12.5 2.3 Building Permits: Total Residential Permits 14.2 2.9 14.0 2.5 .7.3 5.2 Residential, Single-Family 21.0 9.6 13.5 5.8 -7.7 4.5 Residential, Multi-Family 9.1 -2.7 14.4 -0.6 -7.0 6.0 Building Permit Valuation: Total Building Permit Valuation 15.2 5.8 10.4 9.9 -7.0 2.3 Total Residential Valuation 19.2 7.2 14.9 4.9 -9.9 6.5 Residential, Single-Family 23.1 10.1 14.5 7.4 -11.2 6.6 Residential, Multi-Family 15.4 3.6 23.1 1.7 -9.2 9.4 Additions, Renovations 16.0 5.4 5.4 3.4 -7.6 2.0 Total Nonresidential Valuation 11.0 4.2 5.3 16.3 -3.7 -2.2 e = Estimate fr" Forecast DECEMBER 2019 15 CALIFORNIA VARIABLES TABLE 9 QUARTERLY HI STORY AND FORECASTS: 2019:1-2020:4 LEVELS 19:1 19:2 19:3 19:4e 20:11 20:21' 20:3f 20:4f Payroll Employment (Thousands): Total Payroll Employment 17,231 17,454 17,422 17,700 17,509 17,732 17.686 17,954 Mining & Natural Resources 22 23 24 23 22 23 23 23 Construction 844 891 920 894 862 907 935 912 Manufacturing 1,324 1.334 1.351 1,342 1.336 1,349 1,367 1.358 Durable Goods 855 860 867 870 869 877 884 887 Nondurable Goods 469 474 484 473 467 472 482 471 Services 12,413 12,545 12,615 12,775 12,629 12,759 12.819 12,967 Trade, Transportation & Utilities 3.032 3,021 3,042 3,121 3,034 3,028 3,051 3,130 Wholesale Trade 692 697 698 699 691 697 700 701 Retail Trade 1,673 1,655 1,662 1,721 1,665 1,649 1,655 1,713 Transportation & Warehousing 609 612 624 644 622 625 638 659 Utilities 57 57 57 57 57 57 57 57 Financial Activities 831 834 843 843 837 839 847 846 Information 548 551 560 572 564 566 575 586 Professional & Business 2,685 2,713 2,755 2,783 2,757 2,776 2,813 2.832 Education & Health 2,772 2,800 2,791 2,849 2,855 2,883 2,870 2,926 Leisure & Hospitality 1,978 2,046 2,048 2,032 2,012 2,084 2,083 2,065 Other Services 568 579 576 575 571 583 581 580 Government 2,626 2,662 2.512 2,665 2,660 2,695 2,542 2,694 Federal Civilian Government 243 247 249 249 246 249 250 250 State & Local Government 2,383 2,415 2,263 2,416 2,415 2,446 2,292 2,444 Personal Income (S Millions): Total Personal Income 649,631 658,831 662,548 670,846 678,932 689,287 692,854 702,706 Taxable Sales (S Millions): Total Taxable Sales 164,447 182,818 182,385 197,198 169,934 188,621 188,411 203,648 General Merchandising and Clothing 24,958 28,040 27,609 35,897 25.913 29,148 28,696 37,243 All Food and Drink 28,550 29,977 30,283 30,684 29,533 31,011 31,315 31,726 Motor Vehicles and Parts 20,810 22,544 24,071 23,687 21,447 23.369 24,894 24,384 Service Stations 11.655 14,200 13,412 13,525 11,815 13,936 13,495 13,803 All Other 78,474 88,056 87,010 93,405 81,226 91,158 90,011 96,492 Existing Homes: Sales, Single-Family & Condo (SAAR) 384,573 397,823 407,253 405,820 400,340 413,736 422,729 421,647 Median Price. Single-Family 545,713 608,277 610,360 583,911 568,087 632,000 634,774 605,516 Price Index (2009100), Single-Family 197.2 219.8 220.6 211.0 205.3 228.4 229.4 218.8 Affordability Index, Single-Family 86.5 82.2 85.9 91.6 94.1 84.9 84.9 90.3 Building Permits: Total Residential Permits 24,731 28,055 28,570 27,903 26,687 29,692 29,813 28.773 Residential, Single-Family 11,892 15,265 14.466 12,896 12,939 15,981 14,886 13,154 Residential, Multi-Family 12,839 12,790 14,104 15,007 13,748 13,711 14,927 15,619 Building Permit Valuation ($ Millions): Total Building Permit Valuation 15,148 18,828 15.155 17,012 15,455 19,204 15,499 17,494 Total Residential Valuation 8,179 9,005 8,114 8,827 8,814 9.614 8,590 9,314 Residential, Single-Family 3,952 4.833 4,271 3,937 4,322 5,161 4,507 4,127 Residential, Multi-Family 2,533 2,241 2,032 3,194 2,795 2,484 2,223 3,442 Additions, Renovations 1,693 1,931 1,811 1,696 1,698 1,969 1,859 1,746 Total Nonresidential Valuation 6,969 9,823 7,041 8,185 6,641 9.591 6,908 8,179 e = Estimate 1'= Forecast 16 ECONOMIC & BUSINESS REVIEW ORANGE COUNTY VARIA1U.L \RLE 13 QUARTERLY F-IISTORYAND FORECASTS: 2019:1-2020:4 LEVELS 19:1 19:2 19:3 19:4e 20:11 20:21 20:31 20:41 Payroll Employment (Thousands): Total Payroll Employment 1,656 1,670 1,665 1,699 1,681 1,688 1,682 1,716 Mining & Natural Resources 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.4 Construction 105 107 109 110 107 110 113 113 Manufacturing 161 159 159 161 159 158 157 159 Durable Goods 119 118 117 120 118 117 117 119 Nondurable Goods 42 42 41 41 41 41 40 41 Services 1,240 1,238 1,245 1,262 1,249 1,253 1,258 1,275 Trade, Transportation & Utilities 260 259 260 263 259 259 260 263 Wholesale Trade 79 80 79 76 79 80 80 76 Retail Trade 151 149 151 157 151 149 151 157 Transportation & Warehousing 26 26 26 27 27 27 27 27 Utilities 3 3 3 3 3 3 3 3 Financial Activities 117 116 116 116 115 114 114 115 Information 26 27 26 26 26 26 26 26 Professional & Business 322 322 327 334 329 327 331 339 Education & Health 232 234 232 238 239 239 237 243 Leisure & Hospitality 224 229 231 231 229 233 236 236 Other Services 52 53 53 54 53 54 54 54 Government 164 166 152 166 165 167 151 168 Federal Civilian Government 11 II II Il 11 II II II State & Local Government 153 155 141 155 154 156 143 157 Personal Income (S Millions): Total Personal Income 56,930 57,279 57,638 58,952 59,564 59,784 60,169 61,534 Taxable Sales ($ Millions): Total Taxable Sales 15,819 17,477 17,469 19,015 16,377 17.957 17,961 19,549 General Merchandising and Clothing 2,117 2,418 2,425 3,125 2,172 2,485 2,511 3,245 All Food and Drink 2,630 2,749 2,760 2,779 2,672 2,798 2,809 2,835 Motor Vehicles and Parts 2,253 2,468 2,639 2,677 2,410 2,636 2,791 2,815 Service Stations 902 1,120 1,056 1,024 911 1,083 1,046 1.028 All Other 7,917 8,721 8,589 9,410 8,211 8,955 8,804 9,625 Existing Homes: Sales, Single-Family & Condo 5,602 8,619 8.428 7,348 6,416 9,650 9,220 7,726 Median Price, Single-Family 799,500 837,333 826,483 803,302 816,706 863,578 855,629 836,474 Price Index (2009=100), Single-Family...... 158.1 165.6 163.4 158.8 161.5 170.8 169.2 165.4 Affordability Index, Single-Family 68.7 68.9 73.3 77.8 76.3 71.6 727 76.0 Building Permits: Total Residential Permits 2,177 2,129 2.695 1,417 2,310 2,308 2,886 1,489 Residential, Single-Family 703 826 775 641 737 925 856 679 Residential, Multi-Family 1,474 1,303 1,920 776 1,573 1,382 2,029 810 Building Permit Valuation (S Millions): Total Building Permit Valuation 1,442 1,406 1,134 1,362 1,509 1,450 1,179 1,393 Total Residential Valuation 693 595 599 488 718 641 641 511 Residential, Single-Family 255 302 244 217 264 335 268 231 Residential, Multi-Family 326 163 238 79 340 174 253 84 Additions, Renovations 112 129 117 192 114 133 120 196 Total Nonresidential Valuation 749 811 535 874 791 809 537 882 e = Estimate f = Forecast 22 ECONOMIC & BUSINESS REVIEW CALIFORNIA VARIABLES TABLE 9 QUA RTE RLY HI STORY AND FORECASTS; 2019:1-2020:4 LEVELS 19:1 19:2 19:3 19:4e 20:1f 20:2f 20:3f 20:4r Payroll Employment (Thousands): Total Payroll Employment 17,231 17,454 17,422 17,700 17,509 17,732 17,686 17,954 Mining & Natural Resources 22 23 24 23 22 23 23 23 Construction 844 891 920 894 862 907 935 912 Manufacturing 1,324 1,334 1,351 1,342 1,336 1,349 1,367 1,358 Durable Goods 855 860 867 870 869 877 884 887 Nondurable Goods 469 474 484 473 467 472 482 471 Services 12,413 12,545 12,615 12,775 12,629 12,759 12,819 12,967 Trade, Transportation & Utilities 3,032 3,021 3,042 3,121 3,034 3,028 3,051 3,130 Wholesale Trade 692 697 698 699 691 697 700 701 Retail Trade 1,673 1,655 1,662 1,721 1,665 1,649 1,655 1,713 Transportation & Warehousing 609 612 624 644 622 625 638 659 Utilities 57 57 57 57 57 57 57 57 Financial Activities 831 834 843 843 837 839 847 846 Information 548 551 560 572 564 566 575 586 Professional & Business 2,685 2,713 2,755 2,783 2,757 2,776 2,813 2,832 Education & Health 2,772 2,800 2,791 2,849 2,855 2,883 2,870 2,926 Leisure & Hospitality. 