California Forecast: Sales Tax Trends and · 2013 and early 2014, home prices remain well below their pre-recession peak of roughly $500,000 and the state contin - ues to experience

California Forecast:

Sales Tax Trends and Economic Drivers

HdL provides relevant information and analyses on the economic forces affecting California’s local government agencies. In addition, HdL’s Revenue Enhancement and Economic Development Services help clients to maximize revenues.

HdL serves over 400 cities, counties and special districts in California and across the nation.

“Good information leads to good decisions.”

January 2016

HdL Companies, 1340 Valley Vista Drive, Suite 200, Diamond Bar, CA 91765 909.861.4335 www.hdlcompanies.com

HdL Companies www.hdlcompanies.com

HdL Consensus Forecast – January 2016

STATEWIDE SALES TAX TRENDS

2015-16 2016-17 Autos/Transportation 8.8% 4.5%

Rising employment, pent up demand, unusually favorable financing incentives and low fuel prices have encouraged consumer spending on higher priced SUVs, pick-ups and luxury cars resulting in the sixth straight year of U.S. new car sales growth. 2015 sales are expected to exceed previous sales records set in 2000. Auto industry analysts are predicting that the trend will level off after 2016 as pent up demand subsides, interest rates rise and fuel prices recover.

Building/Construction 8.0% 7.0%

New residential and multi-family housing development continues to rise and projections from home improvement retailers remain optimistic. Commercial construction activity remains strong although the gains are primarily regional with strong demand for additional distribution centers and facilities for companies in the information technology and life science industries. Recent adoption of new federal transportation funding should help sales of related materials and supplies. The Federal Reserve’s move to increase short-term interest rates is not seen as a threat to new construction in the foreseeable future.

Business/Industry 4.0% 3.5%

Spending within the biotech, pharmaceutical and technology service industries remains strong and the state’s renewable energy goals will produce occasional peaks in use tax from related projects in some parts of the state. Climate change issues are forcing increased spending on agricultural chemicals for high value crops and orchards. However, recent reports show that capital investment in new equipment and supplies for many industrial segments have slowed or declined. Respondents cite the impact of the strong dollar on export activity, low commodity and energy prices, global market weakness and inflated inventories as factors in postponing future investments.

Food/Drugs 2.5% 2.5%

Overall consumer demand within this segment remains relatively stable but tax receipts are fragmented by turnover in retailers, increased online shopping/home delivery and expanding competition from big box and specialty retailers. Some grocers include sales of fuel in their sales tax returns which can also skew comparisons.

Fuel/Service Stations -13.6% 2.7%

OPEC’s decision to maintain current production levels and the slowdown in consumption by the Chinese economy has analysts projecting that crude oil costs will stay down longer than previously anticipated. However, California continues to pay substantially more than nationwide averages due to the state’s limited refinery and distribution capacities and more environmentally friendly blend requirements. Demands for an antitrust investigation into California refinery pricing practices may emerge as a major issue in 2016.

General Consumer Goods 2.6% 2.6%

Reports show that consumer spending is on the rise although lower prices and the popularity of non-taxable digital products and services are dampening sales tax gains. High-end retailers are also reporting that the strong dollar has slowed international tourist spending on luxury goods. The acceleration in online shopping continues to shift much of the growth in this segment from brick and mortar stores to the countywide allocation pools.

Restaurants/Hotels 6.6% 5.8%

Rising employment, fuel savings and a robust travel/tourism industry continue to create solid gains in sales tax revenues from this economic segment. Californians now spend more money in restaurants than on taxable goods at grocery stores. Recent surveys show that 48% of consumers would like to dine out more often than they are currently.

State and County Pools 9.2% 8.8%

Tax refunds resulting from a lawsuit challenging the application of sales tax levied on computer equipment service contracts substantially reduced third quarter receipts. Even so, the rise in online purchases of merchandise shipped from out-of-state, increased private vehicle transactions registered with the DMV and solid gains in long-term equipment leases and on-site installation sales makes this segment one of the leading tax gainers for many jurisdictions.

TOTAL 3.7% 4.6%

* 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 an increase of 4.4% for Fiscal Year 2015-16 compared to State Controller’s Office remittance totals in Fiscal Year 2014-15. A statewide gain of 4.8% is projected for Fiscal Year 2016-17.

