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.”

Background

Strictly speaking, redistricting is the constitutionally mandated procedure in which district boundaries are redrawn to accommodate changes in population. The United States Constitution requires that Americans are represented equally, and thus it is necessary to redraw political boundaries to balance population numbers in political districts. The redrawing of Congressional lines occurs every 10 years, following the tabulation of the U.S. Census and the process of reapportionment (the reallocation of representatives among states based on population shifts).For California, 2011 redistricting marks a number of firsts. For the first time since California earned its statehood in 1850 (except 1920, in which reapportionment did not occur), the Golden State will not see an increase in its Congressional delegation following the Census. While states like Texas, Colorado, and Georgia will each gain a few more seats in the House of Representatives, a slowing of population growth in California means that the status quo of 53 representatives will remain in place for the next ten years. Perhaps even more historic, 2011 marks the first redistricting cycle in which the power of redistricting has been granted to a brand new, voter-approved organization: the California Citizens Redistricting Commission (CRC).

The California Citizens Redistricting Commission

The California Citizens Redistricting Commission, created with the passage of Proposition 11 in 2008, was initially given the task of handling redistricting exclusively for state legislative districts (and the Board of Equalization). However, its role expanded to include congressional redistricting with the passage of Proposition 20 in 2010. Both propositions had to overcome significant opposition to their passage. The commission, comprised of five Democrats, five Republicans, and four commissioners unaffiliated with either major party, was supported heavily by Governor Schwarzenegger and state Republicans. They believed maps produced by a bipartisan redistricting process would be more favorable to the GOP than ones authored by the legislature, with its majority of Democrats in both chambers. Conversely, Democrats and many incumbents feared the fallout of a group of citizens by drawing lines from scratch. Following the narrow passage of Proposition 11 and the easy approval of Proposition 20, the battle shifted to the CRC.

The process of picking commission members began in December 2009. Through a complex selection process meant to eliminate candidates with any direct ties to state politicians or parties, the state auditor’s office narrowed the applicants from more than 25,000 to 60 candidates. By November of 2010, the first 8 commissioners (randomly selected from the final pool) had been chosen. These 8 commissioners selected 6 more, finalizing the 14 member commission by the end of the year. In 2011, the commission began its work in earnest. Over the course of the next 8 months, it would criss-cross California, take public input from thousands of people, hire numerous staffers (to some controversy), and gradually formulate operational procedure for the first itineration of the most powerful redistricting commission in the nation.

The first signs of forthcoming political upheaval became clear when the CRC announced it would prioritize geographic and cultural factors such as compactness, and city, county, and community boundaries over political considerations in designing the maps. Existing districts and the locations of incumbents’ homes would not play a role in the CRC’s work. The commissioners would instead start from scratch in drawing 53 districts for Congress, 80 for the State Assembly, 40 for the State Senate, and four for the Board of Equalization.

It took little time for the CRC to run into controversy, however, as Republicans criticized the commission for hiring legal and technical consultants with perceived Democratic Party ties. (The Rose Institute submitted an unsuccessful bid for the technical consulting services). Nevertheless, the CRC marched onward with public comment and released the first of two planned draft maps on June 10. The map was met with mixed reviews. Supporters praised improved compactness and a noticeable reduction in community splits while expressing concern over an overall lack of competitive seats. State Republicans attacked the commission for crafting a map that would likely produce several Democratic gains in Congress and the State Senate. Latino advocacy groups such as the Mexican American Legal Defense and Education Fund (MALDEF) voiced outrage that the CRC draft map created few Latino majority seats.

Additional concerns emerged as it became increasingly clear that with just a few weeks left before their August deadline, the CRC continued to consider wholesale changes to the first draft maps. In a controversial vote on July 12, the commission moved to skip the creation of a second full draft map in order to proceed straight to a final map. While CRC opponents such as the California Friends of the African American Caucus criticized the move as an affront to transparency, describing the vote as just the “latest shenanigans” of the CRC, commissioners defended their decision. Commissioner Jeanne Raya claimed the vote would give the CRC “more time to deliberate thoughtfully” and “more opportunity for the public to interact with us in live drawing sessions.”