1,978 2,046 2,048 2,032 2,012 2,084 2,083 2,065 Other Services 568 579 576 575 571 583 581 580 Government 2,626 2,662 2,512 2,665 2,660 2,695 2,542 2,694 Federal Civilian Government 243 247 249 249 246 249 250 250 State & Local Government 2,383 2,415 2,263 2,416 2,415 2,446 2,292 2,444 Personal Income (S Millions): Total Personal Income 649,631 658,831 662,548 670,846 678,932 689,287 692,854 702,706 Taxable Sales ($ Millions): Total Taxable Sales 164,447 182,818 182,385 197.198 169,934 188,621 188,411 203,648 General Merchandising and Clothing 24,958 28,040 27,609 35,897 25,913 29,148 28,696 37,243 All Food and Drink 28,550 29,977 30,283 30,684 29,533 31,011 31,315 31,726 Motor Vehicles and Parts 20,810 22,544 24,071 23,687 21,447 23,369 24,894 24,384 Service Stations 11,655 14,200 13,412 13,525 11,815 13,936 13,495 13,803 All Other 78,474 88,056 87,010 93,405 81,226 91,158 90,011 96,492 Existing Homes: Sales, Single-Family & Condo (SAAR) 384,573 397,823 407,253 405,820 400,340 413,736 422,729 421,647 Median Price, Single-Family 545,713 608,277 610,360 583,911 568,087 632,000 634,774 605,516 Price Index (2009100), Single-Family 197.2 219.8 220.6 211.0 205.3 228.4 229.4 218.8 Affordability Index, Single-Family 86.5 82.2 85.9 91.6 94.1 84.9 84.9 90.3 Building Permits: Total Residential Permits 24,731 28,055 28,570 27,903 26,687 29,692 29,813 28,773 Residential. Single-Family 11,892 15,265 14,466 12,896 12,939 15,981 14,886 13,154 Residential, Multi-Family 12,839 12,790 14,104 15,007 13,748 13,711 14,927 15,619 Building Permit Valuation (S Millions): Total Building Permit Valuation 15,148 18,828 15,155 17,012 15,455 19,204 15,499 17,494 Total Residential Valuation 8,179 9,005 8,114 8,827 8,814 9,614 8,590 9,314 Residential, Single-Family 3,952 4,833 4,271 3,937 4,322 5,161 4,507 4,127 Residential, Multi-Family 2,533 2,241 2,032 3,194 2,795 2,484 2,223 3,442 Additions, Renovations 1,693 1,931 1,811 1,696 1.698 1,969 1,859 1,746 Total Nonresidential Valuation 6,969 9,823 7,041 8,185 6,641 9.591 6,908 8,179 e = Estimate f=Forecast 16 ECONOMIC & BUSINESS REVIEW I,;\i1 I "L.iI()RNI,\ \.\KIARI H QUARTERLY HISTORY AND FORECASTS: 2019:1-2020:4 YEAR-TO-YEAR PERCENTAGE CHANGES 19:1 19:2 19:3 19:4e 20:1f 20:21 20:31 20:4f Payroll Employment: Total Payroll Employment 1.5 1.6 1.7 1.7 1.6 1.6 1.5 1.4 Mining &Natural Resources 2.3 1.6 0.3 -0.7 -1.1 -1.2 -1.3 -1.0 Construction 2.0 3.9 4.2 2.7 2.1 1.8 1.6 2.0 Manufacturing 1.3 0.9 0.8 0.9 0.9 1.1 1.1 1.2 Durable Goods, 2.1 1.6 1.5 1.8 1.6 2.0 2.0 2.1 Nondurable Goods -0.3 -0.3 -0.6 -0.7 -0.5 -0.5 -0.4 -0.4 Services 1.6 1.7 1.7 1.7 1.7 1.7 1.6 1.5 Trade, Transportation & Utilities 0.4 0.0 -0.1 0.0 0.1 0.2 0.3 0.3 Wholesale Trade -o.s -0.3 -0.4 -0.1 -0.2 0.0 0.2 0.3 Retail Trade -0.2 -0.7 -0.9 -0.7 -0.5 -0.4 -0.4 -0.5 Transportation & Warehousing 3.5 2.5 2.2 1.9 2.0 2.1 2.3 2.3 Utilities -o.i 0.6 0.6 0.5 0.4 0.4 0.3 0.2 Financial Activities -0.2 -0.3 0.6 0.7 0.6 0.6 0.5 0.4 Information 1.0 3.0 3.2 3.1 3.0 2.8 2.7 2.5 Professional & Business 2.7 2.5 2.8 2.6 2.7 2.3 2.1 1.8 Education& Health 2.5 2.8 3.0 3.0 3.0 3.0 2.8 2.7 Leisure & Hospitality 1.9 2.3 1.8 2.0 1.7 1.8 1.7 1.6 Other Services 0.8 0.6 0.0 0.3 0.5 0,7 0.8 0.8 Government . 0.7 1.0 1.4 1.4 1.3 1.2 1.2 1.1 Federal Civilian Government -0.4 0.4 1.3 1.1 0.9 0.6 0.4 0.3 State &Local Government 0.9 1.1 1.4 1.4 1.3 1.3 1.3 1.2 Personal Income: Total Personal Income 5.4 5.2 4.8 4.9 4.5 4.6 4.6 4.7 Taxable Sales: Total Taxable Sales 1.6 3.7 2.5 3.4 3.3 3.2 3.3 3.3 General Merchandising and Clothing 0.0 4,7 3.2 3.9 3.8 4.0 3.9 3.7 All Food and Drink 4.7 3.7 3.8 3.7 3.4 3.4 3.4 3.4 Motor Vehicles and Parts -1.0 1.6 1.8 3.7 3.1 3.7 3.4 2,9 Service Stations -5.8 0.5 -5.4 -0.7 1.4 -1.9 0.6 2.1 All Other 2.8 4.6 3.3 3.6 3.5 3.5 3.4 3.3 Existing Homes: Sales, Single-Family& Condo -8.2 -3.5 2.8 5.8 4.1 4.0 3.8 3.9 Median Price, Single-Family 1.4 2.1 3.7 4.0 4.1 3.9 4.0 3.7 Price Index (2009100), Single-Family 1.4 2.1 3.7 4.0 4.1 3.9 4.0 3.7 Affordability Index, Single-Family 4.9 12.5 15.1 18.1 8.8 3.3 -1.2 -1.4 Building Permits: Total Residential Permits -10.3 -25.7 7.2 7.8 7.9 5.8 4.3 3.1 Residential, Single-Family -147 -lt.6 -6.5 4.3 8.8 4.7 2.9 2.0 Residential, Multi-Family ... .... .......... -5.9 -37.6 262 10.9 7.1 72 5.8 4.1 Building Permit Valuation: Total Building Permit Valuation -10.8 -7.5 -10.1 0.5 2.0 2.0 2.3 2.8 Total Residential Valuation -8.2 -21.4 -11.4 5.6 7.8 6.8 5.9 5.5 Residential, Single-Family -12.9 -11.4 -19.0 14 9.4 6.8 5.5 4.8 Residential, Multi-Family 3.1 43.1 7.3 17.1 10.3 10.8 9.4 7.7 Additions, Renovations -11.8 -6.4 -8,9 -3.0 0.2 1.9 2.7 2.9 Total Nonresidential Valuation -13.6 10.4 -8.6 4.4 4.7 -2.4 -1.9 -0.1 e = Estimate f = Forecast DECEMBER 2019 17 YrfYr % Change 3.5 3.0 2.5 CAI.1F(1RNIA ORANGE COUNTY U.S. '16 1 117 '18 1 19 2.0 1.5 1.0 15 2U2() OR\NG 1! COl IN1Y I(iI1C\I O.C. JOB GROWTH CONTINUES TO SLIDE ONE BRIGHT SPOT: HOUSING From 2015-18, Orange County mirrored California's steady decline in job growth. But in 2019, Orange County's job growth dropped sharply from 2.1 percent in 2018 to 1.3 percent in 2019, slower than that of California and the U.S. PAYROLL EMPLOYMENT Rather than creating 34,000 net new jobs as it did in 2018, the County added only 22,000 jobs in 2019. As shown in the table below, four major job sectors in the County either sharply declined or like finance, experienced outright job losses. PAYROLL EMPLOYMENT 2018 211 1 9L ( IIrI. Construction 4.7 1.1 -3.6 Transportation & Warehousing 4.5 1.6 -2.9 Financial Activities -0.3 -2.4 -2.7 Professional & Business 4.6 2.9 -1.7 The drop in construction jobs resulted from the near housing recession the County experienced when mortgage rates hovered in the 5 percent range. Those rates have since dropped sharply, but the damage was already done. Weakness in the construction industry and home sales placed downward pressure on the financial activities and professional & business job categories. The sharp drop in job growth in the transportation & warehousing category is likely the result of the trade war with China. About the only job category in Orange County that is holding its own is leisure & hospitality, the lowest paying of all job classifications. Although the average annual salary for all County workers is about $67 thousand, it's only $27 thousand in leisure & hospitality, A serious challenge to Orange County's econo- mic future is the fact that much of its job creation in recent years has been in low paying sectors like leisure & hospitality. If this trend continues, it will place constraints on overall economic growth for the County. The nature of this economic challenge is made apparent when analyzing rates of job growth in high value-added sectors. In a recent study conducted by our Center, we looked at job creation in three high value-added job sectors in the County and compared it to the growth taking place in Silicon Valley. Those job sectors and the salaries they command on average in California are shown in the following table. HIGH VALUE-ADDED JOB SECTORS tn nit! a .lIi ( alcuuI% Satan 2019 Computer and Electronic Product Mfg. $153,816 $129,700 Computer Systems Design Scientific Research and Development Serv. $174,700 All Jobs $ 67,000 The total number of jobs in the above three job categories in Orange County has been stagnant at about 60,000. That pales in comparison to the Silicon Valley, where jobs in the above three categories increased from 357 thousand in 2016 to about 400 thousand in 2019. To say the least, the Silicon Valley has a head 18 ECONOMIC & BUSINESS REVIEW "li IL( ), .ILE\ - ORANGE COUNTY Percent 15 10 5 0 -5 -10 start over Orange County. What is of greater concern, however, is that the Silicon Valley experienced growth of 12 percent between 2016-19 while Orange County's growth was a measly one percent. AGGREGATE GROWTH IN COMPUTER RELATED JOB CATEGORIES SINCE 2016 16 '17 1 18 1 19 This analysis may strike one as Silicon Valley envy. But unless the County can create more jobs in these categories, STEM graduates especially engineering majors from universities like, UCI, Chapman, and CSUF, are more likely to leave the County for other tech hubs, leading to a brain drain. While we don't see prospects for a pickup in overall job growth in 2020, there are some positive developments. A trade agreement with China, if it occurs, will help stem the downturn in transportation & warehousing. As we forecasted at our June Update, the sharp drop in mortgage rates in 2019 is leading to a pickup in home building and home sales. That pickup is gaining some forward momentum as we move into 2020. TOTAL RESIDENTIAL PERMITS Thousands of Units 15 a Single-Family • Multi-Family 12 10.9 12.1 +6.8% 10.3 9. 