HomeMy WebLinkAboutStaff Report 11504
City of Palo Alto (ID # 11504)
City Council Staff Report
Report Type: Informational Report Meeting Date: 9/14/2020
City of Palo Alto Page 1
Summary Title: Sales Tax Digest Summary 2020 Q1 (Calendar)
Title: City of Palo Alto Sales Tax Digest Summary for the First (Calendar)
Quarter of 2020 (January - March 2020)
From: City Manager
Lead Department: Administrative Services
Information
The City received $5.7 million for the first quarter (calendar year, January to March 2020) sales
which is $2.0 million (26.6 percent) lower than the same quarter in calendar year 2019. The
following files, compiled by the City’s sales tax consultant, MuniServices/A venu, are attached
for this informational report for which no action is required.
COVID-19 Public Health Emergency
During this period, the world began grappling with COVID -19, a global pandemic. The financial
implications of this public health emergency are significant, with regional, national and global
impacts on economies in response to shelter in place orders required by the State of California
and the County of Santa Clara and related social distancing restrictions. On March 12, 2020 the
City Manager, acting as the Director of Emergency Services, issued a Proclamation of Local
Emergency regarding the presence and community spread of COVID-19 in Santa Clara County
and our region. On Sunday, March 15, 2020, the City Manager activated the Emergency
Operations Center (EOC). On March 16, 2020, the City Council ratified the Proclamation of Local
Emergency, which continues in effect. In addition, on March 16, 2020, the County of Santa Clara
implemented a Shelter-in-Place order that remain in effect to a certain degree today.
This quarter of information includes the brief period impacted by these significant and
immediate changes in consumer behavior, immediately impacting sales tax revenues.
Moreover, these orders were also the catalyst for legislative actions attempting to provide
relief to citizens and businesses during this unprecedented time. As noted in the report from
the City’s consultant (page 1 of Attachment C), some payment of sales tax revenue to Palo Alto
is deferred for 90 days or until next fiscal year. It is expected that receipts throughout calendar
year 2020 will be impacted not only by the economic impacts associated with the pandemic but
also the legislative impacts, namely the legislative relief.
Attachments:
City of Palo Alto Page 2
• Attachment A: Avenu Q1 Sales Tax Digest Summary
• Attachment B: Economic Categories and Segments
• Attachment C: Sales Tax Updates
City of Palo Alto
Sales Tax Digest Summary
Collections through June 2020
Sales through March 2020 (2020Q1)
www.avenuinsights.com (800) 800-8181 Page 1
% of Total / % Change PALO ALTO
California
Statewide S.F. Bay Area Sacramento
Valley Central Valley South Coast Inland Empire North Coast Central Coast
General Retail 28.6 / -17.6 28.7 / -5.4 27.4 / -3.5 28.1 / -1.2 29.4 / -2.5 29.6 / -7.6 28.7 / -4 30.9 / -0.7 28.6 / -11.4
Food Products 17.1 / -15.6 22.2 / -8.0 23.4 / -9.6 17.8 / -5.4 17.2 / -4 24.1 / -9.1 19.2 / -3.8 17 / -2 34.8 / -5.1
Construction 0.8 / -44.6 10.0 / -6.2 10 / -7.7 12.4 / -1.5 11.8 / -3.4 8.7 / -8.9 10.9 / 0.4 16.1 / 5.2 8.6 / -10.8
Business to Business 26.1 / 24 13.0 / -3.5 15.3 / -3.9 11.4 / 0.9 14 / 7.4 12 / -5.5 12.2 / -3.8 7.4 / 2.6 3.7 / 1.6
Misc/Other 27.3 / -11.5 26.1 / -6.2 23.9 / -10.8 30.3 / -3.1 27.6 / -1.8 25.6 / -6.4 29 / -3.5 28.6 / 0.2 24.4 / -2.3
Total 100 / -3.0 100.0 / -6.0 100 / -7.2 100 / -2.3 100 / -1.4 100 / -7.5 100 / -3.3 100 / 0.5 100 / -6.6