On August 15, the CRC formally approved finalized legislative redistricting plans in a 13-1 vote and the Congressional plan 12-2. While most commissioners who voted in favor of the plan spoke highly of the plan, the sole dissenter on the legislative plans, Commissioner Michael Ward, alleged that “the commission broke the law,” and “simply traded the partisan, backroom gerrymandering by the Legislature for partisan, backroom gerrymandering by average citizens.” In an LA Times Op-Ed, Commissioner Cynthia Dai responded to CRC detractors, declaring that the CRC’s “commitment to a fair process trumped partisan allegiances,” and boasting that “we were able to eliminate partisan gerrymandering and draw 177 districts for the state Assembly and Senate, Board of Equalization and Congress on time and under budget.”

Redistricting Analysis

A district-by-district analysis of the California Redistricting Commission’s maps illustrates the far reaching nature of the CRC’s work. The new maps drastically reshape congressional and state legislative representation in the Inland Empire. As a result of efforts by the commission to create reasonably compact districts and preserve communities of interest, the new maps offer districts that are, for the most part, much more compact than their predecessors.

By ignoring existing districts and focusing on compactness and communities, the CRC has produced a Congressional map that will result in significant political turnover in the Inland Empire. Longstanding Republican incumbents David Dreier (San Dimas) and Jerry Lewis (Redlands) no longer reside in safe Republican districts. The options available to two of California’s most notable Congressmen are few: retire, move, or wage tough battles to hold onto their seats. In addition, a handful of open seats have emerged in the area, offering up-and-coming politicians a rare opportunity to run for Congress without facing competition from powerful incumbents. All in all, it appears the commission’s work has created three competitive seats and two or three open seats in the Inland Empire’s Congressional delegation. For a regional delegation that has seen little to no turnover in the past twenty years, this is nothing short of a political earthquake.

San Bernardino County Congressional Districts

The 8th District, geographically massive, is primarily a combination of the rural 31st and 25th Districts. It stretches from Bridgeport (near Yosemite) hundreds of miles south to Yucca Valley, and encompasses the cities of Victorville, Ridgecrest, Barstow, Baker, Mammoth Lakes, Death Valley, Highland, East Highland, and Yucaipa.

A hotbed of the California Tea Party, the 8th leans heavily Republican, but neither incumbent Jerry Lewis (R-Redlands) nor Buck McKeon (R-Santa Clarita) reside in the new district. While Rep. McKeon will almost certainly run in the 25th (a safe Republican seat much closer to home), Rep. Lewis is in a bit of a jam. He could run in the 31st District (where he now lives), but he would likely face a very competitive race in somewhat unfamiliar Democratic-leaning territory. Legally, he can still run in the 8th even though he does not actually live in the district, but even this could be a danger given the area’s history of voting out incumbents. If Rep. Lewis does retire, San Bernardino County Supervisor Brad Mitzelfelt (R) has promised to enter the race, and would be a heavy favorite. In any case, this is an open seat, but almost certain to remain in Republican hands given the GOP’s ten point edge in registered voters.

The new 31st District attempts to unify the city of San Bernardino, previously split between the 41st (Rep. Jerry Lewis, R-Redlands) and 43rd (Rep. Joe Baca, D-Rialto) Districts. It includes San Bernardino, Rancho Cucamonga, Upland, Colton, Verdemont, Muscoy, Grand Terrace, Loma Linda, Redlands, Crown Jewel, Meritone, and West Highlands.

