Figure 1 compares the annual growth rate of real GDP in the Inland Empire to growth rates for the U.S. and California. The first thing to note is the apparent strength of the Inland Empire’s economy from 2002-2005. For most of that time, GDP grew at a rate approximately double that of the U.S. and higher even than that of California as a whole. But in 2006, the Inland Empire’s fast growth slowed precipitously. Neither California nor the United States experienced a large slowdown in GDP growth until 2007, when the Inland Empire’s GDP was actually already contracting. In 2008 and 2009, the Inland Empire’s GDP shrank at a much faster rate than that of both California and the United States. The preliminary estimate for the Inland Empire for 2010 shows a continued contraction, albeit much less severe than the previous years. The new data shows that real GDP currently is lower than it was in 2004: we are eight years into a lost decade in terms of lost output.

Based on real GDP growth rates, the “Great Recession” hit the Inland Empire both harder and earlier than either the U.S or California. Even the U.S. has yet to return to pre-recession output levels. The real sign of full recovery would be reaching full potential output, which takes into account the growth of the population and productivity. However, that would require growth rates above the normal, while below average growth rates seem to be on the immediate horizon for the Inland Empire.

Output per Person

Real GDP growth rates paint an interesting picture of the severity of the recession in the Inland Empire, but the numbers are skewed by population increases during the year. Most people are far more concerned with per capita real GDP than with the total, since this income per person is more relevant to them. For example, although China is now the second largest economy in the world in terms of output produced, it is not close to Japan when standard of living is measured on a per person income basis. Figure 2 shows the per capita real GDP growth rate of the Inland Empire again compared to the United States and California. All three experienced population increases every year from 2002-2010. Nonetheless, the pace of the Inland Empire’s population growth far exceeded those of both California and the United States. (See 2010 Census Shows Large Increase for Inland Empire in this issue for a detailed analysis of the IE’s population growth.)

Removing the effects of population growth on GDP changes the story dramatically. The Inland Empire’s impressive growth rates from 2002-2004 disappear, leaving behind growth rates comparable to those of the United States as a whole and below California’s. The Inland Empire’s 2006 economic slowdown seems much more dramatic when we look at per capita GDP, which shows virtually no growth for that year. The drop in per capita GDP from 2007-2009 is much more severe than the corresponding decline in real GDP. Not only does this drop indicate a more severe recession, it also shows that the Inland Empire’s population continued to grow in spite of the very troubling economic situation. The preliminary numbers have the Inland Empire’s per capita GDP following another 2.5 percent in 2010.We expect 2011 numbers to show that real per capita GDP is now lower than it was in 2001, when data was first collected. In terms of this measure, there has already been a lost decade.

A word of caution is warranted here. Perhaps we have painted too bleak a picture for the Inland Empire in terms of per capita output. The fact is that a substantial number of workers commute from the Inland Empire either into the Greater Los Angeles area or into San Diego County. As a result, these workers augment the GDP of those areas, but are not counted as residents there. In the presence of large commuting flows in one direction, per capita GDP will be overstated in the receiving geographical areas (Greater Los Angeles and San Diego County) and understated in the area from which these workers originate (San Bernardino County and Riverside County).

Despite this subtlety, both figures paint a dismal picture of the effects of the recession on the Inland Empire’s economy. The Inland Empire was particularly vulnerable to the effects of a recession triggered by the collapse of the housing sector, given the importance of construction in the region’s economy. While the “Great Recession” officially ended over two years ago for the United States, the Inland Empire is still waiting for any real signs of recovery, much less a return to its full potential GDP. Weakness in the U.S. and California economies bodes poorly for the chances of recovery in the Inland Empire in the near future. Furthermore, without significant increases in GDP growth, the very high unemployment rates experienced here will continue to persist.

Comparison to other California MSA Regions

The relative severity of the recession in the Inland Empire can further be seen through a comparison with California’s other Metropolitan Statistical Areas (MSA). Figure 3 shows the decline in real GDP from peak to trough for each MSA. Real GDP of some MSAs, including the Inland Empire’s, continued to shrink in 2009, meaning that until the 2010 numbers are released, we will not know if they have reached the true bottom. Other California MSAs did not escape the recession entirely, but experienced a less severe decline in real GDP, if any at all.

As Figure 3 shows, the Inland Empire saw one of the largest drops in GDP of any California MSA. Only two MSAs, Merced and Redding, experienced more severe declines, and another two MSAs, Santa Rosa-Petaluma and Modesto had declines roughly equivalent to those experienced by the Inland Empire. While there seem to be no distinguishable patterns between the north and south of California in this figure, the brunt of the recession appears to have hit the inland portions of the state, with the coastal areas hit less severely (“East-West Divide”). The Inland Empire’s position among the hardest hit of California’s MSAs is particularly sobering, given that California is one of the states most adversely affected by the “Great Recession.”

What causes such a disparity in labor market performance among the Inland Empire cities? More generally, what are the determinants of unemployment rates in this particular region? Finally, and perhaps most importantly, what policies can be used to lower the unemployment rates of cities within Inland Empire, and in doing so, what can we learn about lowering the unemployment rate in the region as a whole?

Does Size Matter?

Some have suggested that larger or more populous labor markets produce, on average, lower unemployment rates, since it is easier for job seekers and employers to find each other in a bigger city rather than in a relatively smaller city. The implication is that unemployment rates might benefit from economies of scale, and this theory has been proven empirically between MSAs in the United States. We investigate this possibility in the Inland Empire in Table 1, which ranks most recently available monthly unemployment rates of the major Inland Empire cities in descending order. The last column lists the corresponding population size.

To investigate the possibility of economies of scale, we highlighted in red cities with more than 90,000 inhabitants. Some of the larger cities, such as Temecula and Corona, fit the hypothesis, yet others (Moreno Valley, San Bernardino) clearly do not. Viewing the table as a whole, larger cities are not concentrated in the low unemployment rate section, and smaller cities are not predominantly in the high unemployment rate section. Smaller cities such as Adelanto are as likely to experience high unemployment rates as larger cities such as Victorville. In general, there is no apparent pattern visible for the highlighted cities, and this suggests that size does not matter as a determinant of unemployment rates. This size effect does not seem to be present within the Inland Empire, perhaps because these cities do not have exclusive labor markets. In fact, the high percentage of people commuting to or working outside of the city in which they reside suggests that the Inland Empire cities might share the same labor market. Therefore, although the size pattern may be observable between MSAs according to some studies, it is less likely to be found within an MSA, and it is certainly not present in the data displayed in Table 1.

The conclusion regarding the size effect within the Inland Empire is not dependent on any specific month during which we observe the labor market. In addition, it holds irrespectively whether we use monthly data or annual data.

Finding that size does not matter in the list of potential determinants of unemployment rate differences has not gotten us any closer to an explanation of the observed variation between cities. Perhaps a geographical map of the cities might lead to further clues. Figure 1 illustrates the same thirty-six cities, using darker areas to indicate higher unemployment rates. Setting aside the cities of the Coachella Valley, there appears to be a divide between cities that lie closer and those that lie further away in terms of driving distance to their respective closest “point of entry” into Los Angeles County, Orange County, and San Diego County. By “point of entry” we mean the highway exit on the county line one takes to enter the county of destination. Cities that are closer to these points have lower unemployment rates, on average. In other words, geography does seem to matter.

There currently is an East-West divide in California in terms of unemployment rates where coastal areas, such as Los Angeles, San Francisco, and San Diego, are less affected by the downturn and the slow recovery than the areas that lie further inland. Now assume that residents of communities that live closer to “points of entry” into the economically less depressed areas are more likely to commute from the Inland Empire into these areas, and hence are more likely to hold jobs there. Since unemployment rates are measured by residency (if you lose your job in downtown L.A. and reside in Ontario, the unemployment rate of Ontario goes up while the unemployment rate of L.A. is unaffected), then these communities will show lower unemployment rates when compared to those further away from the “points of entry.”

One third of those who live in the Inland Empire and hold jobs commute to Los Angeles, Orange, and San Diego counties to work. Many residents from those counties who moved to the Inland Empire were drawn by more affordable housing further inland, rather than by the lure of jobs. The combination of more affordable housing and the lack of relatively better paying local jobs in San Bernardino and Riverside counties resulted in these residents spending substantial time commuting to work in neighboring regions.

To determine whether geography matters in explaining unemployment rate differences, we display 2010 annual unemployment rate data in Table 2, with an additional column listing the distance from each city to its respective nearest “point of entry” into either Greater L.A. or San Diego County, whichever is closer. We will ignore the cities of the Coachella Valley in our analysis (marked in blue), because they are clearly too far away for regular commuting. Thus, the Coachella Valley economy must be viewed separately from the other cities when it comes to finding the determinants of unemployment rate.

