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The Nooner for Thursday, March 12, 2020, presented by SYASL Partners
Well, it's Thursday. There is a light at the end of the tunnel -- of the week, that is. I have a feeling the broader tunnel will has a much longer voyage.
It may not have set in ("gottin' real" for the kiddos) for many folks until yesterday. Whether it was a significant shift in tone by the President with a 30-day travel ban from Europe, which is exempts American citizens and permanent residents, although Vice President Pence said on CNN that and such exempt travelers from Europe would be expected to self-quarantine for 14 days upon return. Basically, European spring break trips to most countries are out the window.
Many weren't watching the President. Perhaps they were watching an NBA game. It got real fast when it was announced that the NBA season was suspended after a Utah Jazz player tested positive. It got super real down the street from Nooner Global Headquarters when Kings fans were sitting in their seats ready to cheer our team on against the New Orleans Pelicans, one team of which would have been tied for the 9th spot and three games out of the coveted eighth and final playoff spot in the Western Conference. When it was announced that the game was postponed and people should leave in an orderly fashion, fans loudly booed
It got real for hourly ushers, ticket-takers (scanners now), concessionaires, and cotton candy hawkers. It got real for Uber and Lyft drivers that do big business around the arena on game nights. It got real for restaurant and bar workers around the arena.
The same will be true tonight at the sparkly new Chase Center in San Francisco where, even before the NBA's season suspension, the City and County of San Francisco banned all gatherings of over 1,000, meaning an audienceless Warriors game. It got real yesterday for those wanting to see their San José Earthquakes on the pitch Saturday night, a game required to be postponed under the Santa Clara County public health order that is the same as SF, and preceded it with judicial blessing. The same will be true on March 19 at the San José Sharks game unless some miracle happens.
As I've written, now the NHL and MLS have also suspended their seasons and NASCAR will drive in ovals without fans. It just got real for basically anyone following sports, except for golf.
It's getting real on college and university campuses where seniors are saying goodbye to friends before they head home without knowing if they will have a graduation. It's getting real for high school seniors facing canceled prom dances. Faculty who abhor conducting their classes online are being forced to do. Some fear it for their jobs, but some are very reasonable. My cousin David Lay Williams is a political theory professor at DePaul University in Chicago. He has a Twitter thread on the topic. While I've actually taken a MOOC to just see what the experience is like, I can't imagine political theory online. I can't imagine much of law school online. These are, and should be, Socratic, discussion-oriented classes. They are about far more than the facts that you learn for a final exam. There's a reason why we crammed for two months for the bar exam -- to re-learn that which we briefly learned mostly in the first year of law school. But that 1L year was priceless for thinking, and that came from in-person discussions.
Life is changing. The above are all developments from the last 48 hours. It became real for every Californian at a different moment. In this world of several hundred television channels, on-demand services, and a shrinking newspaper industry. I've wondered over the last week if things would have been different if six weeks everyone was tuning in to Walter Cronkite in black and white telling us " and that's the way it is."
It will get worse before it gets better. That's not from me, but rather from Dr. Anthony Fauci, the Director of the National Institute of Allergy and Infectious Diseases in the National Institutes of Health. He's no political hack. He's been in the job since 1984. Six presidents.
For me, while my lungs are in pretty good shape right now, many of you know I spent a cumulative two years in the hospital growing up with asthma and immune problems. I'm being extra careful and not licking Bacteria Bear anytime soon, as I don't really want to return to severe lung problems. Life is too good now. I've been pretty hunkered down since getting back from Mexico City. I've been out to farmers market and Sunday street food and walks around the park, but I've turned down Kings tickets and am not using my movie tickets at DOCO anytime soon (thank goodness for rollover).
But, it's even more personal than that. On March 29, my sister and I were scheduled to head to Portland to celebrate my Gram's 100th birthday party. Folks were coming in from all over the west for it--many from vulnerable groups and areas of concern (Washington). Of course, for understandable reasons, it has been canceled. Few of us get the opportunity to celebrate a centennial for a grandparent. She is my only living one. But, it is what it is and we all have to take our own steps if we're going to weather the storm.
Some folks wonder why I am providing so much coverage in The Nooner -- which 8% of you pay for to ready about California politics and policy -- on the subject of COVID-19. Some have called me part of a media cabal trying to take down Donald Trump. Something say I'm hyping the results. Nothing could be further from the truth.