8.1 8.4 9.0 6 3 115 '16 '17 118 '19e '20f A return to permit activity above 10 thousand units, however, even with low mortgage rates, is unlikely. Demand for housing will be constrained by population growth in the County that is falling even faster than California's. POPULATION GROWTH '90 '94 '98 '02 '06 '10 '14 '18 The recent decline of population growth to 0.3 percent will constrain future home building in the County. In the short run, however, higher housing affordability resulting from lower mortgage rates combined with a tight supply of housing will lead to stronger market conditions in 2020, perhaps even a "seller's market." In spite of the pickup in residential construction, overall job growth in the County will remain weak in 2020. On the bright side, the sharp fall-off in job growth that occurred in 2019 will not be repeated in 2020. PAYROLL EMPLOYMENT .00 CA 2.1 2.2 2.1 2.0 '16 '17 118 19e '20f ORANGE COUNTY FORECAST TABLES Tables 11 to 14 present details of Payroll Employment, Personal Income, Taxable Sales, Existing Homes and Construction Activity. Tables 7 and 8 present annual levels and rates of change. Tables 9 and 10 present quarterly levels and year-to-year percentage changes on a quarterly basis. Annual % Change 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 '82 '86 Annual % Change 4 2.6 2.7 DECEMBER 2019 19 OI1\N G F (JDU Nil VA R A I) 1. L IA R LE ii ANNUAL HISTORY AND FORECASTS: 20152020 LEVELS 2015 2016 2017 2018 2019e 2020f Payroll Employment (Thousands): Total Payroll Employment 1,545 1,584 1,617 1,651 1,673 1,692 Mining & Natural Resources 0.4 0.3 0.5 0.5 0.5 0.5 Construction 92 97 102 107 108 111 Manufacturing 158 158 160 161 160 158 Durable Goods 116 116 117 118 118 117 Nondurable Goods 42 42 43 42 41 41 Services 1,138 1,169 1,194 1,226 1,246 1,259 Trade, Transportation & Utilities 257 258 261 261 261 260 Wholesale Trade 79 79 79 79 79 79 Retail Trade 152 153 154 153 152 152 Transportation & Warehousing 24 24 25 26 27 27 Utilities 3 3 3 3 3 3 Financial Activities 116 118 120 119 116 114 Information 25 26 27 27 26 26 Professional & Business 288 298 303 317 326 331 Education& Health 199 206 216 226 234 240 Leisure & Hospitality 204 212 218 223 229 233 Other Services 49 50 50 52 53 54 Government 156 160 160 161 162 163 Federal Civiliaii Government 11 11 11 11 Ii 11 State & Local Government 145 148 149 150 151 153 Personal Income (S Millions): Total Personal Income 193,081 200,027 208,950 220,685 230,799 241.050 Taxable Sales (S Millions): Total Taxable Sales 61,358 63,059 65,148 67,469 69,780 71,844 General Merchandising and Clothing 8,836 9,440 9,494 9,845 10,085 10,412 All Food and Drink 9,636 10,020 10,353 10,656 10,918 11,115 Motor Vehicles and Parts 8,353 8,649 8,928 9,408 10,038 10,653 Service Stations 3,768 3,347 3,746 4,204 4,102 4,069 All Other 30,766 31,604 32,627 33,356 34,637 35,596 Existing Homes: Sales, Single-Family & Condo 33,016 33,178 33,451 30,217 29,997 33.013 Median Price, Single-Family 702,904 733,113 778,292 815,319 816,655 843,097 Price Index (2009100), Single-Family 139.0 145.0 153.9 161.2 161.5 166.7 Affordability Index, Single-Family 69.4 71.2 67.4 63.6 72.2 74.2 Building Permits: Total Residential Permits 10,897 12,134 10,294 8,105 8,418 8.992 Residential, Single-Family 3,667 4.226 5,097 3,975 2,945 3,197 Residential, Multi-Family 7,230 7.908 5.197 4,130 5,473 5.795 Building Permit Valuation ($ Millions): Total Building Permit Valuation 5,030 5,647 5,279 6,283 5,344 5,530 Total Residential Valuation 2,834 3,160 3,217 2,776 2,376 2,511 Residential, Single-Family 1,288 1,465 1,810 1,442 1,019 1,098 Residential, Multi-Family 1,052 1,196 881 727 806 850 Additions, Renovations 494 499 527 607 551 563 Total Nonresidential Valuation 2,196 2.487 2,062 3,507 2,969 3,019 e = Estimate f = Forecast ECONOMIC & BUSINESS REVIEW 20 YEAR-TO-YEAR PERCENTAGE CHANGES 2015 2016 2017 2018 2019e 2020f Payroll Employment: Total Payroll Employment 3.2 2.6 2.1 2.1 1.3 1.1 Mining & Natural Resources -20.0 -14.6 41.4 1.9 -4.0 -4.3 Construction 10.3 6.2 4.5 4.7 1.1 3.0 Manufacturing -0.2 0.2 1.4 0.1 -0.4 4.1 Durable Goods -0.1 0.1 0.9 1.0 0.1 -0.9 Nondurable Goods 135 0.7 2.8 -2.3 -1.8 -2.0 Services 3.2 2.7 2.2 2.7 1.6 1.0 Trade, Transportation & Utilities 1.3 0.4 0.8 0.3 -0.3 -0.1 Wholesale Trade -0.3 -0.3 0.5 0.2 -0.5 0.0 Retail Trade 2.0 0.6 0.6 -0.2 -0.6 -0.3 Transportation & Warehousing 1.8 2.1 3.5 4.5 1.6 1.4 Utilities 0.0 -6.1 -2.4 -2.0 -1.1 -0.3 Financial Activities 2.2 1.4 1.3 -0.3 -2.4 -1.6 Information 6.3 4.2 3.1 -0.4 -1.1 -2.0 Professional & Business 3.4 3.5 1.7 4.6 2.9 1.6 Education & Health 4.2 3.7 4.7 4.5 3.7 2.3 Leisure & Hospitality 4.8 4.0 2.9 2.4 2.4 2.1 Other Services 3.5 3.2 -0.3 2.5 2.3 1.6 Government 2.7 2.0 0.4 0.3 0.7 1.0 Federal Civilian Government ' 1.9 1.1 0.0 -2.0 -0.7 -1.2 State & Local Government 2.8 2.1 0.4 0,5 0.8 1.1 Personal Income: Total Personal Income 7.9 3.6 4.5 5.6 4.6 4.4 Taxable Sales: Total Taxable Sales 2.1 2.8 3.3 3.6 3.4 3.0 General Merchandising and Clothing -3.4 6.8 0.6 3.7 2.4 3.2 All Food and Drink 9.3 4.0 3.3 2.9 2.5 1.8 Motor Vehicles and Parts 7.6 3.5 3.2 5.4 6.7 6.1 Service Stations -19.4 -11.2 11.9 12.2 -2.4 -0.8 All Other 3.6 2.7 3.2 2.2 3.8 2.8 Existing Homes: Sales, Single-Family & Condo 11.2 0.5 0.8 -9.7 -0.7 10.1 Median Price, Single-Family 2.4 4.3 6.2 4.8 0.2 3.2 Price Index (2009=100), Single-Family 2.4 4.3 6.2 4.8 0.2 3.2 Affordability Index, Single-Family 4.8 2.6 -5.3 -5.6 13.5 2.7 Building Permits: Total Residential Permits 2.5 11.4 -15.2 -21.3 3.9 6.8 Residential, Single-Family 0.6 15.2 20.6 -22.0 -25.9 8.6 Residential, Multi-Family 3.4 9.4 -34.3 -20.5 32.5 5.9 Building Permit Valuation: Total Building Permit Valuation 8.6 12.3 -6.5 19.0 -14.9 3.5 Total Residential Valuation 7.3 11.5 1.8 -13.7 -14.4 5.7 Residential, Single-Family 4.4 13.7 23.5 -20.3 -29.3 7.7 Residential, Multi-Family 6.8 13.6 -26.3 -17.5 10.9 5.5 Additions, Renovations 17.5 1.1 5.5 15.2 -9.3 2.2 Total Nonresidential Valuation 10.2 13.3 -171 70.1 -15.4 1.7 e = Estimate f = Forecast 1A11 I 2 \NH L(.)UNI \'AIIAII.I ANNUAL HISTORY AND FORECASTS: 2015-2020 21 DECEMBER 2019 LEVELS 19:1 19:2 19:3 19:4e 20:11 20:21 20:31 20:41 Payroll Employment (Thousands): Total Payroll Employment 1,656 1,670 1,665 1,699 1,681 1,688 1,682 1,716 Mining & Natural Resources 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.4 Construction 105 107 109 110 107 110 113 113 Manufacturing 161 159 159 161 159 158 157 159 Durable Goods 119 118 117 120 118 117 117 119 Nondurable Goods 42 42 41 41 41 41 40 41 Services 1,240 1,238 1,245 1,262 1,249 1,253 1,258 1,275 Trade, Transportation & Utilities 260 259 260 263 259 259 260 263 Wholesale Trade 79 80 79 76 79 80 80 76 Retail Trade 151 149 151 157 151 149 151 157 Transportation & Warehousing 26 26 26 27 27 27 27 27 Utilities 3 3 3 