After excluding cities of the Coachella Valley, we marked in red those that were within 15 miles of their “points of entry” in Table 2. As one can easily observe, the majority of the cities with shorter distance to the “points of entry” are found in the bottom part of the list. This pattern suggests a positive relationship between distances from the “points of entry” and city unemployment rates: on average, cities that are located further away will experience higher unemployment rates.

To further investigate this observation, Figure 2 presents a cross-plot of city unemployment rates against the distance from each city center to its “point of entry.” Excluding the cities of the Coachella Valley for the reasons stated above, we constructed a trend line based on data from the remaining cities.

The trend line suggests that geography does matter, but the effect becomes weaker as one moves further away from the county line. In other words, unemployment rates change more drastically in the 0 to 20 mile range from the “point of entry” than in the 20 to 40 mile range. Furthermore, this effect is economically important. Moving away from the county line for the first 20 miles, the unemployment rate increases, on average, by a massive five percentage points.

However, not all of the city unemployment rate observations lie on the trend line. In fact, the considerable scatter around the trend line indicates that there must be determinants other than proximity which play a significant role. That is, closeness to employment centers in the western counties matters, but there are limits to its explanatory power. Take Ontario and Upland as an example. While both cities are roughly the same distance away from the nearest “point of entry,” about 5 miles, Ontario’s unemployment rate, at 15.1 percent, is more than 5 percentage points higher than Upland’s 9.9 percent. Similarly, San Jacinto and Redlands are both located around 32 miles away from the county line, yet San Jacinto’s unemployment rate (21.8 percent) is more than 10 percentage points higher than Redlands’s (10.5 percent). What causes the variation in the unemployment rates given that they have the same proximity to more vibrant economic areas?

We considered a variety of city attributes: median household income level, number of housing permits issued, average household size, average education level, crime rates, demographics, and residential status (rent/own). After controlling for the influence of geography, three of these variables stand out: median per capita income level, percentage of residents with a high school diploma, and crime rates.

Table 3 compares the two city pairs mentioned above by listing the values for the three new variables. Recall from the previous text that Upland and Redlands have lower unemployment rates than Ontario and San Jacinto respectively, while being very similar in terms of proximity to “points of entry.”

Table 3 demonstrates that after controlling for geography, a higher median household income, a higher education level, and lower crime rates result in lower city unemployment rates. More complicated statistical techniques allow us to establish the separate effect of each attribute while controlling (“holding constant”) the others. Performing this type of (multiple regression) analysis establishes the following: apart from geographic factors, the unemployment rate of a city is higher, on average, if

• households have lower income;

• the percentage of high school graduation is lower.

Remarkably, higher crime rates only have a positive effect on unemployment rates when not controlling for income and education level. That is, crime rates lose their significant explanatory power when taking income and education level in addition to geography into account. Hence, crime rates do not play a separate role in determining city unemployment rates above and beyond the influence established by the other factors. To emphasize the result, once geography, income, and education are allowed to cast their effect on the unemployment rate, crime rates have no additional contribution.

What are the Policy Implications?

Given our results regarding the determinants of city unemployment rate variation, what can policy makers do to improve city and county unemployment rates? Clearly cities cannot be relocated easily, so the “closeness” geographical effect must be taken as given. This statement is less obvious than it appears at first. Greater Los Angeles, for instance, has expanded outwards dramatically over time. In other words, whereas the county line always remains at the same geographical location, the employment centers can move closer to their employees over the years.

This fact leaves the other two alternatives as sole factors that can be influenced to have an impact on unemployment: household income and high school attainment levels. Government officials have the ability to raise average household incomes by attracting higher paying jobs into their area, thereby generating higher paying employment opportunities. This can be done through enterprise zones and other subsidies and tax breaks which are under governments’ control, directly or indirectly, in policy circles at the state and local level. However, there are other obstacles to overcome before higher value-adding firms move into an area. These firms are particularly interested in hiring skilled workers, which may be problematic in certain areas of the Inland Empire, given their low education level. Take Adelanto for example. Only 63 percent of its population had a high school degree in 2009, strikingly low when compared to a national average of 85 percent and the average for California, 77 percent. Moreover, the housing boom in the Inland Empire in the late 1990s was created by households with lower income immigrating, instead of by better educated, higher income-earning families, as many lower-income households were attracted to the area by affordable housing.

Hence, it is the third factor, high school attainment levels and education in general, that plays a central role in tackling the labor market problems. Clearly, higher education levels have an effect on median household incomes, but there also seems to be an additional contribution from education beyond its impact on income. Our analysis places education in the center of policy options to reduce unemployment in the Inland Empire. One possibility that has been tried in the past, and claimed by many to be unsuccessful, is to throw money at the problem. That is, to improve education outcomes by increasing expenditures per student and/or by reducing class sizes. However, setting aside the effectiveness of these programs, such a policy is clearly not an option in the current stagnant economy. Moreover, we foresee further school budget cuts in the future.

Fortunately, there are ways to raise high school attainment rates without raising expenditures, such as promoting high performance teachers through merit raises rather than determining salaries by seniority. Unfortunately, as the resistance in the LAUSD and elsewhere indicates, current government educational policies are not implemented along such lines on a large scale. In reality, cuts in educational budgets are most often executed by forcing out more recently hired, younger, more passionate, and thus potentially better performing teachers – the usual LIFO policy. Similar to firms, which acquire some less productive workers during long-lasting expansions and are unwilling to get rid of them during prosperous times in absence of much need for fiscal discipline, schools are often unwilling to deal with less productive teachers. Laying off teachers is costly or even impossible for administrators both in terms of existing tenure rules (note that, as a general principle, tenure does not prevent districts from cutting salaries), the unpleasantness of the process for school administrators, and its negative effects on the morale of the remaining teaching staff. However, school officials should view the current economic climate as an opportune time to implement dramatic changes in school policies.

The Inland Empire saw an economic expansion of over ten years before the bursting of the housing bubble. Facing some of the most powerful unions in the United States, making educated decisions such as changing employment contracts is not only painful, but unlikely to occur during times when the need for such changes are less pressing or obvious. Now that the years of plenty have been followed by the years of famine, school districts should seriously consider how to put policies into motion that will lead to increased educational levels in the local community, not only now but also when the economy bounces back in the future.

These insights into the determinants of city unemployment rates are neither surprising nor are we the first to observe them. However, we are the first to establish these empirically for the cities within the Inland Empire. The results show that these socio-economic, geographic, and demographic factors play a significant role and have a consistent impact on city level unemployment rates within the Inland Empire. High school education, in particular, commands the most attention. Current cuts in the public sector force the government to come up with more efficient ways to operate schools. This encourages us to rethink the convention and status quo in the education system. Rewarding teachers by merit rather than by seniority can allow us to retain or even improve education quality, with the limited budget we have. The time to do it is now—- if cuts are inevitable, at least we can influence the form those cuts take.

Redevelopment agencies are government subdivisions whose main goal is to reinvigorate and improve blighted, deteriorated, and economically downtrodden areas. Sixty years ago, the California legislature established a process whereby a city or county can declare an area to be blighted and in need of redevelopment. Thereafter, most property tax revenue growth from the “project area” is distributed to a newly created redevelopment agency rather than to other local agencies.

Once a community establishes a redevelopment project area, property tax revenue allocated to local government bodies is frozen at its current level, known as the frozen base. If the value of the property increases due to improvements to the redevelopment area or any other factor, than the amount of property tax revenue also increases. The amount of the increase above the frozen base is called the tax increment.

In many cases the use of redevelopment agencies has provided substantial benefits. For example, Riverside embarked on a housing redevelopment project in the city’s University neighborhood by renovating a 64-unit building rife with health and safety violations. Today, the Topaz and Turquoise housing complex has been substantially rehabilitated and is now a vibrant asset to the city, providing affordable housing for low-and moderate-income families. On the other hand, redevelopment agencies have also come under attack for subsidizing projects that would not ordinarily be considered “blight.” State Controller John Chiang’s audit of eighteen agencies found that Palm Desert’s redevelopment agency proposed to eliminate so-called blight by spending nearly $17 million on refurbishing a municipal golf club.

Establishing a redevelopment area is one of the easiest ways for local governments to raise significant money. This is because they are not constrained by some of the key accountability and transparency elements required of other local government bodies. Specifically, redevelopment agencies can incur debt without voter approval and redirect property tax revenues from schools and other agencies without voter approval or consent of the other agencies.