City of Palo
Alto
California
Statewide S.F. Bay Area Sacramento
Valley Central Valley South Coast Inland Empire North Coast Central Coast
Largest Segment Leasing Restaurants Auto Sales - New Department
Stores
Department
Stores Restaurants Department
Stores
Department
Stores Restaurants
% of Total / % Change 12.5 / 58.5 15.9 /18.9 12 / -15.6 12.1 / 6.3 14.0 / 2.2 17.9 / -10 11.8 / 5.1 13.4 / 4.3 24.6 / -5.6
2nd Largest Segment Auto Sales -
New
Auto Sales -
New Restaurants Auto Sales -
New
Auto Sales -
New
Auto Sales -
New
Auto Sales -
New
Auto Sales -
New
Auto Sales -
New
% of Total / % Change 18.8 / -22.1 11.9 /17 16.8 / -11.7 12.1 / -5.9 11.1 / -2.1 12.3 / -5.3 11.1 / -2.9 11.9 / 3.8 12.5 / 1.5
3rd Largest Segment Restaurants Department
Stores
Miscellaneous
Retail Restaurants Restaurants Department
Stores Restaurants Restaurants Food Markets
% of Total / % Change 15.3 / -15.4 15.9 /18.9 8 / 6.1 12.1 / -6.4 11.4 / -5.1 10 / -0.7 12.4 / -5.9 10 / -7.5 8.9 / -4.0
*** Not specified to maintain confidentiality of tax information
CITY OF PALO ALTO
BENCHMARK YEAR 2020Q1 COMPARED TO BENCHMARK YEAR 2019Q1
ECONOMIC CATEGORY ANALYSIS FOR YEAR ENDED 1st Quarter 2020
ECONOMIC SEGMENT ANALYSIS FOR YEAR ENDED 1st Quarter 2020
California Overview
The percent change in cash receipts from the prior year was -0.9% statewide, -0.6% in Northern
California and -1.2% in Southern California. The period’s cash receipts include tax from business activity
during the period, payments for prior periods and other cash adjustments. When we adjust for non-
period related payments, we determine the overall business activity decreased for the year ended 1st
Quarter 2020 by -6.0% statewide, -6.6% in Southern California and -5.1% in Northern California.
City of Palo Alto
For the year ended 1st Quarter 2020, sales tax cash receipts for the City were -6.7% from the prior year.
On a quarterly basis, sales tax revenues were -26.6% from 1st Quarter 2019 to 1st Quarter 2020. The
period’s cash receipts include tax from business activity during the period, payments for prior periods
and other cash adjustments. Note: It is important to recognize that the state offered small businesses a
90 day extension to pay their 1st Quarter 2020 taxes (to alleviate some of the short-term economic
difficulties of the pandemic), and many businesses had partial or no payment for the 1st Quarter. Thus,
the 26.6% decrease for the quarter includes decreases related to the state 90-day extension program
and actual 1st Quarter economic activity did not decline to this extent. As a result of the extension
program, many payments for 1st quarter economic activity will be paid in the 2nd Quarter.
Regional Overview
This seven-region comparison includes estimated payments and excludes net pools and adjustments.
Attachment A
City of Palo Alto
www.avenuinsights.com (800) 800-8181 Page 2
Auto Sales -New
16.8%
Restaurants
14.9%
Office Equipment
10.7%
Leasing
11.1%
Apparel Stores
6.5%
Department Stores
6.1%
All Other
15.0%
Net Pools & Adjustments
19.0%
Gross Historical Sales Tax Performance by Benchmark Year and Quarter (Before Adjustments)
$-
$5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
$30,000,000
$35,000,000
Quarterly Benchmark Year
Net Cash Receipts for Benchmark Year 1st Quarter 2020: $32,812,518
*Benchmark year (BMY) is the sum of the current and 3 previous quarters (2020Q1 BMY is sum of 2020 Q1, 2019 Q4, 2019 Q3, 2019 Q2)
City of Palo Alto
www.avenuinsights.com (800) 800-8181 Page 3
Anderson Honda Lucile Packard Children's Hospital Shreve & Co.