3 3 3 3 3 Financial Activities 117 116 116 116 115 114 114 115 Information 26 27 26 26 26 26 26 26 Professional & Business 322 322 327 334 329 327 331 339 Education & Health 232 234 232 238 239 239 237 243 Leisure & Hospitality 224 229 231 231 229 233 236 236 Other Services 52 53 53 54 53 54 54 54 Government 164 166 152 166 165 167 153 168 Federal Civilian Government 11 11 11 Il Il ii 11 II State & Local Government 153 155 141 155 154 156 143 157 Personal Income ($ Millions): Total Personal Income 56,930 57,279 57,638 58,952 59,564 59,784 60,169 61,534 Taxable Sales (S Millions): Total Taxable Sales 15,819 17,477 17,469 19,015 16,377 17,957 17,961 19,549 General Merchandising and Clothing 2,117 2,418 2.425 3,125 2,172 2,485 2,511 3,245 All Food and Drink 2,630 2,749 2,760 2,779 2,672 2,798 2,809 2,835 Motor Vehicles and Parts 2,253 2,468 2,639 2,677 2,410 2,636 2,791 2,815 Service Stations 902 1,120 1,056 1,024 911 1.083 1,046 1,028 All Other 7,917 8,721 8,589 9,410 8,211 8,955 8,804 9,625 Existing Homes: Sales, Single-Family & Condo 5,602 8,619 8,428 7,348 6,416 9,650 9,220 7.726 Median Price, Single-Family 799,500 837,333 826,483 803,302 816,706 863,578 855,629 836,474 Price Index (2009= 100), Single-Family 158.1 165.6 163.4 158.8 161.5 170.8 169.2 165.4 Affordability Index, Single-Family 68.7 68.9 73.3 77.8 76.3 71.6 727 76.0 Building Permits: Total Residential Permits 2,177 2,129 2,695 1,417 2,310 2,308 2,886 1,489 Residential, Single-Family 703 826 775 641 737 925 856 679 Residential, Multi-Family 1,474 1,303 1.920 776 1,573 1,382 2,029 810 Building Permit Valuation ($ Millions): Total Building Permit Valuation 1,442 1,406 1,134 1,362 1,509 1,450 1,179 1,393 Total Residential Valuation 693 595 599 488 718 641 641 511 Residential, Single-Family 255 302 244 217 264 335 268 231 Residential, Multi-Family 326 163 238 79 340 174 253 84 Additions, Renovations 112 129 117 192 114 133 120 196 Total Nonresidential Valuation 749 811 535 874 791 809 537 882 e = Estimate f = Forecast HR;\NHI (UIIN H \.\RL\H I IARLE H QIJARTERIX HISTORY AND FORECASTS: 2019:1-2020:4 22 ECONOMIC & BUSINESS REVIEW I I UI\N ii L NI Y \'AI&I.\RL.! QUARTERIX HISTORY AND FORECASTS: 2019:1-2020:4 YEAR-TO-YEAR PERCENTAGE CHANGES 19:1 19:2 19:3 19:4e 20:11 20:2f 20:3f 20:41 Payroll Employment: Total Payroll Employment 1.3 1.3 1.2 1.6 1.5 1.0 1.0 1.0 Mining & Natural Resources -5.7 -3.6 -3.0 -3.7 4.2 4.4 4.4 -4.0 Construction 1.7 0.8 0.5 1.5 1.9 3.1 3.7 3.4 Manufacturing 0.7 0.0 -0.9 -1.4 -1.4 -1.1 -1.0 -1.0 Durable Goods 15 0.4 -0.3 -1.2 -1.0 -0.9 -0.7 -0.8 Nondurable Goods -1.3 -1.3 -2.3 -2.1 -2.3 -2.0 -1.9 -1.8 Services 2.6 1.7 1.5 0.7 0.8 1.2 1.1 1,0 Trade, Transportation & Utilities -0,3 -0.4 -0.3 -03 -0.2 -0.1 0.0 0.1 Wholesale Trade -0.4 -0,1 -0.8 -0.6 -0.4 -0.1 0.2 0.3 Retail Trade -0.7 -0.9 -0.3 -0.5 -0.4 -0.4 -0.4 -0.2 Transportation & Warehousing 2.4 1.5 1.4 1.3 1.3 1.5 1.4 1.2 Utilities -1.5 -1.3 -0.9 -0.8 -0.4 -0.3 -0.3 -0.2 Financial Activities -2.5 -2.6 -2.4 -2.1 -1.6 -1.5 -1.6 -1.5 Information -0.7 -0.6 -13 -1.8 -2.0 -2.2 -2.0 -1.7 Professional&Business 3.9 3.0 2.6 2.3 2.1 1.8 1.5 1.3 Education & Health 4.1 4.0 3.7 3.2 2.8 2.5 2.2 2.0 Leisure & Hospitality 2.9 2.3 2.2 2.1 2.1 2.0 2.2 2.1 Other Services 2.9 2.4 21 1.8 1.9 1.8 1.4 1.4 Government 0.2 0.7 0.9 1.0 1.0 1.0 1.0 1.0 Federal Civilian Gov emmeift -0.3 -0.5 -0.8 -1.0 -1,1 -1.3 -1.3 -1.3 State& Local Government 10. 3 0.8 1.0 1.1 1.2 1.1 1.1 1,1 Personal Income: Total Personal Income 4.7 4.6 4.4 4.7 4.6 4.4 4.4 4.4 Taxable Sales Total Taxable Sales I 5 4.7 3.4 3.9 3.5 2.7 2.8 2.8 General Merchandising and Clothing -1.7 4.3 3.4 3.2 2.6 2.8 3.5 3.9 All Food and Drink 3.8 2.2 1.9 2.0 1.6 1.8 1.8 2.0 Motor Vehicles and Parts 4.9 7.8 6.5 7.3 7,0 6.8 5.8 5.2 Service Stations -9.8 3.0 -3.3 -0.1 1.0 -3.3 -0.9 0.5 All Other 22 5.0 3.9 4.2 3.7 2.7 2.5 2.3 Existing Homes: Sales, Single-Family& Condo -16.5 4.2 4.9 13.4 14.5 12.0 9.4 5.1 Median Price, Single-Family -0.5 0,8 -0.5 0.8 2.2 3.1 3.5 4.1 Price Index (2009=100), Single-Family -0.5 0.8 .-0.5 0.8 2.2 3.1 3.5 4.1 Affordability Index, Single-Family 5.1 11.1 17.1 20.7 11,0 3.8 -0.9 -2.2 Building Permits: Total Residential Permits -7.6 132 7.5 4.0 6.1 8.4 7.1 5.1 Residential, Single-Family -377 -29.2 -21.6 -7.1 4.8 12.0 10.5 5.9 Residential, Multi-Family 20.1 82.7 26.5 15.5 6.7 6.1 5.7 4.4 Building Permit Valuation: Total Building Permit Valuation -10.9 -28.9 -15.5 1.4 4.7 3.1 3.9 2.2 Total Residential Valuation -14.4 -16.6 -20.2 -2.7 3.7 78 7.0 4.6 Residential, Single-Family -39.3 -27.8 -32.8 -9.0 3.5 10.7 9.8 6.1 Residential, Multi-Family 30.1 2.8 -5.0 17.8 4.5 6.6 6.2 5.8 Additions, Renovations -19.1 -4.9 -14,4 -1.9 1.6 2.4 2.7 2.3 Total Nonresidential Valuation -7,5 -35.9 -9.6 3.8 5.6 -0.3 0.4 I 0 e = Estimate f = Forecast DECEMBER 2019 23 A FAULTY REPORT LEADS TO FAULTY STATE POLICY BY JIM DOTI Jim Doti is president emeritus and professor of economics at Chapman University. A condensed version of this article was originally published in the Orange County Register on September 6, 2019. Governor Newsom has proposed a $1.75 billion "Marshall Plan" for affordable housing to meet a goal of producing 3.5 million new housing units in California by 2025. On the legislative front, a sweeping new bill introduced by State Senator Scott Wiener, SB 827, mandates zoning changes that will permit dense housing developments in many parts of the state, including most of the land in several major urban cities. The empirical basis for the Governor's "Marshall Plan," SB 827 and other legislation is a McKinsey & Company report, "A Tool Kit to Close California's Housing Gap: 3.5 Million House by 2025." This report has received widespread recognition and acceptance and has led to an outcry for forceful state intervention in California's housing market. Yet, the underlying methodology of this report is flawed. Moreover, its policy recommendation of building 3.5 million homes in California by 2025 isn't feasible. The McKinsey report's finding of a housing shortage in California is based on a simple but faulty premise: since the number of housing units per 1,000 persons in California is significantly lower than the average for New Jersey and New York, California will need to build 3.5 million units by 2025 to match New Jersey and New York. To do that, California will need to produce 2 million more housing units than what would normally be expected. There's a lot to quibble about in these findings. The McKinsey authors should have used occupied housing units instead of total units to account for the sizeable number of vacant homes. The report also ignored the almost one million people housed in group quarters like correctional institutions. I also found it odd that the critical value used in the report is "housing per 1,000 persons" rather than the more intuitively understandable "persons per household." But these are small points. The basic problem with the McKinsey report is the implicit assumption that the ratio of housing units per capita is a meaningful measure of a state's housing supply. It isn't. The McKinsey study, for example, lists Utah as the state with the lowest number of housing units per capita at 347, even lower than California's 358. But Utah's low housing ratio isn't explained by an inadequate supply of housing. It's explained by the fact that its average household size is 3.14 as compared to a national average of 2.64. That, in turn, is explained by its dominant religious and cultural values that have resulted in a greater average number of children per family in the state. With larger families, Utah just doesn't need as many homes. On the other side of the spectrum, Maine has the highest number of housing units per capita at 547. But that's not