Tax increment revenues in California totaled $5.7 billion in 2008-09. Over the last three decades, redevelopment agencies’ share of total statewide property taxes has increased to 12 percent. In some counties, nearly 25 percent of all property tax revenue collected goes to a redevelopment agency rather than schools, community colleges, and other local agencies.

The current law allocates 20 percent of tax increment revenue to low- and moderate-income housing. Another 22 percent (on average) passes through to local governments and is distributed among counties, K-14 schools, special districts and cities. The remaining 58 percent of tax increment revenue is available for redevelopment activities. Controller Chiang’s office found significant flaws with the state’s redevelopment agencies. These include inaccurate audits, substandard reporting procedures and inappropriate use of housing funds. Supporters of redevelopment agencies argue that they reduce unemployment and promote long-term economic prosperity. However, the Legislative Analyst’s Office notes that there are no objective or standard performance measures to gauge whether these agencies do, in fact, promote job growth or generate significant economic returns to the taxpayers.

Under Governor Brown’s proposal, a local successor agency, most likely the city or county that originally authorized the redevelopment agency, would be responsible for managing the existing contractual obligations and paying the agency’s debts. Tax increment revenue would first go to the successor agency to retire the redevelopment agency debt and then to fund other local government services.

The Governor’s proposal assumes tax increment revenues of $5.2 billion in 2011-12. It allocates $2.2 billion to successor agencies to pay down redevelopment debt. It maintains the local pass through at $1.1 billion, approximately 21 percent, and adds another $210 million to local governments. However, the proposal also contains a one-time $1.7 billion dollar payment to the state in 2011-12 to fund trial courts and Medi-Cal. After the first year, any property tax revenues remaining after the successor agencies pay redevelopment debt would be distributed to other local governments in the county.

John Benoit

Brown objects that these changes will save the state approximately $1.7 billion—the amount of the one-time payment to the state—during the next fiscal year. The governor argues that California’s enormous deficit makes it no longer feasible to subsidize the work of redevelopment agencies.

Supporters of redevelopment agencies, however, fear that their elimination would be devastating to the California economy for a number of reasons. First, they argue that the eradication of these agencies will kill jobs and shift much of the fiscal burden on cities themselves. At a time when the state faces a high unemployment rate, they argue that the redevelopment agencies provide much needed employment. They also point to the use of redevelopment to improve many areas of the state through the revitalization of public infrastructure and commercial development, such as Riverside’s Topaz and Turquoise housing complex.

Further, because 20 percent of tax increment revenue must go to low- and moderate-income housing, redevelopment funds have been a significant source of revenue to local housing districts. It has been noted, however, that state audits and oversight reports have concluded that a significant number of redevelopment agencies take actions that reduce their housing program productivity, such as maintaining large balances of unspent housing funds, using most of their housing funds for planning and administrative costs, and spending housing funds to acquire land for housing but not on actual building.

The League of California Cities is also critical of the Governor’s plan, saying that it violates Proposition 22, which prohibits the state from reaching into local government funds. The League argues that the first year allocation of $1.7 billion to the state flies in the face of the 61 percent of California voters who passed Proposition 22 last November.

Governor Brown’s proposal has ignited opposition in the Inland Empire. With traditionally high unemployment rates, his proposal has significant impact in this area of California. Riverside County in particular is among the top ten counties in the entire state in redevelopment growth (first in the Inland Empire) and makes extensive use of redevelopment agencies.

Riverside County Supervisor John Benoit is a leading local advocate of redevelopment agencies and argues that they have helped revitalize economically depressed communities. “We have absolutely been able to use redevelopment agencies to ameliorate the unemployment problems. We have used RDA money to put 8,700 people back to work in Riverside County, particularly construction workers who were previously out of work,” Benoit said.

Benoit fears that if redevelopment agencies in Riverside and the Inland Empire are eliminated, it may require years to adapt to the change. “We’ve clearly made some dramatic improvements using RDAs; it’s a source of pride for us in Riverside, but it’s also in danger. The projects that have been completed have created long-term economic development so significant that it makes it hard to argue about the benefits of RDAs.”

Perhaps the biggest impact that redevelopment authority spending has had in Riverside is Mecca, a community of 5,000 Hispanic farm workers. A small area in Riverside County that had previously been severely impoverished, underdeveloped, and with over 40 percent of the population under the poverty line, Mecca used $50 million dollars of redevelopment money to vastly improve the lives of its inhabitants.

“There has been impressive work being done by the redevelopment agency in Mecca,” Benoit says. “Redevelopment has been used to build a medical clinic, library, sheriff’s station and a lot more that never would have been possible without RDAs.”

Redevelopment agency advocates acknowledge that eliminating them would provide a temporary improvement to the state budget deficit. Advocates hope to see an improvement of the redevelopment process and have developed compromise proposals to save redevelopment authorities.

A recent proposal put forth by Los Angeles Mayor Antonio Villaraigosa, suggests that the agencies could help the state borrow money in order to alleviate the budget deficit. The proposal calls for allowing the agencies to divert approximately $200 million a year to the state for 25 years, thereby allowing the state to finance a $1.7 billion loan to help reduce the deficit. In addition, the proposal would ask redevelopment agencies to divert more tax funds to pay for local services with $50 million going to schools annually.

Governor Brown’s proposed budget also targets enterprise zones—another popular local government program. Currently, there are forty-two enterprise zones throughout the state that offer special tax breaks and other incentives to businesses in designated areas to encourage economic development and growth. The tax benefits provided for most of these areas include a hiring credit, a credit for sales tax paid, a credit for employees who earn wages within the area, and a deduction for interest received from businesses in the area. The governor estimates that his proposal to eliminate all enterprise zone tax incentives will generate an estimated $343 million in 2010-2011 and $581 million in 2011-12 in additional tax revenues.

The enterprise zone program has grown remarkably since the legislature enacted it in 1984.The program started in 1986 with ten zones and expanded to forty-two by 2008. The average cost per zone increased from $48,000 to $11.1 million. The California Budget Project puts the cost of enterprise zone tax credits and deductions at $465.5 million in 2008, up from $657,000 in 1986. The hiring tax credit accounts for 58.7 percent of this cost, $273.5 million in 2008. Yet because the hiring credit is granted for new hires, rather than new jobs, companies can claim it without creating any new jobs. Critics argue that this rewards companies with high turnover rates more than those that create steady employment.

Governor Brown’s proposal sparked an outcry from local officials, legislators, and business leaders who have come to rely on enterprise zones as a tool for economic development. Californians for Jobs and Safe Communities is a coalition of local government bodies, statewide trade and industry groups, local and regional chambers of commerce, and businesses. It argues that eliminating enterprise zones is a tax increase on the more than 10,000 businesses in California currently benefiting each year and it strongly opposes such a move.

Assembly Member Manuel Perez’s Coachella Valley district is home to four enterprise zones. Perez acknowledges that there are problems with the program, but believes that the solution is to reform it, not to eliminate it completely. Perez has an alternative plan, the 2011 Enterprise Zone Reform Package, which would reform the program in several ways. Most notably his plan would phase out the 5-year hiring credit, replacing it with a 3-year credit. The new hiring credit would reward employee retention by increasing the amount of credit each year. It also would offer more accountability by designating “poor performing zones” for zones that have not demonstrated progress and tracks how local resources are spent on zone activities. The Perez proposal would check the unlimited expansion of zones and require enterprise zones to follow census tract boundaries. It also would raise the reporting requirements for claiming the hiring credit and limits the carryover of excess tax credits to 15 years.

Perez strongly supports these reforms because, under current laws, low-income populations in rural areas are treated differently than those in cities. “Too often, rural areas are not invited to the table and we tend to lose out to urban areas with regards to resources,” Perez asserts. He contends that the perception that the program is a wasteful form of corporate welfare is inaccurate, citing data to demonstrate that eneterpise zones have improved economic conditions in Indio.

Perez knows that accountability will be an important issue. “Another element of my reform legislation includes implementing measurements of success that over the course of time, will show numbers grow steadily in terms of variables such as how many jobs are being created in enterprise zones and how many people are getting off social welfare.”

Defenders of enterprise zones also argue that eliminating them would be unconstitutional. Marty Dakessian represents the Communities to Save Enterprise Zones coalition and strongly opposes Governor Brown’s proposal. “Governor Brown’s proposal violates agreements involving the state, local governments, and businesses lured to the zones by hiring tax credits, operating loss deductions, and other invectives.” He argues that repeal of the enterprise zone program violates the contracts and due process clauses of the United States Constitution and the contracts clause of the California Constitution.