Apple Stores Macy's Department Store Stanford Outpatient Clinic Pharmacy
Audi Palo Alto Magnussen's Toyota of Palo Alto Tesla
Bon Appetit Management Co.Mclaren San Francisco Tesla Lease Trust
Hermes Neiman Marcus Department Store Tiffany & Company
Houzz Shop Nordstrom Department Store Urban Outfitters
HP Enterprise Services Richemont Varian Medical Systems
Integrated Archive Systems Shell Service Stations Volvo Cars Palo Alto
Louis Vuitton
$-
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
$3,500,000
$4,000,000
$4,500,000
$5,000,000
Benchmark Year 2020Q1 Benchmark Year 2019Q1
TOP 25 SALES/USE TAX CONTRIBUTORS
The following list identifies Palo Alto’s Top 25 Sales/Use Tax contributors. The list is in alphabetical order
and represents the year ended 1st Quarter 2020. The Top 25 Sales/Use Tax contributors generate 56.5%
of Palo Alto’s total sales and use tax revenue.
Sales Tax from Largest Non-Confidential Economic
City of Palo Alto
www.avenuinsights.com (800) 800-8181 Page 4
Historical Analysis by Calendar Quarter
Cash Category % 2020Q1 2019Q4 2019Q3 2019Q2 2019Q1 2018Q4 2018Q3 2018Q2 2018Q1 2017Q4 2017Q3
General Retail 26.0%1,474,257 2,665,153 2,385,380 1,981,968 1,843,013 2,567,368 2,195,807 1,629,266 1,516,808 1,881,732 1,602,213
Business To Business 33.4%1,892,288 2,354,864 1,834,999 2,047,219 2,198,385 2,428,644 1,937,139 1,965,691 1,851,152 2,635,136 1,860,347
Misc/Other 19.8%1,122,692 1,787,599 1,514,298 1,776,358 1,304,318 1,213,676 1,187,765 1,237,941 1,183,895 1,206,578 1,184,645
Food Products 16.8%954,061 1,206,382 1,203,629 1,252,840 1,160,612 1,877,247 2,260,007 1,789,526 1,639,073 1,569,619 1,448,336
Net Pools & Adjustments 3.9%223,252 2,004,397 1,619,094 1,688,276 1,208,826 1,820,850 2,139,510 1,191,568 -183,952 1,136,075 1,374,372
Total 100.0%5,666,550 10,018,395 8,557,399 8,746,661 7,715,155 9,907,785 9,720,228 7,813,992 6,006,976 8,429,140 7,469,913
Cash Segments % 2020Q1 2019Q4 2019Q3 2019Q2 2019Q1 2018Q4 2018Q3 2018Q2 2018Q1 2017Q4 2017Q3
Miscellaneous/Other 45.7%2,591,205 3,452,948 4,138,457 4,251,453 3,891,665 4,881,849 4,854,095 3,747,045 3,373,907 3,791,527 3,233,434
Auto Sales - New 13.7%777,399 1,389,232 59,312 34,543 34,543 76,617 90,235 54,661 60,326 82,100 56,998
Restaurants 14.7%833,983 1,085,252 1,069,628 1,035,216 1,045,521 1,066,578 1,060,546 1,124,991 1,045,496 1,054,073 1,049,565
Apparel Stores 5.2%294,002 581,209 469,248 404,627 408,968 405,979 361,406 439,601 412,952 701,369 419,279
Department Stores 4.3%245,948 554,454 431,717 356,943 356,943 599,795 475,142 495,267 471,419 642,666 458,066
Miscellaneous Retail 5.0%284,296 504,530 366,010 324,279 326,994 596,192 448,510 451,110 390,780 585,892 440,005
Business Services 3.0%171,181 188,230 124,310 198,913 181,454 173,916 148,751 154,446 163,072 148,906 147,499
Service Stations 2.6%145,255 168,541 175,608 159,032 159,032 110,015 98,072 97,870 117,783 128,671 117,256
Food Markets 1.8%100,029 89,602 104,014 105,601 95,783 175,994 43,961 57,433 155,193 157,861 173,439
Net Pools & Adjustments 3.9%223,252 2,004,397 1,619,094 1,876,055 1,214,253 1,820,850 2,139,510 1,191,568 -183,952 1,136,075 1,374,372
Total 100.0%5,666,550 10,018,395 8,557,399 8,746,661 7,715,155 9,907,785 9,720,228 7,813,992 6,006,976 8,429,140 7,469,913
*Net Pools & Adjustments reconcile economic performance to periods’ net cash receipts. The historical amounts by calendar quarter: (1) include
any prior period adjustments and payments in the appropriate category/segment and (2) exclude businesses no longer active in the current
period.