because Maine is blessed with a bountiful supply of housing. The actual explanation is that jobs and people have been moving out of Maine as its economy has suffered and permanently lost much of its employment base. Many homes in Maine are also vacation residences that are empty most of the year. Including vacation homes will certainly increase the housing per capita ratio but in no meaningful way. In addition, there are many other factors that affect a state's housing per capita ratio that have lr\.AIC' C. II icijicc o t,rCAA CALIFORNIA little or nothing to do with whether a state is under or over housed. These include a state's divorce rate (more divorces require more homes), the proportion of its immigrant population (immigrants typically have larger families), and the average size of a home in a particular locale. Aspiring to New York's higher housing ratio, for example, makes no sense when one considers that the size of a New York home differs from that of California. While statewide data on home sizes are not available, they are at the city level. New Yorkers (all the five boroughs) claim an average of 1,124 square feet per residence which places it at the bottom of a list of 20 cities. In comparison, an average Los Angeles home has an average square footage of 1,895 square feet, 69 percent larger than New York's. The fact that home sizes differ means that any interstate comparison of the number of homes per capita is spurious. It's like comparing apples and oranges (no pun intended). Another factor to consider is that the Ca lit&orni a housing per capita ratio has been higher than New York's since at least 1990. If it has reached "crisis proportions" as the McKinsey study argues, one would expect that California's housing ratio would have diverged from New York's over time. In fact, as shown in the following figure, housing per capita has remained about the same for both states since 1990. That suggests that endemic socioeconomics and cultural factors account for the persistent differences in the housing ratios between the states rather than being explained by a deepening housing crisis. HOUSING PER CAPITA Nonetheless, the McKinsey authors ignore these problems regarding the validity of the housing per capita ratio and charge ahead with its conclusion that California needs to emulate New Jersey and New York by producing 3.5 million more housing units by 2025. That's an average of 500,000 units that will need to be built per year between now and then, a level of home building in California that's more than four times higher than current levels of production. Ignoring for the moment that there is no rational justification for such a draconian increase in housing construction, I will focus on whether such a ramp-up is even feasible. My calculations suggest that California would need to add 1.7 million more construction workers than the current 850,000 workers to meet the construction goal of 500,000 housing units. That doesn't even include the additional workers in finance, insurance, and real estate that will be needed to facilitate all the transactions that would take place. Who will fill all these jobs? Recall that the McKinsey study's basic goal is for California's housing ratio to equal the New Jersey and New York's average by 2025. But the only way that can happen is by placing existing Californians in more homes - not by increasing its population. Doing so would reduce the housing per capita ratio. But then there will be no additional workers to build, sell, or rent all the additional homes proposed to come on the market. That means the McKinsey study is not only baseless; it's internally inconsistent. What it proposes (more homes) defeats its stated objective (higher housing per capita ratio). In spite of these weaknesses, the McKinsey report is being used by Governor Newsom and other public servants as justification for enacting housing initiatives that will lead to greater government involvement and control of the state's housing market. While the Governor's "Marshall Plan" is full of ambition, it falls short on sound reasoning. Moreover, its policy recommendations are inherently impossible to achieve. Even more alarming, the plan is designed in a way for California to look more like New Jersey and New York. That's not who and what we are. '00 '10 3.0 2.8 2.6 2.4 90 DECEMBER 2019 25 THE WEALTH TAX PROPOSAL NOT READY, BUT ALREADY IN PRIME TIME BY HANK ADLERAND MADISON S. SPACH, JR. Hank Adler is an associate professor at Chapman University. Prior to his seventeen years as a member of the Aiyros faculty, he was a tax partner at Deloitte & Touche. Madison Spach, Jr., Esq. is a founding member of Spach, Capaldi & Waggaman LLP The following is a summarization of "The National Wealth Tax: Unconstitutional and Unworkable, " published in Tax Notes, November 4 and ll, 2019. Senator Elizabeth Warren has proposed an annual "wealth" tax of 2% for individuals with net assets in excess of $50 million, increasing to 6% for "wealth" in excess of $1 billion. Senator Bernie Sanders has proposed an annual wealth tax starting at 1% on "wealth" and moving progressively to 8% on wealth in excess of $10 billion. While it may be difficult to interest all but a few in the debate over a tax applicable only to ultra- millionaires, the history of the income tax, which started the same way, should inspire a sense of alarm in even those who would not be directly affected by the proposals. Both plans to tax wealth are proposed to begin at exceptionally high levels of wealth, but once enacted, Congress would forever be free to follow the example of the national income tax to consistently increase revenue from such a source by lowering the threshold amount or raising the rate. Seemingly, in an effort to validate this concern, only a few months after Senator Warren proposed a maximum 3% "wealth" tax, Senator Sanders proposed a maximum 8% "wealth" tax. And then in November, Senator Warren doubled her maximum "wealth" tax from 3% to 6%. A primary issue with Senator Warren and Senator Sanders's wealth tax proposals is that they propose to lay direct taxes without apportionment to the states. The authors submit, based on the evolution of the Direct Tax Clause included within the Constitution that, absent a constitutional amendment granting Congress the power to impose an unapportioned tax on the ownership of real and personal property, a national wealth tax is unconstitutional. One need only look to Chief Justice Roberts' brief discussion of direct taxes in N.FI.B. v. Sibelius in 2012 to conclude that these wealth tax proposals would likely not survive a challenge to their constitutionality. There is no indication in NFIB or any other of the Supreme Court's recent decisions to suggest a majority of the current justices would find a wealth tax allowable under the Direct Tax Clause. We admit that while we find the constitutional issue somewhat free of doubt, some very bright people have differing views on the constitutionality of a wealth tax. Following the signature of the President of the United States on a wealth tax bill passed by Congress, a lengthy court fight would begin. Even before the court fight began, taxpayers would begin to sell assets to pay their wealth tax. The net proceeds from these sales would be reduced by accompanying state and federal income taxes. These net proceeds would be used to pay the wealth tax. The result would be that taxpayers required to pay a wealth tax would also be subject to additional income taxes. The combined taxes would be the reduction in net worth attributable to the wealth tax. Within a very short period, taxpayers would simultaneously be filing their income tax returns and filing refund claims as they