Governor Brown’s proposal to eliminate redevelopment agencies and enterprise zones has sparked serious debate throughout the state. Inland Empire officials have come to rely on both as valuable economic development tools. They vow to fight both proposals.

California currently lags behind other western states in its quest to expand production of green energy. There are four primary impediments to its growth: aesthetics, environmental concerns, huge acreage requirements, and cost. Even many people who support renewable energy object to the sight of power lines or wind farms in their own neighborhoods. This issue came up recently in Chino Hills, where Southern California Edison is constructing power lines and poles as close as 75 feet to some homes to bring wind-generated energy from Kern County to the Los Angeles area. Residents are rallying against Edison concerned that the project will lower property values, destroy trees and land, and risk toppling towers onto homes. Edison counters that the new power lines are necessary because existing power lines are at full capacity. Continued construction of green energy will not make sense without sufficient infrastructure to transmit power from the generation site to the place where people use it.

In addition to aesthetics, many people are concerned about the environmental costs of green energy projects. One of the first large-scale solar projects in the Inland Empire is the Ivanpah Solar Electric Generating Facility, currently under construction in northern San Bernardino County. The project, owned and designed by BrightSource Energy Company with the help of a $1.375 billion dollar loan from the United States Department of Energy, was recently approved after years of debate over its environmental impact. A key issue was the project’s impact on the desert tortoise.

The desert tortoise was considered “threatened” for several decades before this project began. It is prone to various diseases, vulnerable to many predators, and also has very specific habitat requirements. Moreover, the desert tortoise has not withstood past attempts to alter its habitat. As part of the expansion of Fort Irwin military base in the Mojave Desert, the Army was required to relocate the desert tortoise to unoccupied lands. But the $8.7 million effort to relocate over 760 tortoises proved unsuccessful. Many tortoises died quickly from attacks by new predators like the coyote, increased spread of disease likely due to the tortoises’ close proximity to each other during transport, as well as injuries inflicted by humans and cars.

Flash forward to the BrightSource solar project. Conservationists are extremely worried about the desert tortoise’s continued survival. A pre-construction study of the area found only 16 tortoises in a 5.6-square-mile area surveyed. Yet when construction actually began in late 2010, biologists hired by BrightSource found 23 tortoises in the first 2 square-mile area to be developed, with an additional 18 found very near the project area. While the company has taken pains not to reproduce the overcrowding and potential disease spreading transport methods utilized by Fort Irwin, a number of tortoises have already died. This spring another tortoise round up and relocation will begin and conservationists anxiously await the results.

Brad Mitzelfelt

San Bernardino County Supervisor Brad Mitzelfelt was initially opposed to BrightSource’s construction plan for a number of reasons, including the impact on the desert tortoise. In a phone interview, Supervisor Mitzelfelt expressed his view that “[we] need to adopt a more aggressive conservation plan, not just to stop decline, but to recover the species.” The California Energy Commission compelled BrightSource to purchase 8,000 acres of desert habitat to be set aside permanently for conservation to offset the 4,000 acres used for the Ivanpah facility. Mitzelfelt cited this as a positive start towards conservation, but also pointed out the purchase of this much land for a single project raises other concerns.

BrightSource purchased a total of 12,000 acres in San Bernardino County to house both the solar facility and the required conservation area. It now owns ten percent of the undeveloped land in the county. Supervisor Mitzelfelt points out that the scale of this habitat offset requirement will not be sustainable given the high number of potential new projects in the area. He cautions, “We’ll see more projects go to Arizona and Nevada” if we continue to require such large offsets. Mitzelfelt says there is already an uneven playing field among the western states, as states such as Nevada require much lower offsets for the desert tortoise. Because it is easier to do business in the other states, “[San Bernardino] County is in danger…of losing opportunities.”

Another problem is that much of the land eyed for solar or wind power projects is owned by multiple entities. The federal government owns much of the desert land in San Bernardino County and Native American tribes also lay claim to some potential sites. In February, Native American protection groups sued the Bureau of Land Management over plans to construct green energy projects, including a solar project planned in Blythe (Riverside County). The lawsuit claims that the land is culturally significant to tribes in several Western Deserts. The 7,000-acre Blythe project has been moved several times in an attempt to address tribal concerns, but construction is now underway despite the ongoing lawsuit.

Finally, the fact that these developments will increase costs for consumers is also an issue. In promulgating the new renewable energy standard, Governor Brown stated a goal of developing 20,000 megawatts of green power from new sources; he believes this will help create hundreds of thousands of new jobs. But the construction cost of enough new renewable energy sources to reach this goal will require much higher utility rates for consumers. According to an analysis done by California’s Public Utilities Commission, utility rates could increase by as much as 14.5 percent in order to reach Brown’s goal by 2020.

A look to California’s northern neighbor is instructive: the largest wind farm in the United States is currently under construction in the Columbia River Gorge in Oregon. The building costs are estimated to be $1.9 billion, much of which is subsidized by the federal government. The Energy Department provided a $1.06 billion federal loan guarantee so that the owners, General Electric Co. and Caithness Development LLC, could find lenders to finance the project. The U.S. Treasury will provide a $490 million cash grant once the wind farm is operating. In contrast, a natural gas plant of comparable size would cost less than half, about $865 million, and would not need government support.

The potential increase in costs for consumers also makes construction of new renewable energy projects more difficult for developers. Because of the pressure on companies to plan for consumer costs upfront, “a change in the [cost] margin doesn’t have to be too much to make a project not feasible,” says Fred Bell, COO of Noble Enterprises in Palm Desert. Initial costs are going to continue to be problematic for companies trying to develop green projects in California. “It’s getting more expensive to make anything in California,” says Bell, “if we really want green power…[we] must get involved in the key metrics to make it more viable than it is now.”

Despite an increased focus on creating more renewable power, energy from green sources still accounts for just 8 percent of the country’s power, while petroleum makes up 37 percent. If California wants to reduce its dependence on foreign petroleum then it will have to make major changes in its renewable energy plan.

With the recent enactment of the renewable energy standard, the discussion of increasing renewable power has now become a reality. The Inland Empire will likely soon become the region of focus as California strives to lead the country in renewable energy use.

The Great Recession started in December 2007 and ended in June 2009. The output decline for 2008 in the U.S., as a whole, was negligible (you may recall the Bush tax cuts in the second quarter of 2008, when Gross Domestic Product (GDP) actually increases slightly): there was no decline for the U.S. figures in annual numbers. The severity of the U.S. recession started with the third quarter of 2008 with the fall of Lehman Brothers, and we saw the sharpest declines in the second half of 2008 and the first two quarters of 2009. Despite the recovery for the last two quarters of 2009, U.S. real GDP declined by 2.6 percent for the year, making it the most severe post World War II recession in the U.S.

However severe the U.S. numbers may sound, they pale compared to those of the Inland Empire. To begin, there was a small decline in real GDP from 2006 to 2007 of 0.7 percent, probably starting in the summer of 2006 with the burst of the housing bubble. The recession worsened in the Inland Empire in 2008, when real GDP declined by 3.4 percent. 2009 proved to be a true disaster year, with output declining by a further 4.9 percent. This represents 1/20th of output lost in a single year. At the end of 2009, real GDP in the Inland Empire stood at a horrifying 8.8 percent below its 2006 peak. It will take quite some time to recover from this low point.

Figure 1: Employment by Industry in Riverside County, December 2009

How did the two counties within the Inland Empire fare during this period? The recession and subsequent recovery are far from even for San Bernardino County and Riverside County. While San Bernardino County currently has an unemployment rate of 13.7 percent, Riverside County is suffering from an unemployment rate of 14.1 percent. A detailed analysis of industrial composition and per capita income shows that Riverside County was hit harder by the recession and is recovering more slowly.

Due to their location and proximity to the Greater Los Angeles area, both counties have a similar industrial composition. Trade and transportation (logistics) dominate, employing approximately a quarter of the labor force (26 percent in San Bernardino County and 23 percent in Riverside County). Educational and health services, leisure and hospitality, and manufacturing follow closely, each averaging roughly 10 percent in both counties.

Figure 2: Employment by Industry in San Bernardino County, December 2009

Both counties have sustained severe job losses in their key industries of construction and manufacturing. This is not surprising, since the Great Recession affected these sectors particularly hard. As a result, it is sometimes referred to as a “mancession” due to the significant job losses for males in the two sectors. In September 2006, construction and manufacturing employed 17 percent of the workforce in San Bernardino County and 23 percent in Riverside County. By December 2009 these numbers had fallen to 12 percent and 14 percent respectively. This is quite dramatic. Since the employment share of construction and manufacturing is higher in Riverside County, it is not surprising that the recession had a more severe effect there.