Democrats hold a small registration advantage over Republicans in this district (41 percent to 37.5 percent), which does not bode well for Rep. Jerry Lewis, should he decide to run in his new home district. Rep. Joe Baca could run here as well, in which case he would be a slight favorite, but he may instead opt to run in the 35th District, where he would be a strong favorite against any Republican. Rep. Baca and Rep. Lewis each appear to be waiting to see if the other will move to another district, despite pressure from Democratic and Republican party officials to stay and win in what is seen as a winnable race for either incumbent. If both incumbents run in this district, the 31st could be one of the marquee races of 2012.

The 35th District includes much of the remainder of San Bernardino County: Fontana, Ontario, Montclair, Chino, Montclair, Rialto, and Bloomington. This area was previously split into four separate districts. The 35th also includes Pomona from Los Angeles County.

This seat will likely be a safe Democratic seat, given the sizable registration advantage the Democrats hold (48.6 percent to 29 percent), and the large number of Latinos in the area. President Obama won more than 66 percent of the vote here in 2008, making it an appetizing prospect for district resident Joe Baca (D-Rialto) to run here rather than risking an expensive contest with Rep. Jerry Lewis in the 31st. Somewhat complicating things for Rep. Baca, however, State Senator Gloria Negrete McLeod (D-Chino) has all but claimed this district as her own. The 35th District closely resembles Senator McLeod’s current district, giving the Senator somewhat of an incumbency advantage. Senator McLeod and Rep. Baca are no strangers to conflict either. In 2006 Congressman Baca’s son, Joe Baca Jr., was beaten in the Democratic State Senate primary by Senator McLeod. Further complicating the picture, Democratic Assemblywoman and former Pomona mayor Norma Torres has also declared for the 35th district. With the “top two” primary system set to kick in next fall and a vast swath of Democratic voters in the district, it could come down to two popular Democrats battling it out in the general.

The 27th District is comprised of most of Pasadena and odd pieces of the north San Gabriel Valley. It includes Glendora, San Gabriel, Rosemead, Altadena, Arcadia, Temple City, Alhambra, and South San Gabriel. Once prominent members of Inland Empire districts, Claremont and parts of Upland have now been demoted to mere appendages of this Pasadena-dominated district.

Rep. Judy Chu (D-Monterey Park) has announced she will be running in the 27th District, and would be a heavy favorite to win, given the double digit Democratic edge (42 percent to 30 percent).

The 41st District includes the cities of Riverside, Moreno Valley, Glen Avon, Mira Loma, Rubidoux, Pedley, Sunnyslope, and Perris.

A major change is in store for residents of Riverside and the Moreno Valley area. Once split between Rep. Mary Bono Mack’s (R-Palm Springs) 45th District, Rep. Darrell Issa’s (R-Vista) 49th District, Rep. Ken Calvert’s (R-Corona) 44th District, and Jerry Lewis’s (R-Redlands) 41st District, the Riverside/Moreno Valley population now has a district of its own. The 41st offers Democrats an open seat with a moderate registration advantage (42 percent to 36 percent). Nevertheless, popular Republican Riverside County Supervisor John Tavaglione is favored for this seat over the only declared Democratic candidate, Mark Takano. There still remains a significant chance that other Democrats may jump into the race, and in all likelihood the 41st will be another close race to watch next election night.

The 36th District remains remarkably similar to its predecessor, the 45th District, trading Moreno Valley and Murrieta for San Jacinto, Banning, and Desert Hot Springs. Palm Springs, Cathedral City, La Quinta, Coachella, Indio, Hemet, Blythe, and the Riverside County portion of Joshua Tree remain in the district.

Mary Bono Mack (R-Palm Springs) remains a favorite, as the narrow partisan advantage she has traditionally held in her district remains effectively unchanged (42 percent to 39 percent). Rep Mack stands as one of the few Republican beneficiaries of the redistricting process, as her district remains largely intact and efforts to add Democratic-leaning Imperial County to the district were rejected by the Commission. Although the Democrats will likely again make a serious attempt to unseat Rep. Mack, the redistricting process does not appear to have affected Rep. Mack’s chances in the race.