await a decision from 26 ECONOMIC & BUSINESS REVIEW the Supreme Court. The upset to the economy and to the lives of these taxpayers and their businesses would be sensational. Nothing could be worse. Anything reasonably approaching the magnitude of imposing a wealth tax belongs as a constitutional amendment and not as an Act of Congress. Anything that would have such a dramatic impact on families and that economy and could easily be determined to be unconstitutional must be pursued as a constitutional amendment. What also should not and cannot be lost in the analysis of Senator Warren and Senator Sanders's plans are the major flaws and accompanying naivety in the underlying thought processes and assumptions made to support them. Neither Senator Warren's nor Senator Sanders's proposals tax net worth; their proposals tax "wealth" without consideration of federal and state income taxes. The proposals do not contemplate that taxpayers would be fqrced to sell assets to pay the wealth tax. As a result of selling assets and paying the applicable income taxes, the reduction in an individual's net worth to pay both the resulting income taxes and the wealth tax would be significantly greater than the wealth tax rates proposed by both Senator Warren and Senator Sanders. As a result of taxpayers having different tax basis in their assets, taxpayers with identical "wealth" as calculated in these proposals would have dramatically different reductions in their net worth after paying both the wealth tax and their applicable income taxes from selling assets to pay the tax. Many taxpayers holding real estate for decades would find that selling property, paying off the mortgages and the applicable income taxes would not leave any funds to pay the wealth tax that was calculated as the fair market value of the property less third party debt. One of the frightening aspects of the wealth tax proposals is that if there is a wealth tax, the ultimate payors of whatever wealth tax and applicable income taxes paid would or could be charities. Here, for example, we look to Warren Buffett. It has been widely reported that Mr. Buffett plans to leave each of his three children $2 billion and the rest of his estate will be given to charity. We make the following reasonable assumptions with respect to Mr. Buffett's estate plan: (1) $10 billion is set aside for distributions to his children and applicable federal estate taxes; and (2) the remainder goes to various charities. Therefore, at death, he plans to leave about $72 billion to charity. If Mr. Buffet sells assets to pay his wealth tax and then pays both his applicable wealth and income taxes, the funds paid to the government will reduce his estate. Based on his assumed will as above, his heirs will receive exactly the same inheritance, the federal government will receive exactly the same estate tax, but his donations would be reduced dollar for dollar equal to the amount of his income taxes paid to create the funds necessary to pay the wealth tax and the amount of the wealth tax itself. If Mr. Buffett paid $15 billion of wealth and necessary income taxes as the result of the wealth tax before his death, every dollar of taxes paid would, dollar for dollar, reduce the amount of funds left to charity at his death. The wealth tax would be paid for by the specific charities included in his will. Of the billionaires who would be subject to the wealth tax, hundreds have promised to leave 50% of their estates to charity. Likely, each one has a will similar to that of Mr. Buffett and therefore their charities would be the ultimate payor of the wealth tax. There are a plethora of other major issues with respect to the wealth tax proposals, which have not been reasonably vetted. These include the impact to the economy and existing pension plan valuations, general liquidity of the taxpayers subject to a wealth tax, the ability of private businesses and family farms to remain private, valuations, etc. The proposed wealth taxes by Senators Sanders and Warren have not been subject to either robust debate or scrutiny by the Congressional Budget Office. Ignoring the obvious constitutionality issues, the undiscussed impacts to charity, the economy and basic fairness of the proposals are the elephant or perhaps the herd of elephants in the room. One quickly gets to H.L. Mencken who in 1920 said, "There is always a well-known solution to every human problem - neat, plausible and wrong." DECEMBER 2019 27 BANK OFAMERICA BANKOF AMERICAS CHAPMAN CONNECTION Why is there a bronze bust of Bank of America founder A.P. Giannini at Chapman University? Early in his career, Giannini was a banker and produce broker who bought fruit from entrepreneur Charles C. Chapman, originator of the famed Valencia variety of oranges. Giannini admired Chapman's business acuity, and asked him to join the board of his Bank of Italy. It was the beginning of a close personal and professional relation- ship that would last all their lives, with Chapman playing a very special and little-known role in Bank of America's fabled history. Chapman was also a banker, having founded a small -bank in Los Angeles. He wasn't fond of the name of Giannini's bank, despite his admiration for the man and the institution he was building. Chapman thought his own bank should have "a name emphasizing loyalty to our own country." So he proposed calling it Bank of America - and that was the name that went on the charter of Chapman's new bank in 1923. Both banks grew rapidly. Soon Giannini offered to buy Chapman's bank, and the transaction was car- ried out. It turned out, Chapman said later, that "the name of our institution was an important factor in the deal, for the entire Bank of Italy chain quickly became Bank of America." Giannini, eager to expand in lucrative Southern California, first merged Bank of America with the Liberty Bank he had acquired in the north, as well as two other compa- nies, and called the new entity Lib- erty Bank of America. In 1930, he merged all his financial institutions into a single entity he called Bank of America. So it was Charles C. Chapman who actually named the company that is today one of the world's most admired financial services institutions and best-known American brands. Chapman served on the Bank of America board into the 1940s. He and Giannini were both innovative business leaders who shared many interests, including a strong belief in the importance of education. This spurred Chapman's philanthropic support for California Christian College, renamed Chapman Col- lege in his honor in 1934, which became Chapman University in 1991. Giannini's interest led to a tradition of generous funding for education that continues stronger than ever today, including partnerships with Chapman University and many other colleges, universities, primary and secondary schools and extracurricular programs. Our generous funding contin- ues. This year in Orange County, Bank of America will provide more than $2 million to support non-profit groups through grants, event spon- sorships, associate matching gifts and volunteer efforts. Although we participate in many philanthropic activities in the county, one of our main areas of focus is supporting education. Without an educated workforce, America will not be able to compete. We believe there is no greater investment we can make than in the health, well-being and education of our young people. They represent our future. . . and our greatest asset. CHARLES C. CHAPMAN PLAYED A VERY SPECIAL AND LITTLE-KNOWN ROLE IN BANK OF AMERICA'S FABLED HISTORY. Bust of Bank of America founder A.P. Giannini on the Chapman University campus. ECONOMIC & BUSINESS REVIEW 28 ECONOMIC FORECAST UPDATE WEDNESDAY, JUNE 10, 2020 2 