Nooner newbies may not know that before I even transferred to UC Davis for undergraduate and long before law school know that I spent a year working for the Cystic Fibrosis Foundation and three years working at Children's Hospital of Orange County, mostly in the Pediatric Intensive Care Unit. My training was as an EMT although much of my time was as unit secretary (better pay). I've donned protective gear and taken kids to the morgue who have died from contagious respiratory infections. I have friends with CF who have had lung transplants and will be immunocompromised for life. (I wrote about that during the vaccinations debates the last few years.)
So, I do think about the impact the spread of a virus has on us as possible asymptomatic carriers, and that includes school kids that are remarkably asymptomatic to COVID-19 relative to the flu and colds. There are estimates that 1% of the population in the United States could be affected, with obvious concentrations in the hot spots, including Santa Clara, California. That's 400,000 Californians. Most will not get sick, but all could affect vulnerable populations, including the elderly and those with underlying medical conditions. With her permission, I've written about my CF friend Donalyn in St. Louis a few times, but I think about her when I think of those with underlying medical conditions. She's roughly my age and doesn't live in a senior living home. But, she's just as vulnerable as she's had double lung and kidney transplants. Anyone around us could be vulnerable even if they look healthy.
For Nooner purposes, while I hope it does not, this has the potential for being the most consequential economic developments of many of our careers--worse than 9/11. I was watching it when it started in Asia. I have been watching it in Italy, where all restaurants and shops in the country other than grocery stores and pharmacies are closed. I sure hope we don't get to that in any part of the United States, but King County (Seattle) is getting closer by the day.
That's what became real last night.
We are now less than two months from the May Revise. I'll talk about some of the major issues that were totally unforeseeable when the Governor's January Budget was introduced below.
Take the unprocessed ballots with a grain of salt. Twenty-six counties that continue to submit ballot count updates haven't updated their unprocessed ballots since election night.
more after the jump...
CORONAVIRUS/COVID-19: I covered most of this above, so just a few items today.
more after the jump...
COVID-19 AND STATE AND LOCAL BUDGETS: This is long and complicated. Consider it a draft. Things are literally changing by the half-hour. But, for those of us in policy and politics, obvious the health of our families, friends, and ourselves comes first, but we can't ignore another dramatic impact of this crisis that is developing. I will likely continue to edit this item and welcome feedback from those of you smarter than me. But for now, here we go.
Only a few months ago, state and local budgets looked strong. After years of squirreling away acorns by Jerry Brown, the state has reserves that haven't been seen since the mid-70s (which led to Prop. 13, but I digress). We knew a recession would come some time leading to a downturn in state revenues, but the assumption was that it would be the normal ebb and flow of the business cycle, which already appeared to be slowing. Nobody expected to hear the screeching sound of tires.
To be clear, we're not technically in a recession, which is defined as two consecutive quarters of negative GDP. However, many analysts such as Mark Zandi of Moody's suggest it is more likely than not forthcoming. Thus, I expect the May Revision to be structured with such assumption.
First, let's talk about state revenues. Generally speaking, state revenues are driven by the "Big 3" revenue sources--Personal Income Tax ("PIT"), Sales and Use Tax, and Corporation Tax. In budgetese, 2019-20 would be "current year" or simply "CY." The "budget year" or "BY" would be 2020-21. Let's look at the projections for the Big 3.
Personal income tax: PIT is driven by withholding, quarterly, and April tax payments. Withholding is largely driven by salary and wage employment, quarterly by independent contractors and those salary and wage earners with spikes in earnings (i.e. stock sales), and April are settle-ups where we usually see the biggest payments particularly for capital gains among the highest earners in the state taxed at the highest rate.
We're already seeing layoffs and furloughs at ports, airports, and elsewhere. The hospitality industry is being hammered ("worse than 9/11") and that would range from hotels that have reduced occupancy from both business and leisure travel to restaurants and convention centers and associated businesses (A/V, convention services, and catering). Some of the biggest technology conferences in the world have been canceled in the Bay Area. That will lead to reduced monthly revenue in April-June of the CY (unless the situation is resolved sooner) and concomitantly the BY projections, which are based on the CY ("base year") and adjusted for assumptions in growth or decline. Unfortunately, the BY change is likely to be a negative. If you're following a bouncing ball, we have to lower that $101.2B PIT estimate in the CY column by some amount and also the $102.9B PIT projection in the BY column by the change in the CY and whatever the decline % change assumption is.