The 42nd District also remains somewhat similar to its predecessor, the 44th District. The core of the district, including Corona and Norco is unchanged, but the district now moves south and east to include much of what used to be in Darrell Issa’s (R-Vista) 49th District. Key cities include Corona, Norco, Murrieta, Sun City, Canyon Lake, Wildomar, Lake Elsinore, Lakeview, and Nuevo. The Orange County portion of the old 44th is no longer included in the new 42nd, which is located entirely in Riverside County.

Much like the 36th District, the 42nd District is unlikely to undergo any significant political turnover. Rep. Ken Calvert (R-Corona) resides in the district, and Republicans enjoy a ten point registration advantage. Rep. Calvert, probably the biggest winner in this redistricting effort after facing significant reelection challenges in 2008 and 2010, will likely have a much safer seat than in years past.

What’s Next?

With the CRC’s plan formally adopted on August 15, California is now moving toward using the new lines for the 2012 election. To the dismay of Commission supporters, however, there remains a distinct possibility that the Commission’s work could yet unravel.

The biggest danger to the CRC’s congressional plan is a Republican referendum. Several state Republican officials have expressed concern that the new maps will unfairly benefit the Democrats, who are poised to make several gains thanks to the new maps. If the Republicans are able to gather at least 505,000 signatures on a congressional referendum by November, then the CRC’s congressional plan will be suspended for 2012 and replaced with a court-drawn plan. Should the referendum pass and reject the CRC lines, the court-drawn plan will remain in place for the rest of the decade. Should the referendum fail, the court plan would only be used in 2012 and the CRC map will be used from 2014-2020.

Will such a referendum make it to the ballot? The answer is currently unclear. According to redistricting expert and Rose Institute fellow Douglas Johnson, getting the 505,000 signatures it takes to reach the ballot “is a matter of money.” If Reps. Dreier and Lewis decide to run for reelection, and dislike their election chances, they could throw their considerable financial strength behind the referendum. “[Dreier and Lewis] have the ability to essentially fund the referendum on their own,” says Johnson. Reps. Ed Royce, Gary Miller, and other GOP Congressmen displeased with the new lines could support the referendum as well.

So if the courts do end up drawing lines, what would they look like? Insiders speculate that the courts could produce districts similar to those drafted in 1991, the last time the courts drew the lines. The 1991 lines were “community oriented, with limited splits of cities and counties, and very competitive districts,” says Johnson. But where court-drawn lines will actually end up is anyone’s guess. While much of the rest of the state might closely resemble the 1991 plan, in the Inland Empire, Johnson says “there’s been so much growth in this area that anything that actually resembles the 1991 lines is not a possibility.” Whether the public pushes for a plan from the courts, or sticks with the California Citizens Redistricting Commission, one thing is certain: California’s congressional delegation will likely be facing a major shakeup come 2012.

Census numbers revealed disappointingly low population growth for the state of California over the course of the past decade. With a population increase of 10.0 percent (4.5 million residents) since 2000, California barely managed to beat the national average of 9.7 percent. This marks the first time California did not gain a seat in the U.S. House of Representatives. The growth that occurred reflects a shift strongly inland from the coast, threatening to pull political power away from the traditional strongholds of San Francisco and Los Angeles.

California’s slow growth stands in sharp contrast to the Inland Empire’s robust expansion. Made up of San Bernardino and Riverside counties, the Inland Empire has seen considerable growth over the past decade. According to the 2010 Census, Riverside County’s population grew by an impressive 42 percent while San Bernardino County grew by nearly 20 percent. This growth brought the Empire’s total population to 4.2 million, a 30 percent increase over 2000. Even with Riverside County’s explosive gain of 42 percent, it failed to place near the top of the nation’s rankings for the fastest growing regions. The nation’s fastest growing counties were strongly concentrated in the southern United States and frequently reported population increases higher than 50 percent. Kendall County, Illinois, was the fastest growing county in the country and is the exception that proves the rule. It is located in northeastern Illinois (in the Chicago region) and saw its population increase by 110.4 percent in the last decade. Riverside County just makes the top 70 on the list of the decade’s fastest growing counties, placing 69th.