p.m. Reception • 3 p.m. Conference MARYBELLE AND SEBASTIAN P. MUSCO CENTER FOR THE ARTS Chapman University One University Drive Orange, California 92866 (714) 744-7958 Chapman. edu/economicforecast DECEMBER 2019 3 ECONOMIC FORECAST SPONSORS Sponsored by: BANK OF AMERICA ARGYROS FAMILY FOUN DATION PLATINUM GOLD SILVER BRONZE AYCO £ SOLOHA'. I&CHS COMP*N FEDERAL CREDIT UNION CoreLogic C&L REFRIGERATION SCHOOLSFIRST .J First Am erican RITECARE CHILDHOOD LANGUAGE CENTERS OF CALIFORNIA \ttierTrt IYPSTNL$T SIat,fl M*Z4,.4011fl YP YASSAI PROPERTIES MEDIA SPONSORS ORANGE COuN1Y Busrss JOURNAL The Csunfryofilithiez' **wwocbj cnn Cos AnlcsTimes 7SOUTHERfl CflhIFOROlfl 1)AIIxd)PII.o'rdiiii NEWS GROUP •current as sf11118119 ARGYROS SCHOOL BOARD OF COUNSELORS Hank Adler, Chapman University Mike Ahmar, Partners Bank of California Erik Anderson, A. Gary Anderson Family Foundation The Honorable George L. Argyros '59, Arnel & Affiliates Shannon Argyros Don Bailey, Asrenas Biotherapeutics, Inc. Cyrus Bozorgi, Veros Credit Phillip Case, Rondell Homes Mark Clemens, KPMG LLP Adam Cohen MBA '09, Union Bank Christian Cuzick, Johnson & Johnson Vision Jerry Cwiertnia, Poly-Tak Protection Systems, Inc. Randy Davis MA. *72 Ph.D., RCD Consulting John DeCero, Mechanics Bank Christopher Do Rosa, Cigna James Ducotc MBA '02, R. J. Noble Company Lucy Dunn, Orange County Business Council Robert Elliott, Elliott Investment Company Andy Fathollahi, A-Type Ventures, LLC Robin Foliman-Otta EMBA '15, Markall, LncJRA Industries, LLC Alex Hayden '95, CBRE Joe Hernandez EMBA '09, City National Bank Patty Juarez, Wells Fargo Commercial Banking Elim Kay '09, Zaka, Inc. Kim Letch, Ernst & Young LLP Vance Maddocks, CBRE Strategic Partners U.S. Rick Rayson. Deloitte & Touche LLP Richard Reisman, Orange County Business Journal Scott Sherman, Ingram Micro Frank and Christine Sims, MacArthur Sims Properties Donald Sodaro, Hanford Hotels, Inc. Ronald Soderling, RESCO Development, Inc. Allen Staff, Bank of America Khanh Tran, Aviation Capital Group Jason Traut '98, Superior Press, Inc. Diane Uehlinger '80, Bank of Hope Kelly Vlahakis-Hanks EMBA ItI, Earth Friendly Products Robert Waltos, Jr., True Path Financial Nella Webster O'Grady '71, Miracle Mile Advisors Roger Weninger '85, Moss Adams LLP Ted Wilm, PricewaterhouseCoopers LLC For information, please contact The George L. A,gyros School of Business & Economics, Office of the Dean (714) 628-7362. 32 ECONOMIC & BUSINESS P..E\*' CHAF'MAN UNIVERSITY provides personalized education of distinction that leads to inquiring, ethical and productive lives as global citizens. ill E GEORGE L ARGYROS SCHOOL OF BUSINESS AND ECONOMICS provides students and alumni with unmatched access to exceptional teachers and scholars, a network of top executives and opportunities for practice-based business education in one of the nation's most dynamic business communities. THE A. GAkY ANDERSON CENTER FOR ECONOMIC RESEARCH provides data, facilities and support to encourage faculty and students to engage in economic research of high quality, and to widely disseminate the results. CALIFORNIA FORECAST SALES TAX TRENDS.,.. AND ECONOMIC RIVERS. HdL provides relevant information and analyses on the economic forces affecting Californi'a's local government agencies. In addition, HdL's Revenue Enhancement and Economic Development Services help clients to maximize revenues. HdL serves over 500 cities, counties and special districts in California and across the nation. Delivering Revenue, Insight and Efficiency to Local Government Since 1983 HDL CONSENSUS FORECAST - JANUARY 2020 STATEWIDE SALES TAX TRENDS HdLO Co M 3anies 2019 /20 J 2020/21 TOTAL 2.4% 1.8% 2019/20 1 2020/21 Autos/Transportation -1.5% 10.3% Auto and transportation receipts fell this quarter for the first time since the end of the Great Recession, but this deterioration was largely the result of an aberration rather than a symptom of economic decline. The anomaly was caused by the fulfillment of a large backlog of orders for a recently released model by an emerging vehicle manufacturer, which spiked results in the third and fourth quarters of last year. Results are otherwise expected to be flat to slightly down over the next year. Sales activity will be negatively impacted by the high price of today's vehicles but sustained by record manufacturer incentives. Building/Construction 1.6% I 2.1% As the quantity of permits issued for residential and commercial developments continues to decline, the value of permitted projects is beginning to drop as well. Meanwhile, prices for materials are rising but the lack of demand for lumber is a drag against the volume of total sales. The good news is that there are plenty of permitted projects left to be built since construction timelines have been extended from the lack of available workforce. Infrastructure projects are expected to keep construction crews busy for some time. Overall, this sector will reflect reasonable activity, however, tax gains will be sluggish through the 2020-21 fiscal year. Business/Industry 2.4% I 1.8% Labor shortages and ongoing uncertainty over trade and tariff policies appear to be slowing capital investment decisions and new orders. California's high-tech service economy is expected to do better than the country as a whole with most analysts predicting more modest growth in procurement of equipment and supplies to support healthcare, food processing, logistics/warehouse operations and information/data technology. Much of the group's projected gain is related to the acceleration of online shopping which shifts consumer retail tax revenue from brick and mortar stores to industrial zoned logistics centers. Minimal growth and some declines are expected across other categories. 101mou Food/Drugs 1.9% I 1.5% Customers routinely express the desire to shop locally. Grocery chains are meeting this demand by establishing same day deliveries for online alcohol purchases and partnering with companies to establish micro-fulfillment centers. Pharmacies, also sensitive to purchaser preferences, are embracing technology in various ways. Artificial intelligence is being used more to create drugs while specialty medication and 3-D printed prescriptions become more common. Recent healthcare megamergers will impact this industry in 2020 and beyond. Taxes from this group will also grow as more cannabis businesses are licensed and become operational at the local level. I ;; I A Fuel/Service Stations 1.0%11.0% Higher gas prices in California due to refinery issues ahead of the holiday shopping period may push consumers to reprioritize spending. Should supply remain tight into the spring of 2020, future summer fuel pricing could reach levels not seen since 2014 when crude was over $100! barrel. Currently, global crude oil appears stable, however, tension in the Middle East remains and OPEC appears ready to reduce production output levels, both of which will increase future cost per barrel. General Consumer Goods -0.1% 1-0.4% As retailers invest in customer engagement through social media platforms and omnichannel capabilities, they are leveraging mobile technology to drive buyers into physical stores. Greater use of smartphones will improve buy- online-pickup-in-store (BOPIS) services which can influence additional in-store purchases. Changes in consumer attitudes by younger shoppers are fueling the rise of recommence. Off-price or discount shopping is still a major trend, but the resale market is expected to double its size in the next five years. Low unemployment and solid wage growth are good indicators although in-store sales should stay flat or dip moving into 2020. 