The construction industry in Riverside County, in particular, has suffered much more than its counterpart in San Bernardino County. In Riverside County, the construction industry accounts for 40 percent of cumulative losses since January 2007, or approximately 36,000 jobs. In San Bernardino County, the construction industry has lost 21,500 jobs since January 2007, accounting for 27 percent of the jobs lost.

Figure 3: Cumulative Employment Losses by Industry in Riverside County from January 2007 to December 2009

In contrast, the logistics industry has fared better during the recession in Riverside County than in San Bernardino County. San Bernardino County lost 2,300 jobs in the trade and transportation industry from 2007 to 2009. During the same period, Riverside County actually gained 2,200 jobs in the same industry. These gains, however, are dwarfed by the sheer size of the losses in the construction industry.

Per capita income in Riverside County is historically slightly higher than that in San Bernardino County. However, San Bernardino County per capita income increased steadily during the recent recession and is now almost equal to that in Riverside County. From 2006 to 2008, San Bernardino County’s per capita income has climbed by roughly $1,750 to slightly more than $30,360, while Riverside County’s increased by only $600 dollars to approximately $30,900; there was actually a small decline in the Inland Empire’s per capita income from 2008 to 2009.

Figure 4: Cumulative Employment Losses by Industry in San Bernardino County from January 2007 to December 2009

Although San Bernardino County and Riverside County have historically grown at similar rates, the former has gained considerably on the latter from 2006 to 2009, which is the most recent year available. Looking at the graph, it appears that San Bernardino County is approaching Riverside County primarily because the growth rate of Riverside County has significantly flattened out, while San Bernardino’s has not changed much from historical patterns. It will be interesting to make further comparisons once data becomes available for the post recession year. It appears likely that San Bernardino County will pass Riverside County in per capita income in 2010.

Figure 5: Personal Income Levels in San Bernardino County and Riverside County, 1990-2008

The continued growth of per capita income in both Inland Empire counties over the past twenty years illustrates the incredible economic boom the area enjoyed until the start of the Great Recession. In particular, from 1997 to 2003 annual growth rates reached seven percent. Yet, despite the fact that increases in per capita income have flattened since 2006, per capita income has still increased by over two-thirds for each county since 1990. Meanwhile, Orange County per capita income has actually dropped since 2007, though it remains significantly higher than the per capita income in either Riverside County or San Bernardino County. Los Angeles County per capita income continues to grow at a rate similar to both parts of the Inland Empire, despite the fact that, again, Los Angeles per capita income is higher than in the two counties of the Inland Empire.

While the short lines at Ontario Airport may be a blessing to passengers, to airport officials and insiders, they are just the latest symptom of a dying airport.  Officials in Ontario, Los Angeles, and the Inland Empire have all expressed concern about Ontario Airport’s future, and called attention specifically to the airport’s unique operational structure.  Ontario International Airport is actually owned and operated by the city of Los Angeles. Los Angeles World Airports (LAWA), a department of the Los Angeles city government, runs both LAX and Ontario Airport, as well as Van Nuys Airport in San Fernando.  Although LAWA successfully managed Ontario Airport in the past, the airport’s recent decline has caused many to question this operational model.

The statistics for Ontario Airport certainly point to trouble.  In 2009, Ontario Airport’s annual passenger volume fell to five million, a decline of 28% in a decade. Average daily departures on Southwest, Ontario Airport’s highest volume airline, declined from 58.4 in 2001 to 39.7 in 2010. JetBlue and ExpressJet, once promising new additions, have more recently abandoned the airport entirely. Passenger traffic at Ontario Airport has fallen sharply, domestic flights have been slashed, and airlines have left in droves. While other airports around the country and in Southern California have been on a road to a post-recession recovery, Ontario Airport has remained stagnant.

Ontario Airport’s decline has serious consequences for the entire region.  Recent estimates by the city of Ontario suggest that the Inland Empire lost upwards of $400 million in business and revenue, as well as more than 8,000 jobs from 2007 to 2009 directly because of Ontario Airport’s decline.

Ontario Airport wasn’t always on such a tumultuous path. Thanks to low costs and robust support from numerous airlines, Ontario Airport enjoyed significant increases in annual passenger volume throughout the 1980s and 1990s.  Annual passenger volume increased from approximately two million in 1980 to seven million in 2007.  In 2000 JetBlue chose Ontario Airport as its first west coast destination.

What went wrong in Ontario?  The answer is not difficult to identify — it is an exorbitantly expensive airport in which to operate.  Airports use a measurement called Cost per Enplaned Passenger (CPE) to compare costs. In US airports, the median CPE is $6.76.  In contrast, Ontario Airport’s estimated CPE was $14.50 for 2010, more than 214% above the median. This is higher than every other major regional airport. Similar sized airports in the southern California region, such as Long Beach ($5.34) and Palm Springs ($4.07), are less expensive.  Even LAX, despite being a much larger airport, has a CPE of $11.  With such prohibitively high costs, Ontario Airport is unable to offer competitive prices, and consequently, airlines have low profit margins at Ontario Airport and little incentive to operate there.

Greg Deveraux, Chief Administrative Officer of San Bernardino County

What is behind these enormous costs?  According to Greg Devereaux, Chief Administrative Officer of San Bernardino County, there are three primary reasons for the high cost of operation at Ontario Airport:  a costly and unnecessary administrative fee imposed by LAWA, overstaffing and overcompensation of airport employees.

LAWA charges Ontario Airport a 15% fee as overhead for “administrative fees.” Some believe that this fee is superfluous.  Devereaux estimates that once the administrative fee is taken into account, the airport is effectively paying staffing costs “triple the size of other [comparable] airports.” According to a report commissioned by the city of Ontario in 2010, Ontario International Airport – A Recovery Plan, “this administrative charge alone adds $3.68 per enplanement to Ontario Airport’s costs – which is more than Orange County, San Diego, or Burbank paid in total compensation and benefits per enplanement in FY2008.”

The second issue is overstaffing. Until very recently Ontario Airport had more than twice the number of employees as most comparably sized airports. With 302 budgeted employees, and 85 additional LAWA employees (compensated via the administrative fee), Ontario Airport employs a significantly larger staff than John Wayne (175) and Long Beach (124), despite comparable traffic. This problem is nothing new.  As Deveraux notes, “Even at the point where [Ontario Airport] had 7 million passengers, it was clearly overstaffed.”  While other airports were able to cut down on staff following a decline in business, local labor unions have been a major obstacle to initiating staffing changes at the airport.

The final source of Ontario Airport’s high cost is perhaps the most surprising. Not only does Ontario Airport appear to have significantly more employees than necessary, it also pays them at an inflated rate. Ontario Airport, with a compensation budget of $30.9 million for 302 budgeted employees, pays an average of $102,400 per employee. According to Devereaux, this high level of compensation occurs because employees of Ontario Airport are paid according to the Los Angeles living wage ordinance and payroll structure, rather than that of Ontario.  Ontario Airport employees are compensated as if they lived in Los Angeles even though most live in the Inland Empire, where the cost of housing alone is 34% lower, according to CNN/Money.  Thus, overstaffing compounded by overcompensation of airport employees has contributed to the high cost of operations at Ontario Airport.

In response to mounting criticism, LAWA recently cut Ontario Airport staff by 30% through early retirements and transfers to other LAWA owned airports. Yet even now, LAWA Executive Director Gina Marie Lindsey acknowledges in an interview with the Daily Breeze that “we have not been able to keep pace with the reduction in traffic and revenues.”  Ontario Airport remains an overstaffed and exceptionally expensive airport, even after these reductions.

The alleged inefficiencies caused by the governance structure at Ontario Airport are not the only points of concern for local officials. Devereaux and members of the Ontario city council have repeatedly expressed their concern that the city of Los Angeles is not doing enough to help save Ontario Airport.  Devereaux points out that LAWA “hasn’t been meeting out in Ontario” for several years and appears to be “focusing on building in LA,” rather than Ontario Airport.  These facts, says Devereaux, combined with LAWA’s decision to slash Ontario Airport’s marketing budget by 85% in 2008 appear to indicate of a clear “lack of focus and interest [from LAWA] even as the number of passengers [at Ontario Airport] was declining.”