The population of Riverside County grew from 1,545,387 in 2000 to 2,189,641 in 2010, with most of the rapidly expanding cities along freeway corridors. On the 10 Freeway, Beaumont led with a 223.9 percent increase, with San Jacinto (85 percent) and Coachella (79.1 percent) also showing large gains. Murrieta (133.7 percent) and Perris (89 percent), on the 215 Freeway corridor, also had big population increases. Lake Elsinore (79.1 percent), and Temecula (73 percent) led the growth along the 15 Freeway.

In San Bernardino County the Victorville area was the center of significant growth. Victorville’s population increased by 81 percent, Adelanto’s by 75.2 percent, and Hesperia’s by 44.1 percent. Twentynine Palms grew by 69.7 percent, driven by increased military activity. Closer to Los Angeles, Fontana (52.1 percent) and Rancho Cucamonga (29 percent) both grew substantially.

As expected, the Hispanic population throughout the Inland Empire grew substantially while Caucasian numbers remained fairly steady, thus decreasing in the percentages. Hispanics now make up 49 percent of San Bernardino County and 46 percent of Riverside County, much higher than California’s statewide total of 38 percent, and the national average of 16.3 percent. African Americans now make up 7.6 percent of the Inland Empire while Asians make up 6.2 percent.

With substantial population growth came new and more inclusive district boundaries for the Inland Empire. These lines, drawn by the California Redistricting Commission (CRC), are a considerably shift from those of 2001. In 2001 the region’s Congressional representation was split, with western portions San Bernardino County placed in districts with Los Angeles County, and western Riverside County sharing districts with Orange and San Diego Counties. The CRC has adopted districts that stay almost entirely in the Inland Empire plus Pomona (Pomona-Ontario-Fontana, Redlands-San Bernardino-Rancho Cucamonga, Riverside-Moreno Valley-Perris, and so on). See New Maps, Big Changes for the Inland Empire in this issue for a detailed analysis of California’s new congressional districts.

State Senate and Assembly lines have also undergone changes, although not to the same degree. Key shifts in the state Senate include placing eastern areas of the City of San Bernardino in a Rancho Cucamonga-Lake Arrowhead-Highland-Redlands-Hemet-Menifee district, and the placement of Riverside-Corona-Moreno Valley into a single “Northwest Riverside County” district. The assembly lines maintain the Pomona-Ontario and Fontana-west San Bernardino districts. The 2001 Yucaipa – Apple Valley – Claremont – Glendale 59th District has been replaced with a district that appears only slightly less geographically creative as it climbs Mount San Antonio to link Rancho Cucamonga with east San Bernardino and Redlands. The Coachella Valley is divided between Assembly Districts, placing Indio/Coachella and Desert Hot Springs with Imperial County and the rest with San Jacinto, Banning and Twentynine Palms. The San Jacinto/Hemet area is split three ways: San Jacinto with most of the Coachella Valley; East Hemet with Wildomar and Murietta, and Valley Vista with eastern San Diego County. The CRC’s maps are finished but face legal and referendum challenges.

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.

The first city in the nation to experiment with contracting was Lakewood, California in 1954. Lakewood, unincorporated at the time, faced aggressive, and unwelcome, annexation attempts from the neighboring city of Long Beach. John S. Todd, the former city attorney of Lakewood and father of what came to be known as the “Lakewood Plan,” describes the genesis of the modern contract city in his memoir: “I suggested…that Lakewood incorporate and contract with [Los Angeles] County for the performance of municipal services so as to avoid costly capital investment in buildings and other facilities…. This was the first time it had occurred to me that there was a method of incorporating and thereby preserving Lakewood’s identity, continuing county-type services, which the community had been receiving, and avoiding annexation to Long Beach.” This, then, was the beginning of The Lakewood Plan.” After Lakewood’s successful incorporation, many other cities began adopting variations on the Lakewood model.