City of Palo Alto
www.avenuinsights.com (800) 800-8181 Page 5
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Campbell -46.2%-35.5%-72.3%-34.1%-32.0%1,318,355 2,352,307 -44.0%Electronic Equipment Light Industry Restaurants Apparel Stores
Cupertino -41.1%-53.9%-20.7%25.9%-49.7%301,061 653,064 -53.9%Business Services Chemical Products Restaurants Service Stations
Gilroy -25.2%-42.5%-37.0%-13.2%-60.2%2,145,391 3,618,595 -40.7%Department Stores Light Industry Auto Sales - New Apparel Stores
Los Altos -46.1%-48.7%10.0%-59.0%-35.7%302,888 553,343 -45.3%Recreation Products Bldg.Matls-Retail Restaurants Food Markets
Los Gatos -59.6%-53.3%0.6%-1.6%-51.9%693,834 1,470,684 -52.8%Light Industry Electronic Equipment Miscellaneous Retail Restaurants
Milpitas -33.8%-38.3%-13.1%-8.7%-8.7%3,939,559 5,158,859 -23.6%Auto Sales - New Office Equipment Restaurants Apparel Stores
Morgan Hill -28.1%-42.6%-44.3%22.9%-40.0%1,387,200 2,026,418 -31.5%Light Industry Heavy Industry Restaurants Service Stations
Mountain View -26.0%-34.1%10.1%-69.7%-38.2%2,803,858 4,899,820 -42.8%Heavy Industry Bldg.Matls-Retail Business Services Restaurants
Palo Alto -38.4%-55.2%-77.6%-11.0%-27.0%4,546,121 6,678,707 -31.9%Leasing Recreation Products Restaurants Electronic Equipment
San Jose 62.2%-41.4%-32.2%-14.5%-26.0%4,565,895 7,789,284 -41.4%Miscellaneous Retail Office Equipment Restaurants Bldg.Matls-Retail
Santa Clara -23.3%-35.9%-11.5%-11.2%-22.9%8,913,547 11,210,424 -20.5%Bldg.Matls-Whsle Chemical Products Restaurants Auto Sales - New
County of Santa Clara -77.2%-64.7%-41.0%-64.4%-59.3%375,026 999,694 -62.5%Chemical Products Drug Stores Restaurants Miscellaneous Retail
Saratoga -22.1%-55.7%46.4%-71.4%28.4%104,040 214,675 -51.5%Bldg.Matls-Retail Drug Stores Restaurants Service Stations
Sunnyvale -5.7%-30.6%-53.7%-55.4%#N/A 4,190,379 6,205,518 -32.5%Department Stores Auto Parts/Repair Office Equipment Restaurants
Quarterly Analysis by Economic Category, Total and Segments: Change from 2019Q1 to 2020Q1
Economic Categories and Segments
Economic Category Economic Segment Description
Business to Business ‐ sales of
tangible personal property from
one business to another business
and the buyer is the end user.
Also includes use tax on certain
purchases and consumables.
Business Services Advertising, banking services,
copying, printing and mailing
services
Chemical Products Manufacturers and wholesalers
of drugs, chemicals, etc.
Electronic Equipment Manufacturers of televisions,
sound systems, sophisticated
electronics, etc.