11' Restaurants/Hotels 2.5% I 2.1% Restaurant traffic has remained sluggish as low unemployment is making hiring and retention extremely difficult while food service options intensify competition within categories. Restaurant operators increase menu prices as labor costs and lease rates continue to rise. In the short term, the rising menu prices offset the slowing traffic stabilizing restaurant sales tax revenue. im State and County Pools 12.4% 16.5% - Business to business plus consumer spending on out-of- state merchandise will surge as companies expand digital investments while managing shipping wars, data privacy and logistic challenges. This segment is expected to stay strong and outpace all other traditional sales tax groups without letting up. Early results from the Wayf air decision implementation, which launched in the second quarter of 2019 under AB147, added new revenues at the State and local level. The marketplace facilitator phase started October 1st; current and next year forecasting comprises Wayfair's total impact on anticipated use taxes distributed through the countywide pools. Proposition 172 projections vary from statewide Bradley-Burns calculations due to the state's utilization of differing collection periods in its allocation to counties. HdL forecasts a statewide increase of 3.51% for Fiscal Year 2019/2020 and a gain of 1.44% in 2020/2021. HdL Companies I hdlcompanies.com 0 111~ CA Unemployment Rate 4.2% I 4.1% Despite a nagging perception that there are murky clouds on the horizon, California's economy reached a number of significant milestones in the most recent quarter. The state's unemployment rate dipped to 3.9%, which represents a new record low - all while employment and wages reach all-time highs. The longer the current expansion persists, the closer we are to the next recession, but business cycles do not die of old age, and at present, there are few signs of a slowdown in the state's economy. CA Median Existing $488,900 1 $509,500 Home Price Home price growth has shown some signs of exhaustion over the past year. The median price for a single-family home in California grew 2.2% over this period, which when adjusted for inflation, means that price growth has effectively been flat. Following the run up in prices in recent years, such a slowdown is not surprising; after all, when the median home price in a place like San Francisco stands at $1.4 million, the room for sustained price inflation is limited, no matter the strength of the local economy. To be sure, lower interest rates should spur home price growth in the state, but it's unrealistic to expect the rate of growth we've seen in recent years to continue. on CA Residential 111,310 I 124,150 Building Permits The issue of home building permits is a cause for concern. The supply of building permits peaked in the first quarter of 2018, and permit growth turned negative in the third quarter of that year. This growth has remained negative throughout 2019. Constrained housing supply will continue to place upward pressure on home prices and could also limit growth of the state's labor force. At least at the national level, the third quarter saw residential investments contribute to overall growth. Hopefully this continues and materializes within California sooner rather than later. NATIONAL AND STATEWIDE ECONOMIC DRIVERS (4 4 BEACON ECONOMICS 2019/2012020/21 U.S. Real GDP Growth 2.3% 1 2.0% What is most notable about current GDP data is just how steady growth has been despite all the frantic headlines. U.S. GDP growth was 2.8% in 2017, 2.5% in 2018, and has averaged 2.4% for the first three quarters of 2019. Throughout this entire period consumer spending has been the primary driver of growth and that spending is now growing at roughly the same pace as U.S. GDP. Much of the overall confidence surrounding the ongoing health of the U.S. economy sits with the consumer. The one weak spot in the nation's GDP data in 2019 was in business investment, although spending is down in that area for a number of specific reasons, but not too many general ones. Weak export data has played a role in slowing investment but the overall impact of the trade war with China has been highly overstated. The biggest issue for U.S. exports isn't China, but rather a U.S. dollar that hasn't been this expensive in global currency markets since 2002. Alongside a weak global economy, the dollar's value actually illustrates the resilience of the U.S. economy overall. U.S. Unemployment Rate 3.7% I 3.8% What will not make negative headlines is the actual health of the United States economy. Pessimistic press coverage and punditry aside, the sum total of indicators for the year show that the U.S. economy is continuing to grow at the same steady rate that has now become the hallmark of the longest expansion on record. The health of the consumer and, therefore, the growth of the economy is being supported by record tight labor markets. The U.S. unemployment rate fell to 3.6% in the latest quarterly read, and has trended below the national jobs opening rate for two years. Competition for scarce labor resources has led many workers to receive a significant increase in earnings, and a growing share of national income. In 2014, compensation for employees was 60% of national income compared to 63% in 2019. CA Total Nonfarm 1.7% I 1.4% Employment Growth Since October 2018, California's economy has added 308,000 jobs, which is equivalent to a 1.8% year-over-year increase, exceeding the nation's growth rate of 1.4% over the same period. This rate of growth is well above the state's long-term employment growth rate, which has averaged 1.2% per year since 1991. Within the state, we see considerable variation in job growth rates by region. Perhaps the most impressive performance within the state occurred in the San Francisco Bay Area. Together, San Francisco, San Jose, and Oakland added jobs at a rate of 3.0% and accounted for one-third of California's job growth over the past year. Fully 40% of the state's job growth over the past year was concentrated in just two sectors: Health Care and Social Assistance and Leisure and Hospitality. Secular trends, such as a growing elderly population, account for growth in Health Care and Social Assistance employment, while growth in Leisure and Hospitality employment reflects underlying strength in the health of the consumer. The more confident consumers feel, the more likely they are to travel or dine at a restaurant. Beacon Economics I BeaconEcon.com HdL Companies 120 S. State College Blvd., Suite 200 Brea, CA 92821 Telephone: 714.879.5000 • 888.861.0220 Fax: 909.861.7726 California's allocation data trails actual sales activity by three to six months. HdL compensates for the lack of current information by reviewing the latest reports, statistics and perspectives from fifty or more economists, analysts and trade associations to reach a consensus on probable trends for coming quarters. The forecast is used to help project revenues based on statewide formulas and for reference in tailoring sales tax estimates appropriate to each client's specific demographics, tax base and regional trends. Beacon Economics Southern California Office 5777 West Century Boulevard, Suite 895 Los Angeles. CA 90045 Telephone: 310.571.3399 Fax: 424.646.4660 Beacon Economics has proven to be one of the most thorough and accurate economic research/analytical forecasting firms in the country. Their evaluation of the key drivers impacting local economies and tax revenues provides additional perspective to HdL's quarterly consensus updates. The collaboration and sharing of information between Beacon and HdL helps both companies enhance the accuracy of the work that they perform for their respective clients. Hd L C o rn anies 714.879.5000 1 hdlcompanies.com