Executive Director Lindsey responded to these concerns in a March 1, 2011 letter acknowledging the difficulty of giving Ontario Airport complete focus, while denying that LAWA has been inattentive. “We do agree that given LAWA’s portfolio of responsibilities, it is impossible for our senior management team to devote its full attention to (Ontario airport), just as it is impossible for us to devote our attention exclusively to Los Angeles International Airport or our other two airports.”

While diagnosing the problem of high costs facing Ontario Airport is fairly simple, prescribing a solution is much more difficult, and there remains significant divide over what action should be taken.

Officials in the city of Ontario and San Bernardino County argue that the best course of action is to maintain ownership with LAWA, but transfer operational control to the city of Ontario.  Devereaux firmly believes that costs could be reduced immediately with the transfer of operational authority.  “You could get it down to about a $10.50 CPE right away,” he says.

Devereaux isn’t the only advocate for such a change at Ontario Airport. State Senate Minority Leader Bob Dutton (R-Rancho Cucamonga) recently authored a resolution calling for a transfer of control over Ontario Airport from Los Angeles to a local authority. It is co-sponsored by Assembly members Wilmer Amina Carter (D-Rialto), Kevin Jeffries (R-Lake Elsinore), Brian Nestande (R-Palm Desert) and Norma Torres (D-Ontario).  The resolution asserts that a local authority, such as the city of Ontario, would be the most capable of turning Ontario Airport around.

Deveraux and others have been involved in ongoing negotiations with the city of Los Angeles to transfer control of the airport; however, Executive Director Lindsey and other LAWA officials have expressed concerns that the city of Ontario, without any experience in airport management, may not be the best group to take over control.  As a result, LAWA has recently begun exploring other options for a transfer of authority, including a number of potential private solutions.

Viggo Butler, an expert in airport privatization and the chairman of the aviation subcommittee at the Los Angeles Economic Development Corporation, sees a number of potential solutions involving private contractors working in conjunction with government groups. Ten private firms, including the Carlyle Group and Goldman Sachs Infrastructure Partners, have thus far expressed interest in becoming involved with Ontario Airport.

According to Butler, a private solution for Ontario Airport could take a number of forms. One idea involves Los Angeles retaining ownership, while granting operational authority to a private entity through a long term lease. A public-private partnership, in which a government sponsoring agency (either Ontario or a new authority with Ontario and San Bernardino County) joins with a private investment firm to operate the airport jointly, similar to the model employed at the Burbank airport, may also be possible. A third possibility involves an outright sale of the airport; Los Angeles officials, including City Councilwoman Janice Hahn, have expressed a newfound willingness to put a transfer of ownership on the table.

While there is little precedence for privatization in the US, Butler points to London Heathrow Airport and other international successes as evidence of the feasibility of private airports.   Further, he notes that Ontario Airport has large capacity for terminal expansion – an asset no other Southern California airport enjoys — and direct access to the Inland Empire.  Both give it enormous potential for growth.  According to Butler, these factors make control of the airport particularly appealing to private entities.

The long term potential for cost reduction with a transfer of ownership is substantial. A transfer of operational control to the city of Ontario or a private firm could present cost-cutting options currently unavailable to LAWA.  Depending on the structure of ownership and control, a new owner may not be bound by the L.A. living wage ordinance in the future.  Devereaux believes that with a staff cost reduction and relief from the LAWA administrative fee, Ontario Airport’s CPE could eventually fall to the $5-$7 range. If Ontario Airport succeeds it may be able to convince low cost carriers like Virgin, Jet Blue and Southwest to return or expand service.  With more carriers, lower costs, and an increase in airport marketing, Ontario Airport may be able to get back on track.

The battle over Ontario Airport’s control and future is enormously important to the Inland Empire and Southern California as a whole. Despite some setbacks and delays, local officials remain optimistic.  “We have made a lot of progress and I am hopeful that many of these groups know that it is in the long term interest of Southern California and LA to make the airport successful,” said Devereaux. For now, Ontario Airport remains at a crossroads, grounded squarely on the tarmac.

Figure 1: Change in USA, California, and Inland Empire Unemployment September 2007- June 2009 (click for larger graph)

The official arbiter of United States business cycles, the Dating Committee of the National Bureau of Economic Research in Cambridge, MA, recently declared that the Great Recession ended in the United States in June 2009. If so, the national recession lasted 19 months. During that period, the number of jobs in the Inland Empire declined by 10 percent—a greater hit than in the rest of California or in the United States as a whole.

Even worse, whereas the weak recovery in the national economy has generated some employment gains since June 2009, the Inland Empire continues to shed jobs as shown in Figure 2. In San Bernardino and Riverside Counties, jobs have decreased another 3 percent since the end of the national recession. Job losses at the national and state level seem to bottom out during the last quarter of 2009, but not in the Inland Empire.

Figure 2: Change in USA, California, and Inland Empire Unemployment September 2009-June 2010 (click for larger graph)

Unemployment
The unemployment picture is similarly bleak, if not worse. In the Inland Empire, unemployment rates reached a record high seasonally unadjusted level of 15.1 percent in July 2010. This number is even slightly higher than the January and March levels of 15 percent. By comparison, the United States unemployment rate seems stuck for the moment at around 9.5 percent. National unemployment rose slightly in August 2010 to 9.6 percent, but has declined from its peak of 10.1 percent in October 2009. Even California’s unemployment rate, the third highest in the United States after Michigan and Nevada, has seen a minimal decrease since reaching a peak of 12.5 percent in January 2009.
Tables 1-3 display month-by-month levels of unemployment, as well as changes in unemployment rates, during the three phases of the recent business cycle for the United States, California, the Inland Empire, and San Bernardino and Riverside Counties. The first table shows the low unemployment that prevailed before the recession. In March 2007, the nation’s unemployment rate was only 4.4 percent, and the rate was only slightly higher in California (4.9 percent in January 2007) and in the Inland Empire (5.2 percent in March 2007). The tables also show the gap between the unemployment rate in a given month and the rate in December 2007—the beginning of the national recession. These figures show that, unlike the rest of the country, unemployment was rising in the Inland Empire throughout 2007, before the beginning of the national recession. Finally, the shading in the tables indicates increases in unemployment rates—a darker shade indicates a sharper increase in unemployment. The shading reveals that, in the regions studied, the increase in unemployment was heaviest in Riverside County, followed by San Bernardino County, California, and finally the United States.

Table 2 shows the changes in unemployment rates from the beginning of the national recession in December 2007 to its official end in June 2009. The red shading at the top of the table indicates the duration of the United States recession. Until the investment bank Lehman Brothers collapsed in mid-September 2008, the progression in the unemployment rate for the United States suggested a mild recession, similar to those experienced in the early 1990s and early 2000s. In California, however, unemployment rate increases were approximately twice as high as the national level, and the Inland Empire saw increases of close to 3 percent over the same period. Starting in October 2008, the national recession earned the title The Great Recession. As the table reveals, matters deteriorated rapidly from that point until the end of the recession.

Table 3 shows the unemployment rates in the months since the end of the national recession. The shading does not get much lighter following the end of the recession because unemployment rates have improved only slightly in the United States and in California during the past 15 months. In the Inland Empire, the unemployment situation has worsened since June 2009. While the August 2010 numbers look promising for the Inland Empire, and in particular for San Bernardino County, in fact the drop in the unemployment rate was not generated by an increase in employment. Instead, many workers simply gave up looking for a job in the region. It is too early to tell whether these are so-called discouraged workers or workers who have merely left the Inland Empire.
Meanwhile, individual cities in the Inland Empire have large variations in unemployment: for example, Rancho Cucamonga has an unemployment rate of 9.4 percent, which is actually lower than the national average. Redlands is also relatively low at 10.5 percent, while Ontario is at 15.1 percent. The City of San Bernardino suffers from an extremely high rate of 18.9 percent.

Prospects for the Inland Empire Job Market
Will the Inland Empire’s unemployment rates return to pre-recession levels? The short answer is that we project a significant drop in the region’s jobless rates before the end of the year, but expect that it will take quite some time for the Inland Empire to return to single digit unemployment figures. The region’s unemployment rates will not reach their low pre-recession levels for the foreseeable future, and certainly not for the next five years.

Our forecasts are based on a relationship between unemployment rates and output growth. At an intuitive level, high output growth will result in more employment and a reduction in unemployment. The crucial questions are:
· How much output growth is needed to keep the unemployment rate from growing?
· How much output growth is needed to reduce the unemployment rate by one percentage point?