Energy Sales Bulk fuel sales and fuel
distributors and refiners
Heavy Industry Heavy machinery and
equipment, including heavy
vehicles, and manufacturers and
wholesalers of textiles and
furniture and furnishings
Leasing Equipment leasing
Light Industry Includes, but is not limited to,
light machinery and automobile,
truck, and trailer rentals
Office Equipment Businesses that sell computers,
and office equipment and
furniture, and businesses that
process motion pictures and film
development
Construction Building Materials – Retail Building materials, hardware,
and paint and wallpaper stores
Building Materials ‐ Wholesale Includes, but is not limited to,
sheet metal, iron works, sand
and gravel, farm equipment,
plumbing materials, and
electrical wiring
Food Products Food Markets Supermarkets, grocery stores,
convenience stores, bakeries,
delicatessens, health food stores
Food Processing Equipment Processing and equipment used
in mass food production and
packaging
Liquor stores Stores that sell alcoholic
beverages
Restaurants Restaurants, including fast food
and those in hotels, and night
clubs
Attachment B
Economic Categories and Segments
Economic Category Economic Segment Description
General Retail – all consumer
focused sales, typically brick and
mortar stores
Apparel Stores Men’s, women’s, and family
clothing and shoe stores
Department Stores Department, general, and variety
stores
Drug Stores Stores where medicines and
miscellaneous articles are sold
Florist/Nursery Stores where flowers and plants
are sold
Furniture/Appliance Stores where new and used
furniture, appliances, and
electronic equipment are sold
Miscellaneous Retail Includes, but is not limited to,
stores that sell cigars, jewelry,
beauty supplies, cell phones, and
books; newsstands, photography
studios; personal service
businesses such as salons and
cleaners; and vending machines
Recreation Products Camera, music, and sporting
goods stores
Miscellaneous/Other Miscellaneous/Other Includes but not limited to
health services, government,
nonprofit organizations, non‐
store retailers, businesses with
less than $20,000 in annual gross
sales, auctioneer sales, and
mortuary services and sales
Transportation Auto Parts/Repair Auto parts stores, vehicle and
parts manufacturing facilities,
and vehicle repair shops
Auto Sales ‐ New New car dealerships
Auto Sales ‐ Used Used car dealerships
Miscellaneous Vehicle Sales Sale and manufacture of
airplanes and supplies, boats,
motorcycles, all‐terrain vehicles,
trailers and supplies
Service stations Gas stations, not including
airport jet fuel
Attachment B
1264 Hawks Flight Court #270, El Dorado Hills CA 95762 | 559-288-7296 | www.avenuinsights.com
Early June 2020
Revenue Projections
under Covid-19
CLIENT UPDATE #1: Sales and Use Tax
Avenu has been hard at work developing economic
assumptions on which to build revenue projections
for each of our clients. For many of our clients, Sales
and Use Tax is a primary revenue source and one that
currently is in a state of flux. The pandemic has caused
reduced economic activity, business closures, and
uncertainty about the future.
The recent Sales Tax Executive Order from Governor
Newsom also impacted sales tax cash flows. This
communication is intended to explain the lower than
normal first quarter 2020 allocations to local
governments resulting from the pandemic and the
Governor’s Executive Order.
Sales and Use Tax Liabilities
Deferred by CDTFA
Extension Program: On April 2, 2020, Governor
Newsom issued Executive Order N-40-20 that
allowed businesses with under $1M in tax liability to
delay their first quarter sales and use tax filings for 90
days. This action means that first quarter filings for
these businesses, normally required by the end of
April, could be delayed until the end of July.
Deferral Program: Another state program allows
small businesses ($5M or less in taxable sales) to defer
up to $50,000 of their sales and use tax liabilities until
next fiscal year. For those who request the deferral,
the owed amount would be payable in twelve equal
installments over the following year and would not be
subject to interest or penalties as long as these
payments are made. The payments will start in August
2020 and they will not extend beyond July 31, 2021.
The Avenu team continues to have ongoing
discussions and communication with the CDTFA in
order to better understand and report back to our
clients on the status and impacts of Q1 Extensions/
non-filings, Q1 & Q2 sales tax deferrals, late payments
and other sales tax issues. According to the CDTFA,
the impact of the first quarter 2020 sales and use tax
return and payment extensions are as follows:
▪First quarter allocations to local jurisdictions
are down approximately 13% compared to the
first quarter 2019. A portion of the decrease
was reduced economic activity and a portion
was due to the Extension/non-filers.
▪CDTFA stated that they believe most of the
decrease will be recovered when businesses
that elected to take the three-month extension
file and pay those returns that are due by July
31, 2020. These revenues will be paid to local
governments in August and most will accrue
them to FY 19/20.
▪The CDTFA estimates that 178,288 tax
payers who have a tax obligation of under
$1M have $844M in taxes still outstanding.
