Insights on L.A. – March 30, 2020

Insights on L.A.
Quote of the Week: “We have never in modern history suggested that people not work, that entire countries stay at home, and that we all keep a safe distance from one another. This is not about GDP or the economy: it is about our lives and livelihoods.” McKinsey Article – March 2020 – Safeguarding our lives and our livelihoods: The imperative of our time
1.  Big Picture
Data: McKinsey estimates that 40 to 50 percent of discretionary consumer spending might not occur due to COVID-19.
Why: Recessions keep people from big purchases, but now people will also eliminate spending for restaurants, travel, and other services that usually fall, but do not drop to zero.
Impact: A 40 to 50 percent drop in discretionary spending translates to a roughly 10 percent reduction in GDP—without considering the second- and third-order effects. That’s not only unprecedented in modern history, it has been historically almost unimaginable—until now.
2. Some Good News
The federal government can print money and go into debt…A new ~$2 trillion federal funding bill will now provide some relief to businesses, workers, residents and communities.
CA: ~$10 billion* to the state, which keeps 55 percent, and ~45 percent will go to local governments with populations that exceed 500,000…Another reminder of how important the U.S. Census is…the dollars being allocated are based on it. *(Another estimate says $15 billion)
  • $400 million to bolster the area’s airports
  • $700 million to Metro for the region’s transit systems
  • Tens of millions in community development block grants that include aid for the unemployed and funding that local officials can leverage for affordable housing, anti-poverty programs and infrastructure development
  • $32 million for homeless aid grants
  • $1,200 per adult and $500 per child (based on income)
3. A New Era of Big Government and Big Business
Capitalism depends on a well-functioning government. And vice versa.
Pay attention to: The growing role the public sector plays in our country’s GDP.
Data: The U.S. government will spend, not including COVID-19 dollars, $4.829 trillion this upcoming budget year. (Though when you add-in state and local direct spending, it hits $8 trillion) That first number is equivalent to 20.7 percent of U.S. GDP (OMB FY 2021)
Context: In 1929, federal spending as a percentage of gross domestic product (GDP) was 3 percent.
Allocation: Two-thirds of federal expenses must go to mandatory programs such as Social Security, Medicare, and Medicaid. And a large amount pays off debt.
Going forward: We should expect government, at all levels, to be larger in the future than it has been in the past, based on the growing need to provide resources to a aging population, initiatives to mitigate inequality, growth of labor intensive services (education and medical care) and military spending.
4. CA Inc.
CA’s State Government’s revenue and operations are equivalent to a fortune 50 company.
Budget: Governor Newsom’s proposed budget for 2020-2021 is 222.2 billion dollars.
Jobs: State government employs ~230,000 workers (~15 percent of the state’s total workforce) and the public sector in CA cumulatively employs ~2.6 million people, an increase of 2.7 percent since 2008.
Overall spend: Federal funds comprise over one-third of CA’s State Budget, supporting a broad range of public services and systems. Overall, the federal government spends ~$436B annually in the state; and state and local governments spend $591B. State and local governments additionally spend ~$429B in interest alone
Impact: Cumulatively (not counting dollars twice), the public sector’s overall spend equates to a little more than 12 percent of the state’s GDP. Only two other industry categories rank higher: finance, insurance, real estate, rental, and leasing represent 22 percent; and professional and business services 12.7 percent.
5. L.A.
Big numbers:
  • L.A. County’s GDP is ~$710 billion, which represents almost 30 percent of the state’s GDP. It is the nation’s largest county by output and equates to 3.8 percent of the U.S. total.
  • L.A. County added $395.2 billion to total U.S. GDP from 2001 to 2018. Just 31 counties in the U.S., or the top 1 percent by share, made up 32.3 percent of U.S. GDP in 2018 (BEA).(L.A. Times)
Public sector: The two dominant spenders in the region are L.A. County, whose annual budget is a little more than $30B and L.A. City, whose annual budget is a little more than $10B. The City of Long Beach, the next highest spender, ranks much lower at ~$2.6 billion. In the L.A. region, the public sector spend represents ~13 percent of the region’s GDP.
Jobs: The public sector represents nearly 13 percent of the region’s overall workforce of 4.5 million. (See chart based on 2018 numbers)
Growth industry: Local governments employed four times as many people on a per capita basis in 2018 as they did in 1977, while the state doubled its per-capita inflation-adjusted expenditures since Prop. 13 passed. Although Prop 13 may have slowed some of this growth, it clearly did not prevent it. (Cal Matters)
What to watch: In order to operate, L.A.’s governments need revenue. Since the great recession, a stronger economy has produced increased tax revenues, but a combination of decreased state and federal aid, and heightened obligations in areas such as pensions, healthcare, services, infrastructure and wages, have continued to burden local government budgets…and now COVID-19!