In the Inland Empire today, many cities and local governments employ some variation of the original Lakewood Plan. Contract emergency services – police and fire protection – are the most obvious examples of services for which cities have recently received media attention, but everything from tree-trimming to traffic signal repair, to legal services can be outsourced. Some cities and counties are even outsourcing library services to private, for-profit companies.

Not only are the types of contract services varied, the partnerships themselves also take a number of forms. Cities can contract with other governmental entities such as counties or neighboring cities, special districts, and, of course, private sector companies. If a Care ambulance drives by, a Burrtec truck picks up trash weekly, or the county sheriff’s office responds to a 9-1-1 call, those entities are providing services under contract with the local government. In Lakewood, for example, the city hired Los Angeles County to provide a variety of municipal services. Riverside County similarly provides police services to seventeen incorporated cities and one tribal area. Nineteen cities contract with Riverside County Fire for emergency services.

“You contract for services because of economies of scale,” says Palm Desert City Manager John Wohlmuth. “You get all these ancillary services that, if you did not contract, you would have to supply as a city and use them very rarely.” Because it chooses to contract for services, Palm Desert, a medium sized city of approximately 50,000 people, has access to a SWAT team, DUI enforcement, hazardous material clean up crews, helicopters, and other specialty equipment that would not be cost-effective to provide in-house. Even more basic facilities such as public service yards and stations can be provided more efficiently when the cost is spread across different jurisdictions. As Wohlmuth says, “you don’t necessarily pay 100% for [these services], but when you need them, they’re there.”

There are examples of cities forced to take the contract model to an extreme. The city of Maywood laid off almost all its public employees in 2010. It kept only the city manager, city attorney, and the city council. It contracted with Los Angeles County to provide police protection and with its neighbor, Bell, for all other services. The city council took this action because Maywood had a budget deficit and found itself in the position of not being able to secure insurance due to a history of lawsuits, mostly against its police department.

Many cities fear a loss of identity if they no longer provide certain services. What is a city, some may ask, if it does not have its own police department, fire department, public works department, or finance department? The residents of Maywood, however, are not bothered by this. Following the wholesale change last summer, the New York Times reports that residents noticed an improvement in the delivery of services, felt safer, and were generally more satisfied with the way their community was governed.

It is hard to argue with the trend. “Residents and council people who have the responsibility for providing the best possible services they can and keeping their costs low, have looked at contracting because it is flexible and more economical,” states Sam Olivito, Executive Director of the California Contract Cities Association.

Cities and counties contract for a wide range of services. For example, Riverside County employs Library Systems Services, LLC (LSSI), a Maryland-based for-profit company to run its library system. LSSI replaced the City of Riverside, which had managed the County’s libraries for eighty-five years. It beat out competing bids from the Riverside County Office of Education and the San Bernardino County Library. Within the first year of the partnership the library system saw its operating costs decrease by $900,000 while its materials budget doubled. In a report released last year – thirteen years after Riverside County hired LSSI – the County cites many achievements including twenty completed construction projects, the implementation of six joint-use library facilities shared with local school districts, the creation of more than 100 new jobs, an increase in the book budget from $180,000 in 1997 to $2.6 million in 2010, and a 63 percent increase in the number of visitors each year.

An interesting aspect of the Riverside County/LSSI partnership is that LSSI offered employment to all existing library staff when it took over in 1997. The new LSSI employees received the same rate of base pay and accumulated vacation time as they previously held. They were given the option of participating in LSSI’s 401-K plan and other LSSI employee benefits. This removed some expensive aspects of their employment from Riverside County’s budget and gave LSSI more staffing flexibility than the County ever had. Many of the incumbent employees are still working for the library system, with more than fifty marking ten years of service with LSSI in 2008.