▪85 taxpayers who have tax obligations of over
$1 have $81M still outstanding as well.
•The liabilities allowed under the Executive
Order that can be included are tax liabilities
from the first and second quarters of 2020
and include monthly and fiscal year filers.
•It is important to note that all taxes remain
due eventually: they are not waived.
Attachment C
1264 Hawks Flight Court #270, El Dorado Hills CA 95762 | 559-288-7296 | www.avenuinsights.com
Early June 2020
The delay in payment of taxes results in a timing issue
of when tax revenues will be received by local
jurisdictions. The Extension program will delay some
payments to August and the Deferral program will
delay some payments to FY 20/21.
Applications for the Deferral payment plan will be
available in July 2020. To date CDTFA has stated that
they have received inquiries from approximately 6,800
businesses or their representatives interested in the
Deferral program.
We are in contact with CDTFA and we will provide
further updates as more information becomes
available.
Other Brief Updates
Proposition 172 : PSAF Revenue: Although
the decline in taxable sales May 2020 over May 2019
(March sales) averages 21.9% statewide, the range
among counties is significant: -17.1% to -41%. The
21.9% tracks with our current forecast. However, at
the end of June, the June (April Taxable Sales) Prop
172 payments will provide a better indicator of the
assumptions on the recession rates we used for each
of our clients.
Unemployment
Recent estimates of U.S. unemployment came in lower
than expected at 13.3%. The Bureau of Labor
Statistics acknowledged that there are errors in the
13.3% number and that it is likely higher. California’s
unemployment rates are published monthly, after state
analysts have had a chance to closely review all
available data. The most recent estimate, published
last week, showed a California unemployment rate of
15.5%, with more than 5.1 million Californians out of
work.
In addition, the actual number of unemployed is
assumed to be much higher due to: recent data issues
with the unemployment survey, those workers that
choose not to register for unemployment, and
undocumented workers not counted in the survey.
The ‘real’ unemployment rate is likely much higher
than the typical figure used. We are keeping a close
eye on this.
Consumer Spending
Historically, unemployment rates are highly correlated
with consumer confidence and consumer spending,
which ultimately impact sales tax revenue. It is
difficult to predict consumer spending at this time
given the uncertainties with employment, the nature
of the recovery, and the re-opening of businesses.
Again, we will be tracking consumer spending and
consumer behavior closely to analyze new trends.
Conclusion
We hope that this brief update keeps you informed
and up to date. Please do not hesitate to contact your
Client Services Representative at any time - we are
here to help you through these difficult times.
NOTES: A copy of the Governor’s 90 day extension
Executive Order can be found here. Information
about the $50,000 deferral program can be found
here.
1264 Hawks Flight Court #270, El Dorado Hills CA 95762 | 559-288-7296 | www.avenuinsights.com
1264 Hawks Flight Court #270, El Dorado Hills CA 95762 | 559-288-7296 | www.avenuinsights.com
Client Update #2: Mid July 2020
Recovery Indicators
The Importance of Unemployment Statistics
Quick Take-Away
Unemployment statistics are one indicator of the economic health of a region. Under the COVID caused
economic downturn, the unemployment rate is especially important for local taxes because it indicates the
speed at which local business is recovering…or not. While unemployment is not necessarily a clear
indicator of sales tax activity, it does correlate to consumer confidence which drives c onsumption and
ultimately sales tax. Unemployment rates also impact other taxes such as trans ient occupancy tax (TOT).
The [published] California Unemployment Rate measures the total number of employees in California that
are a part of the labor force but are without a job, and is generally tied to current levels an d applying
unemployment assistance cases. As published by state and federal agencies, the California Unemployment
Rate through May 2020 is at 16.30%, compared to 16.40% from last period and 4.10% last year. This is
higher than the long-term average of 7.22%.
However, the real unemployment rate (U-6 ) is a broader definition of unemployment than the official
unemployment rate (U-3 ). In June 2020, it was 18%. It is down from the 22.8% rate in April. That is almost as
bad as the 25% rate during the Great Depression. Please feel free to discuss the U-6 numbers for your
jurisdiction with your Av enu Representative.