A situation of no growth is insufficient to keep the unemployment rate from rising. While the economy is technically not in a recession if Real Gross Domestic Product (GDP) does not grow, the population typically increases and so does the labor force. If these new workers cannot find a job, the unemployment rate will rise. In addition, the average worker becomes more productive over time, which is to say that workers will produce more output per hour worked. If output does not grow, productivity increases imply that fewer workers are needed to produce the same amount of GDP, and the unemployment rate will increase. For the United States as a whole, simple calculations reveal that GDP growth of approximately 3 percent is needed to keep the unemployment rate from rising, and that the United States economy has to grow by approximately 5.5 percent to reduce the national unemployment rate by 1 percent.

A look at United States GDP growth since July 2009 explains why the national unemployment rate has not fallen significantly from its peak of 10.1 percent. Quarterly growth rates since the end of the Great Recession have been 1.6 percent (2009 Q3), 4.9 percent (2009 Q4), 3.7 percent (2010 Q1), and 1.6 percent (2010 Q2). Compared to a year ago, these numbers translate to a 3 percent growth in GDP. Hence these numbers suggest that unemployment rates over this period should not have fallen. Indeed the unemployment rate in July 2009 stood at 9.4 percent and was 9.5 percent in July 2010. The lesson is that we need higher growth than we currently see for unemployment rate levels to decrease.

The United States Department of Commerce periodically reports GDP for the state and county levels. The latest available information for the Inland Empire shows that in 2008 the region’s output fell by 1.3 percent, while the United States and California saw no change and a small positive growth of 0.4 percent respectively. Data for 2009 is yet to be published, but we can be sure that during that year output in the Inland Empire dropped more sharply than the national decline of 2.6 percent.

Figure 3 displays the relationship between the change in the unemployment rate for the years 2002-2008 for the Inland Empire, California, and the United States. While the growth rate needed to keep the unemployment rate from rising is similar for the United States and California (approximately 2.5 percent to 3 percent), the situation is different in the Inland Empire, where unemployment rates are less closely related to the region’s economic growth. This difference can be explained by the fact that the Inland Empire is home to a large commuter population. Consider a worker who lives in the Inland Empire and works in Greater Los Angeles, defined as Los Angeles and Orange Counties. This person’s job depends more on economic conditions in Los Angeles and Orange Counties than on economic conditions in the Inland Empire. However, the Current Population Survey, a report by the United States Census Bureau and Bureau of Labor Statistics which measures unemployment, is based on residency, not where jobs are actually lost. We therefore expect unemployment rates in the Inland Empire to respond much more closely to economic conditions in Greater Los Angeles than in the Inland Empire, and indeed they do as the dotted line indicates in Figure 3.

Figure 3: Changes in Unemployment and GDP Growth Rate (click for larger graph)

This high sensitivity between the unemployment rate in the Inland Empire and the economic conditions in the Greater Los Angeles area generates hope during the current times. There are many indicators which point to a more advanced state of recovery in the western parts of Southern California. While it stretches one’s imagination to see high growth rates in the Inland Empire in the near term, it is plausible to expect such growth in the Greater Los Angeles area. In particular, we expect to see job growth in the logistics sector. The outlook for the construction sector remains bleak especially now that the period of “delay and pray” or “extend and pretend” seems to have come to an end with no further policy proposals in the making to support the residential housing market.

A final word of caution is necessary. The International Monetary Fund (IMF) recently published a study that suggests the unemployment rate in the United States in general, and in California specifically, will be higher when we factor out the cyclical component—that is, when we reach the next peak of economic activity down the road. Instead of returning to pre-Great Recession levels of 4.5 percent, the national unemployment rate is expected to remain above 6 percent, perhaps even a bit higher. This prospect of chronic high unemployment can be attributed to the large number of jobs lost in manufacturing and construction, and the fact that these displaced workers will have to learn new skills before they can be employed in expanding sectors. In addition, job mobility is limited if people cannot move because their housing values are less than their mortgages. In other words, even if households wanted to leave Southern California to move to, say, North Dakota, where the current unemployment rate is 3.8 percent, the continuing housing crisis may prevent them from doing so.
The IMF forecasts that the unemployment rate for California as a whole will not fall below 8 percent. While the IMF does not present similar figures for the Inland Empire, it can be safely assumed that unemployment rates will continue to be higher for this region. As a result, we expect the Inland Empire will not return to single-digit unemployment rates until at least 2015, and even at that time it is unlikely that the unemployment rate will fall significantly below 9 percent. The jobs outlook for the Inland Empire is indeed bleak, but it is necessary for the region’s public officials and business leaders to understand and adapt to this difficult reality.

One way the Inland Empire can work to emerge from the severe regional recession is to develop a stronger export economy. Exports, along with consumption, investment, and government expenditures, are the four basic components of real Gross Domestic Product (GDP), a key measure of economic vitality in a nation, state, or region. If the Inland Empire’s GDP is going to grow, exports are essential because the other components of GDP—consumption, investment, and government spending—are unlikely to produce a strong recovery in the Inland Empire in the near term.
For many years, consumption has driven the Inland Empire economy. However, the local housing market crash and high unemployment rates have prevented consumer spending from rebounding. Although housing values have begun to recover from their low in April 2009, the Case-Shiller Index of housing prices for the Los Angeles metro area has only reached 2002 levels. Meanwhile, the Inland Empire’s seasonally unadjusted unemployment rate reached new high in July 2010. Without income growth or loan-financed increases in consumer spending, it is unlikely that consumption can generate recovery in the region for quite some time.
Investment is also unlikely to fuel growth in the near term. The three major categories of investment (residential, plant and equipment, and inventory) are all stagnant. Clearly, the collapse of the housing market will severely limit residential investment in the region. At the national level, inventory investment has made up the majority of GDP growth since the end of the Great Recession in June 2009, but this growth cannot be sustained unless firms are able to deliver significant increases in sales. That leaves investment in plant and equipment as a potential driving force.

Figure 1: Riverside County's Export Sales

However, in the wake of the credit crunch following the financial meltdown of September 2008, banks have only reluctantly loaned to firms, especially small businesses. This is a serious problem because small business growth has led the recovery of the American economy after previous downturns. In addition, lack of consumer demand limits investment growth. Historically, increases in demand following a downturn have inspired businesses to expand their capacity; however a resurgence in consumer demand seems unlikely due to low consumer income and continued high unemployment. With no expectation of higher future demand or easier availability of credit, businesses will continue to limit their investments. For these reasons, investment will not drive GDP growth in the region, unless there is a national expansion, or at least substantial output and income growth in the Greater Los Angeles area.
Finally, government spending has obvious limits as an engine of new growth. Mounting concerns over debt have constrained the ability of both state and federal governments to use spending to stimulate the economy. While there is some talk about a second federal stimulus package involving infrastructure spending and expanded business tax cuts, passage of such a program is highly uncertain. Indeed, few in the nation’s capital dare to use the “S-Word.” The Inland Empire economy cannot expect much help from new government spending.

Figure 2: Inland Empire's Share of Exports by Country in 2008

Exports, then, will have to help the Inland Empire emerge from the recession. Fortunately, boosting exports is a high priority for San Bernardino and Riverside County governments. Riverside County Board of Supervisors Chairman Marion Ashley believes that matching President Obama’s National Export Initiative goal of doubling exports in the next five years is ambitious, yet doable. His optimism derives from his belief that the area is “lean and mean” and ready to work.

In recent years, the Inland Empire has improved its export performance. According to a study by the Brookings Institution, the region now ranks 24th in the nation in export-supported jobs, and its export-related jobs are expanding at 11.5 percent per year, a much higher rate than the 8.7 percent average for the 100 largest metro areas.
In addition, the continuing weakness of the United States dollar gives the Inland Empire’s primary trading partners incentives to look to the area for some of their manufacturing needs. According to the International Trade Association, the Inland Empire’s top five export categories are all manufactured commodities. Transportation equipment, which includes all components made for transportation save motor vehicle parts, looks especially promising, given that the sector doubled in size between 2006 and 2008. The Inland Empire can also assume sustained Chinese demand for airplane parts will further support export growth.
Figure 2 depicts the top five trading partners for the area, which receive a little over half of all Inland Empire exports. As seen in Figure 2, the region’s chief trading partners are in North America and East Asia, both of which appear to be recovering from the Great Recession more rapidly than other parts of the world. 45 percent of the Inland Empire’s exports go to those two parts of the world, and their improving economic health provides opportunities for Inland Empire firms.
 

Foreign Investment

The future of the Inland Empire’s economy also depends on foreign direct investment. Foreign investment generates new economic activity, including in the manufacturing and export sectors. Several foreign firms are increasing their presence in the region, including the British supermarket giant Tesco, which owns the Fresh and Easy chain, and the Canadian-owned American Medical Response ambulance service.