Beacon Economics www.BeaconEcon.com

National and Statewide

ECONOMIC DRIVERSJanuary 2016

2015-16 2016-17 U.S. Real GDP Growth 2.7%% 3.0%

U.S. real GDP grew at an annual rate of 2.0% in the third quarter of 2015, following growth rates of 3.9% and 0.6% in the prior quarters. While it looks to be another blah year, the numbers actually reflect strength in the midst of global economic turmoil and plunging commodity prices. Final demand (direct spending by US consumers, businesses and government) is growing at close to a 3% pace this year, one of the fastest rates since the start of the recovery. Low inflation and interest rates continue to support spending. We project real GDP growth will be 2.3% in the fourth quarter and continue to grow at about 3% in the upcoming years.

U.S. Unemployment Rate 4.9% 4.8%

The headline U.S. unemployment rate dropped to 5.0% in November 2015—close to its pre-recession low. Yet we feel that labor markets are still far from full recovery. The labor force participation rate was recorded at 62.5% in November, the lowest rate in nearly 40 years. The U-6 alternative unemployment rate, which accounts for discouraged and under-employed workers, were still higher than normal at 9.9% in November. Labor markets are expected to continue to improve, but these improvements will likely show up in these alternative labor market metrics. We forecast that the U.S. unemployment rate will remain near 5.0% for the next few years.

California Total Nonfarm Employment Growth 2.7% 2.4%

Job growth in the golden state continues to outshine the nation overall. California’s nonfarm employment grew by 2.6% from November 2014 to November 2015, while U.S. nonfarm employment grew by 1.8%. State employment growth may well be revised up at the start of 2016 if the patterns of the past few years are repeated. The Professional and Business Services sector provided 116,000 new jobs over the year. The Leisure and Hospitality (79,100 jobs) and Construction (41,000 jobs) sectors were another major source of growth as both the tourism and building industries have been thriving. We project that nonfarm employment in California will continue to grow through 2016-17, although limited growth in the civilian labor force will start to slow the rate down some.

California Unemployment Rate 5.9% 5.6%

California’s unemployment rate has continued to fall and reached 5.7% in November 2015, but remains higher than the national rate (5.0%). Unemployment rates across most of the state’s metropolitan areas are trending lower and more closely resemble historic averages. Yet much like the nation, California’s labor force participation rate has reached historic lows of 62.0%. While retired baby boomers are not expected to re-enter the labor force, many residents margin-ally attached to the labor force are expected to have better prospects in the coming years. We project that California’s unemployment rate will drop below 5.5% by the end of the 2017 calendar year.

California Population Growth 1.0% 1.0%

California’s population grew by 0.9% in 2014, adding 358,000 residents. The Bay Area had the most population growth over the year with San Francisco, Alameda and Contra Costa Counties experiencing the largest gains. On a city-by-city basis, the largest population gains were in Irvine (3.2%), Temecula (2.5%), Clovis (2.4%) and Stockton (2.4%). Population growth has been outpacing new residential construction which tightens the state’s housing supply and pushes home prices higher. We forecast stable population growth at 1% annually moving forward.

California Median Existing Home Price Growth 6.5% 8.8%

California home prices continue to rise. The median home price grew by 3.9% from the third quarter of 2014 to the third quarter of 2015, reaching $395,300. While the recent rate of home appreciation has slowed from double-digit rates in 2013 and early 2014, home prices remain well below their pre-recession peak of roughly $500,000 and the state contin-ues to experience a shortage of housing. Home prices are anticipated to appreciate at a robust pace in the coming years given the shortage of supply and ongoing low interest rates.

California Existing Home Sales 362,100 372,200

Sales of California existing homes from the fourth quarter of 2014 to the third quarter of 2015 grew by 8.0% compared to the previous four-quarter period, as 337,225 homes were sold. Credit conditions have been easing and these conditions will continue to help drive existing home sales. Beacon Economics expects home sales to continue to rise in the coming fiscal years.

SOUTHERN CALIFORNIA OFFICE

5777 West Century Boulevard, Suite 895Los Angeles, California 90045Telephone: 310.571.3399Fax: 424.646.4660E-Fax: 888.821.4647

Beacon Economics, LLC has proven to be one of the most thorough and accurate, economic research/analytical forecasters in the country. They regularly provide national, state, regional, and sub-regional economic analysis/forecasting to clients ranging from the State of California to private hedge funds to major universities.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 Economics and HdL helps both companies enhance the accuracy of the work that they perform for their respective clients.

HdL Companies1340 Valley Vista Drive, Suite 200Diamond Bar, California 91765Telephone: 909.861.4335 • 888.861.0220Fax: 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.

“Good information leads to good decisions.”