Sam Olivito insists that competitive bidding for government contracts drives down prices and that shifting potential liability to private sector firms can save cities in unforeseen future costs as well. He adds, “The beauty of contracting is its flexibility.” Cities are not responsible or additional future costs such as pensions and workers’ compensation for contract employees. And in tough economic times, it is easier for cities to scale back on the amount of services they provide. Wohlmuth agrees, “I can adjust contracts far easier than I can layoff employees and reorganize a city.” An additional benefit is that smaller full-time staffs reduce the bureaucracy within city governments.

There are, of course, disadvantages to the contract city model. Once a city decides to outsource a service, it must go through the difficult process of re-assigning or dismissing city employees. Also, contract workers may have responsibilities to clients in multiple jurisdictions, which can result in slower response times. For example, Palm Desert used to contract for traffic signal repair services, but, according to Mr. Wohlmuth, it took repair crews two hours to travel to the desert before they could start fixing a broken signal – a delay that was unacceptable to the city. Palm Desert recently chose to bring that service in-house in an effort to reduce response times.

Cronyism and corruption are also concerns, as these lucrative government contracts can lead to outsized profits for private sector companies (although these concerns are certainly not limited to public/private contracts). Olivito insists that this is not a problem so long as appropriate controls are implemented. Making the process open and transparent, he argues, is the way contracting should be done. But ensuring that the bidding process is always fair, balanced, and non-biased, is hard to guarantee. Moreover, successful contracting requires ample supervision and oversight on the part of the city.

One counter-intuitive result of contracting for services, however, is that cities who do so may wind up with little or no direct control over contract workers’ benefits. If the service provider decides to increase workers’ retirement plan, the contract city and the taxpayers have little control. In Palm Desert, “we don’t have a lot of say in what we think about those extra expenses or those contracts. So, the price has been creeping up because those benefits have been creeping up,” says Wohlmuth. One response to this is that the city could find another contract provider. “It’s a competitive world,” points out Sam Olivito.

Increased attention to public employee pensions and benefits is also driving interest in privatization. A steady stream of stories about bloated pensions from California cities such as Bell, Vernon, and others has resulted in intense scrutiny to benefit costs for all public employees. It is not then surprising that cities facing such pressures would seek to contract with private companies that may not be burdened by rich benefit programs. It is also not surprising that organized labor opposes this development.

Public employee unions are fighting against the wave of privatization. Camarillo, Santa Clarita, and Ventura are each contracting for, or considering outsourcing, library services to LSSI. According to privatizationbeast.org, a blog written by the Service Employees International Union, “Privatizing public libraries means libraries will be de-professionalized and residents will pay more and receive less, while LSSI makes a profit for its investors and shareholders.” The public employees are fighting back in the state legislature. On June 3, 2011 the California Assembly passed AB 438, a bill proposed by Das Williams (D-38), which would strip cities of the authority to outsource library services. “Elected officials and lobbyists in support of privatization tried to kill the bill but thousands of California residents made calls in support of AB 438 and it passed 41 to 28,” according to a blog written by the Southern California Public Service Workers. Having passed the Assembly, the bill has been introduced in the California Senate and referred to committee. The California League of Cities strongly opposes the bill on the grounds that it will tie the hands of local governments at a time when they need more flexibility, not less.

As with most debates, there are reasonable arguments to be made on both sides and the decision to contract ultimately rests with the community. Local governments that are focused on efficiency may prefer to contract for services. Others that value workforce stability, or have a strong union presence or history, may prefer the traditional in-house model. A multitude of exogenous factors might ultimately influence a city’s decision.

The Rose Institute of State and Local Government has begun work on a long-term, comprehensive study of contract services in California. Look for updated information at www.rosereport.org.

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.