But, that's just on salaries and wages. We also have the capital gains/"unearned income" element of the PIT. I don't know what the Governor's January Budget proposal was based on, but the nonpartisan fiscal advisor to the Legislature ("LAO") estimated last November that the 2020 average S&P 500, the based broad-based measure of the stock market, would average 3,129 points. I have no crystal ball or I would shuffle my 457 around today. As I pull up the S&P 500 at 10:00am, it is currently at 2,653, but today is the low of the year. The peak was 3,386, but I think it's fair to assume we'll be nowhere near 3,129 average for 2020. I'm no economist and don't know how to predict it. Obviously, with a lot of selling, people may be realizing capital gains, so it works out as a mixed bag. It complicates the revenue estimates is all I know.
Sales and Use Tax: While PIT is highly variable, sales tax is usually slow and steady up and down with the business cycle. This is an entirely different situation. People are working at home (if at all). People are not going out to restaurants. Sports arenas are empty. We won't know new car sales for a month, but it's likely they have dried up over fears. Virtually every part of the economy is affected by sales tax. This will likely affect both CY and BY, as we likely won't have an "all clear" by the time the budget is put to bed by June 15.
Corporation Tax: You can draw your conclusions to both PIT and sales to understand that this will be similarly affected.
Local Government: A majority of sales taxes go to local governments and many have adopted supplemental sales taxes for general or specific purposes. Local governments will be hit hard by a decline in sales tax for as long as this crisis continues (and likely longer). Additionally, many local governments have a transient occupancy tax on hotels, which will be similarly reduced. For example, in Los Angeles County, it is 12%.
Let's think about those airport hotels that house international airline crews and travelers along Century Boulevard leading to LAX. It's unclear how long the China travel ban will last or whether the selective European travel ban will last more than 30 days. What is clear is that fewer hotel rooms have been used recently as flights had already been cut back and the decline will be amplified. During my previous life, I spent a lot of time in those hotels for conferences and other business travel. They rely significantly on these crews and travelers. For each $185 hotel room night, that's $22 in lost tax revenue for Los Angeles County.
Thus far, property values remain strong and these revenues are key to local government operations. Schools and community colleges rely on them as well and, to the extent they don't materialize for education (for Prop. 98 funding, not voter-approved local bonds), the state General Fund has to backfill the revenue. Thus, state budget-watchers will be watching property tax revenue closely along with their local counterparts.
The Good News: I mentioned above the acorns that former governor Jerry Brown squirreled away for a recession. We just had no idea that we'd likely be facing it so quickly and for this reason. Let's look at those reserves.
The Bad News: If the overall business climate continues, many local governments have not taken steps to create reserves in the manner that the state has let alone tackled things like pensions and unfunded retiree health obligations.
The state and locals have undoubtedly spent significant money responding to COVID-19 and will spend much more. To the extent schools are closed, that raises public safety costs as teens end up hanging out on the street.
I don't know how all this pencils out with the $8.3 billion approved by Congress to assist in the response. I'm sure we'll hear about that before long, but right now we're focused on putting the fire out before rebuilding the house.
The state could not only be eyeing its reserves to maintain the General Fund, but also the prospect of local governments facing bankruptcy (again). There are going to be some awful budget choices ahead, something that few members of the current Legislature have seen.
SD13 (San Mateo): For Assembly member Sally Lieber has been creeping up to challenge Republican Alex Glew (R) for the second spot in the race to succeed Senator Jerry Hill (D-San Mateo). She currently trails Glew by 1,998 votes, although the belief is that San Mateo has more unprocessed ballots than Santa Clara, where Lieber runs strongest. The winner of the second spot will face Josh Becker (D) in November in the safe Dem seat.
AD72 (Garden Grove-Westminster): Not surprising in ballot watchers, Democrat Diedre Nguyen moved ahead of Assembly member Tyler Diep (R) for the second spot in the November election. On Tuesday night, he was 17 votes ahead. (I errantly said 17 points, although it was clear from the vote totals I displayed below the narrative. Let's look at the numbers from last night:
cakedays and classifieds after the jump...
CAKEDAY: Happy birthday to Michael Faust and Lisa Maas!