Bad trend: Today, the City of L.A. generates more revenue from licenses, permits, fees and fines than every other revenue category, except property taxes. Since the release of the City’s 2004-05 Budget, revenue from this category has more than doubled to more than $1 billion annually, from $439 million. This has far surpassed the slower growth of the Utility Tax, which has only increased by 12 percent.
6. Unemployment climbs
Data: Unemployment claims reached 186,809 for the week ending March 21. One million claims have been filed total due to CIVID-19. (CA EDD)
Context: March 2019 – 40,000 claims.
L.A.: Preliminary numbers show that ~40 percent of L.A.’s workforce is at risk.
Background: Unemployment insurance is paid by employers, so the pot of money from which recipients collect does not come from the state directly. If the claims exceed the unemployment insurance fund and the state becomes insolvent — as it did during the Great Recession — the state will likely take a loan from the federal government. 
History: CA’s reported total was the third highest behind Pennsylvania’s estimated 378,908 and Ohio’s estimated 187,784. Expressed as a percentage of the February labor force, California was 39th highest at a weekly claims rate of 1.0 percent compared to Rhode Island at 6.3 percent, Nevada at 6.0 percent, and Pennsylvania at 5.8 percent. While reflecting a sharp upward spike in absolute numbers, California’s relatively lower rate indicates that the economic effects are only beginning. (CA Business Roundtable)
7. We are all in this together
From the Great Depression through the Great Recession — contractions have started in large, but not particularly labor-intensive, industries like manufacturing and construction. COVID-19 is hitting the economy in a sector that employs 86 percent of all American workers – services; and the CA and LA. labor forces are particularly concentrated in the service sector. L.A.’s economy is ~ 90 service sector.
Social contract: We have a trillion dollar economy in L.A., massive public and private sector spending and amazing philanthropic initiatives, yet COVID-19 highlights the reality that millions of Angelenos cannot sustain themselves for more than two weeks without a pay check.
Focusing on our region’s most vulnerable: Community partners asked USC’s Program for Environmental & Regional Equity (PERE) to look at certain vulnerable populations in L.A.: the elderly, the undocumented, renters, and children on the other side of the digital divide. The presentation brings to light what not everyone sees amongst the glitter of L.A. (See chart)
Filling the gaps:
  • The fact is a large number of Angelenos will not benefit at all from the federal $2 trillion dollar spending bill or the state’s response, specifically, undocumented workers and the ~14 percent of the population working in the informal economy who do not qualify for unemployment insurance, the direct money infusion of cash to individuals from the federal government, or for the CA Earned Income Tax Credit. Philanthropy will take care of some of this, but the need it great and until the federal government fixes the immigration system, the state needs to step up.
  • Some L.A. businesses and nonprofits are doing their best to keep workers employed, on their health care plans or providing subsidized childcare. What can the state do to support them?
Some ideas: Those most impacted by the crisis are drawing down their budgets – businesses and private citizens – and even when things are back on track the will have to pay back back the debt they will most likely incur. The state could step in by focusing matching dollars to those businesses and nonprofits willing to keep their workers employed, or if furloughed, keep them on their healthcare plans; and to also help subsidize childcare for workers on the front lines of this crisis. Any support should exceed at the least 6-12 months. Thank you Mayor Garcetti, for the$11 million economic relief package for small businesses impacted by the novel coronavirus (COVID-19). The state can do more…stay tuned.
Highlighting Community Leadership
What the public and private sector cannot/does not fund…philanthropy can, especially when it comes to our society’s most vulnerable, provide some of the resources needed.
Significant funding pools have been created to fill the gaps dues to the crisis. The good news is that these organizations below are working collectively to make sure their respective funding initiatives do not overlap.
Focus: reduce the spread of the virus in homeless encampments and shelters, and help pay the bills for people in danger of losing their homes.
Focus: support community needs identified by our partners in health, housing, education and immigration, and will aid impacted individuals
Focus: Provide meals and urgently needed supplies; provide devices, digital libraries and books and help students to continue learning. Unacceptable facts in a trillion dollar economy: More than 17,000 LAUSD students are homeless and 25 percent lack access to technology.
Focus: Support for families and small businesses (childcare, meals, and other community resources); relief for healthcare workers (childcare services, counseling support); equipment for health response; services for our unhoused neighbors; powering real-time research.
Focus: Support the urgent needs of local school districts: Student and family basic needs; providing students with devices for online/distance learning; professional development training for educators utilizing online instruction; district infrastructure for distance learning and to support the delivery of mental health services.