In one innovative move, the County of Riverside is collaborating with Japan to commission a study on the effects of foreign direct investment in the county. The Riverside Press-Enterprise, the Riverside Chamber of Commerce, the Coachella Valley Economic Partnership, and U.C. Riverside are also contributing to this partnership. According to Tom Freeman, Commissioner of the Riverside County Economic Development Agency’s Office of Foreign Trade, the county’s Board of Supervisors, and the Economic Development Agency believe that the study will generate more contact between the Inland Empire, especially the manufacturing and agriculture sectors, and foreign firms. Already on the table is an agreement with Jiangsu, the second-most prosperous province in China, to export table grapes and navel oranges. Another agreement, signed with Croatia, seeks to foster bilateral trade and tourism between the two parties.

Riverside County Board of Supervisors Chairman Marion Ashley

East Asian firms are boosting their presence in the region, as well. Jusung Corporation, based in South Korea, is an example of such a firm. Jusung manufactures television parts for LG and is interested in establishing a solar energy presence in Riverside County. Other Asian businesses are also seeking to become players in the region’s solar energy market. Chinese, South Korean, and Japanese firms are vying for control of the Diamond Valley Reservoir solar energy project. Wind energy is also on the rise in Riverside County, which should see benefits from rising demand for renewable energy sources. According to a joint study by U.C. Berkeley and the United States Economic Development Administration, San Bernardino and Riverside Counties represent a disproportionately high number of California’s green start-ups and small businesses, or ‘gazelles,’ due to their plentiful solar, wind, and geothermal resources.
These expanding relationships with foreign firms are beneficial in themselves, and should also help the region develop its export economy.

In the end, foreign trade cannot be the sole driver of the Inland Empire’s economic recovery, because it represents only a small part of the region’s overall economy. But if the region is to flourish in the future, its export economy will have to continue to grow.

We at the Inland Empire Center believe it is important for the region’s leaders to gain an accurate understanding of the region’s unique economic problems in order to build a more solid foundation for the future. To this end, this third edition of Inland Empire Outlook closely analyzes the Inland Empire’s employment and unemployment trends over the past four years. We then look to some ways the region can begin to rebuild. We see promise in expanding the region’s exports  and its health care system, in part through development of the new U.C. Riverside School of Medicine. Finally, we examine how the recent political unrest is fueling one local race for the state legislature.
In addition to presenting the Outlook, the Inland Empire Center is designed to give local leaders access to leading economic and political analysts through periodic conferences. On October 6, 2010, the Inland Empire Center will hold its inaugural conference—the CMC-UCLA Inland Empire Forecast Conference—at the Citizens Business Bank Arena in Ontario. At this important event, Jerry Nickelsburg of the UCLA Anderson Forecast will present a state and national economic forecast, and CMC Inland Empire Center economists Marc Weidenmier and Manfred Keil will present an economic forecast for the Inland Empire. The conference will also feature a real estate panel and a government finance panel featuring leading practioners in these respective fields. For more information about the conference and the Inland Empire Center, visit our website at www.inlandempirecenter.org.

-The Editors

In 2008, the University of California Regents announced plans to establish a new medical school in the Inland Empire on the U.C. Riverside campus. With capital costs expected to exceed $500 million, the new medical school is an expensive venture for a cash-strapped state. But, despite severe funding challenges, the school has hired key personnel, begun construction, and moved forward with plans to welcome its first class in fall 2012. When it opens, the new institution will be the first public medical school in California in over four decades, joining U.C. San Francisco, U.C. Davis, U.C. Los Angeles, U.C. Irvine, and U.C. San Diego. The UCR medical school and related facilities promise to address one of the Inland Empire’s most pressing needs—access to quality health care—while also providing a range of economic benefits to the region.

At present, Riverside and San Bernardino Counties lag behind the rest of California in several important indicators of health care services. Most notably, the region suffers from a shortage of physicians. According to several studies, the Inland Empire has the lowest per capita number of primary care physicians and specialist physicians of of any region in California. This physician shortage forces many Inland Empire residents to travel to neighboring regions, especially Los Angeles County, to access health care. Other residents are treated by non-physicians, such as nurse practitioners. Riverside County Supervisor Bob Buster, an advocate of the new medical school, is concerned by the physician shortage and notes that the Inland region especially needs “generalists to provide community-wide preventative care.”

Without the new medical school, the region’s physician shortage would likely become even more acute. According to a 2007 RAND study, the Inland Empire will need about 9,000 new physicians by 2030 to meet rising demand. Moreover, the recent passage of federal health care reform has increased the anticipated demand for physicians by expanding the number of people with health care coverage.

While one might expect the region’s shortage of physicians to correct itself through normal market forces, the solution is not that simple, in part because physicians face significant barriers to entry in any given geographic area. Doctors must build connections with their communities, establish reputations, and develop sources of referrals over long periods of time, and thus have difficulty relocating to a new region. It is noteworthy that, according to RAND, 40 percent of graduating doctors remain in the immediate region surrounding their medical school. At present, Loma Linda University School of Medicine in San Bernardino County is the region’s only medical school, and it does not produce enough physicians to meet the region’s demand.

The new U.C. Riverside School of Medicine promises to help alleviate this shortage by bringing a steady infusion of new physicians into the Inland Empire. The school will open with approximately 50 students in its inaugural class, eventually increasing to classes of 100 students or more, for a total student body of 400 students. In time, the school also expects to host 160 post-graduate residents. A large number of these new physcians are expected to establish medical practices in the region.

Economic Benefits
Medical schools provide direct economic impact through institutional spending, employee spending, and spending by out-of-area visitors to the facility, among other factors. In addition, through multiplier effects, medical schools bring indirect economic benefits to the community. Crucially for the Inland Empire, medical schools generate jobs. Projections for a medical school in Eastern Washington State indicate that it would create more than 13,000 jobs over the course of 20 years in various sectors, including construction, services, health care, and the research sector. The U.C. Riverside Medical School promises to bring similar benefits to the Inland Empire.

Maximizing the economic benefits of the new medical school will require a strong local hospital infrastructure, research support from U.C. Riverside and other local institutions, and investment in health care-related start-ups. Riverside Supervisor Buster observed that “this is going to take a lot of cooperation between the county, the physicians’ association, the other hospitals, and the leaders in the community, so we can make this a self-reinforcing system.”

Ideally, the UCR School of Medicine will foster the formation of a high-tech research cluster in the Inland Empire. Other regions have found that training of researchers and high-end specialists promotes the establishment of research clusters. Clusters of this type have already formed around medical schools in Los Angeles and the Bay Area. In light of this competition, Riverside may need to make broad medical research a secondary priority, and focus on a few specialized areas where the university already has strong complementary research, or where Riverside is positioned to be a leader, such as air quality research.

More broadly, the U.C. Riverside School of Medicine will create a variety of opportunities for the local workforce, ranging from construction work to the large numbers of administrative and nursing staff needed to support the medical facilities. The growth of a research cluster will also bring an influx of highly educated, high earning researchers, further boosting the local economy.

To open its doors, the medical school must secure start-up resources during difficult economic times. U.C. Riverside has been forced to pursue a mix of federal, state, and local government funds, as well as private gifts for the new venture. Last year, the school received $4 million in federal money through an appropriation sponsored by Inland Empire representatives Ken Calvert, Joe Baca, Jerry Lewis, and Mary Bono Mack, and United States Senator Dianne Feinstein. More recently, Senator Barbara Boxer has requested an appropriation of at least $1 million in federal funding to help purchase new state-of-the-art medical equipment. This year, the school also requested a minimum appropriation of $10 million in state funding, but that appropriation has been

tied up in the state’s long budget impasse.

Meanwhile, Riverside County has planned to help fund construction. County Supervisor Buster has advocated local government support for the start-up, calling the new medical school “the most potentially transformational institution that we have seen in Riverside County in a long time. We need to do all we can to support this.”

In addition to government funding, U.C. Riverside is soliciting donations from private donors, but those sources sometimes present their own challenges. For example, Kaiser Permanente has pledged $10 million, but only if matching funds can be secured.

If UCR can overcome these funding difficulties, the new medical school promises many benefits for the Inland Empire. It will help the region’s health care system catch up with the demands of the growing population and bring advanced medical care to an area that lags behind the rest of the state. Equally important, this new institution will help bring new investment dollars, jobs, and economic vitality to a region that urgently needs them.

From left: Congressman Ken Calvert (R, CA-44), UCR Chancellor Timothy P. White, Congressman Jerry Lewis (R, CA-41), and Medical School Founding Dean G. Richard Olds