Understanding Unemployment Statistics
Historically, the unemployment rate in California reached as high as 12.40% in 2010, while the United
States reached 9.50% in that time frame. https://ycharts.com
•While the state’s unemployment rate of 16.31 percent is slightly lower than the record high set in April
2020, it is still far higher than the 12.3 percent level during the height of the Great Recession (March,
October, and November 2010).
•April’s revised loss of 2.4 million jobs in California since March, is the biggest month-o ver month job
loss in state history, far eclipsing the Great Recession’s then record-s etting, month-over loss of
132,800 jobs between December 2008 and January 2009.
•Nine of California’s 11 industry sectors gained jobs in May. Construction posted the largest job gain
(+75,000) thanks to strength in specialty trade contractors and ongoing construction projects. Leisure
and hospitality (+64,800) had the second largest job gain due to growth in accommodation and food
services. Government (-9 5,800) had the largest drop with state and local government jobs both
experiencing large decreases over the month.
While these numbers are staggering enough, it is important to understand that they must be looked at locally to
fully understand the long-term impact on a city’s business recovery. The real unemployment rate is always
higher. According to the balance, the real unemployment rate (U-6) is a broader definition of unemployment
than the official unemployment rate (U-3). In June 2020, it was 18%. It is down from the 22.8% rate in April.
That is almost as bad as the 25% rate during the Great Depression.
California COVID-19 Update
1264 Hawks Flight Court #270, El Dorado Hills CA 95762 | 559-288-7296 | www.avenuinsights.com
The U-3 is the rate most often reported in the media. In the U -3 rate, the Bureau of Labor Statistics (BLS) only
counts people without jobs who are in the labor force. To remain in the labor force, they must have looked for a
job in the last four weeks. The U-6 , or real unemployment rate, inc ludes the underemployed, the marginally
attached, and discouraged work ers. For that reason, it is roughly double the U-3 report.
The BLS reports other, broader definitions of underemployment. H ere are the designations:
•U-1: Persons unemployed 15 weeks or longer, as a percent of the civilian labor force.
•U-2: Job losers and persons who completed temporary jobs, as a percent of the civilian labor force.
•U-3. Total unemployed, as a percentage of the civilian labor force. The current official unemployment
rate may confirm current economic trends.
•U-4. Total unemployed plus discouraged workers, as a percentage of the civilian labor force plus
discouraged workers.
•U-5. Total unemployed, plus discouraged workers, plus all other persons marginally attached to the
labor force, as a percentage of the civilian labor force plus all persons marginally attached to the labor
force.
•U-6. Total unemployed, plus all persons marginally attached to the labor force, plus total employed
part-time for economic reasons, as a percentage of the civilian labor force plus all persons marginally
attached to the labor force. The current real unemployment rate is about double the official
unemployment rate, designated as U-3.
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Other Economic/Financial Impacts
We are still in the early days of the COVID economic downturn. The most current detailed sales tax data
available to us from the California Department of Tax and Fee Administration (CDTFA) we have is for
January to March 2020, so it is very preliminary and only includes a few weeks of COVID impact. It also
includes some data irregularities due to the state extension and deferral programs, put in place under the
Governor’s Executive Order N-4 0-20, which cloud the overall economic picture a bit. Since we already know
that Q2 2020 (April to June) will be very bad fiscally for most jurisdictions due to the stay at home order and
the associated business closings, we think the first initial sign of how things might proceed for the economy
and how FY 20/21 (and future years) might look will be better understood when we receive 3 rd quarter 2020
detailed sales tax information. We will continue to monitor everything closely, but the recession will play out
over time as conditions change and settle. We do not think there will be a definitive event/data point for at
least another five to six months when Q3 data is available. The Q3 sales tax data will be a ‘first look’ at how
the longer term recession is starting to unfold and it too will likely twist and turn over time.
It will be some time before full impacts are known on other kinds o f local
revenue, but as l ocal budgets are finalized, several trends a re clear.
Communities with significant Transient Occupancy Tax revenue (TOT)
have been severely i mpacted. Napa County hotel revenue dropped 95.5
percent year-over-year; Palm Springs staff estimated 75% - 85% losses in
the Spring months. Hotels around California are asking their e lected
officials and city/county government officials for at least a 90-day de ferral of
TOT payments. Los Angeles, Anaheim, West Hollywood, Vacaville, and Woodland have taken various actions
to provide relief from TOT payments with many other cities/counties considering this action.
Stay-at-home orders and increased telecommuting should increase residential utility use, and therefore
generate some local Utility Users tax (UUT) revenue, but that may be offset by businesses shutting down and
the commiserate drop in commercial usage.
Reduced economic activity will also cause declines in income from fines and fees (e.g. new businesses
opening, new licenses, construction permits, building inspection, etc.). This also affects revenues tied to
transportation—parking tickets, bridge tolls, gas taxes, transit fares.
Key Summary Points
•To identify the real unemployment rate in your area, double the formal rate (U-3 ) published by the
Bureau of Labor Statistics (i.e., look closely at the U-6 rate.).
•Unemployment is a key indicator of business recovery under COVID and should be looked at in
parallel with other more standard financial indicators such as performance of a jurisdiction’s
primary tax revenue.
•When making budget assumptions and making resulting projections under COVID, it is critical to
base your assumptions as much as poss ible on local data; and to check and revise y our
projections much more frequently as COVID conditions change in your area.
1264 Hawks Flight Court #270, El Dorado Hills CA 95762 | 559-288-7296 | www.avenuinsights.com
On May 6 Governor Newsom issued an executive order that suspends until May 2021 the ability of county
assessors to levy late fees for property tax payments. As laid out by the Labor Center at UC Berkeley, a
reduction in the number o f property transactions will drive a drop in property transfer taxes, a t least temporarily.
A lengthy recession (which most local governments are treating as a worst-case scenario) could reduce
property values, particularly in the commercial rental market, which we are already seeing. This could spark
downward assessments and reductions in sales prices.
During this time of u ncertainty, it is essential for local government to assess all possible avenues to stabilize
revenue. Given the different i mpacts of COVID on local governments and their l ocal economy, the inconsistent
timing of COVID spikes, and the varying l ocal responses to the national conversation on r acial equity and racial
justice, even adjacent communities may b e suffering different impacts or degrees of impact. Therefore,
financial assumptions, recovery projections, and response plans must be based as much as possibl e on local
data and local analysis. Avenu is keenly aware of this and is committed to assisting each of o ur clients w ith
that local analysis i n a responsive and responsible manner.
State Money – Last week, the Governor signed i nto law a S tate Budget that holds out hope f or another round
of federal stimulus funds but a lso provides funds for homelessness and for COVID-19 response, including
$500 million in CARES Act dollars for cities. While the new budget is balanced, the impact of the pandemic and
the delayed tax deadlin e means that uncertain budget will need to be revisited in August once more is known
about the State's total tax receipts and a possible July stimulus package from Congress.
The California Budget and Policy Center offers their perspective on Governor Newsom’s 2020/2021 budget.
Policy think tanks across the country a re writing about the shortage of dollars in all states, how states are going
into deep deficits despite their somewhat healthy reserves at the start of this fiscal year, and that cities should
not be looking to states to send them bailout money.
Local Ballot Measures -- Many jurisdictions struggling with reduced revenue flow, diminishing reserves,
and increased costs are looking to the November ballot for relief. A s ignificant number of cities are
considering tax measures for November including Sales Tax, UUT, TOT and others. There is little agreement
among pollsters and other pundits as to a 'general mood' for tax increases and whether such ballot
measures have a reasonable chance of s uccess or not. Voter sentiment is likely to change as economic and
pandemic conditions change and a lot will depend on local conditions which makes it difficult to predict voter
perspectives across the state.
Other COVID Resources – There are many resources available for c ities regarding the constantly moving
target of COVID and recovery . The League of California Cities, through their publication “C A Cities
Advocate”, has a depth of information and als o issues many other communications weekly as needed. The
California Department of Public Health has a myriad of up-t o-date information on their web site. Stateside has
a quality up-to-date report on a timely basis showing relevant actions and impacts across the states.
In summary, we leave you with a quote that sums up our perspective on this c hallenging time and the corona
virus: “Don’t expect the current health and economic challenges to end with a touchdown pass. It’s
more likely to be three yards and a cloud of dust.” Alan Murray, Editor of Fortune Magazine.