07/19/2024

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Full September 2023 Jobs Report

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Highlights for policy makers:

State Budget Still Operating Under Reduced Surplus Rather than Deficit Conditions

A slowing economy has immediate implications to state spending plans, both under the current Budget Bill and projected spending over the 5-year Multi-Year horizon. Anticipated impacts on total revenues, however, will be difficult to project for the upcoming budget cycle that will begin with the Proposed Budget in January. The tax deadline for most counties previously was extended from April to October 16, and recently was extended again to November 16.

The extent of any downward adjustments in state revenue projections are still uncertain given both the delay in tax collections and the latest economic data. Comparing the latest results to the economic projections underlying the current Budget Bill, the employment results ran close to projections in the first half of 2023, but fell short by 50,000 in Q3. The difference is only 0.3%, but it is a first sign of slowing that would affect revenue expectations as well.

There is, however, plenty of play in the state revenue numbers in particular the portion that truly can be considered “surplus” amounts running above historical levels. Assessing the issue through the spending side, state expenditures as a share of total personal income historically was remarkably stable up until the last few budgets, especially as increasing reliance on fees led to boosts in total expenditures (general, special, and selected bond funds) as taken from the Department of Finance Schedule 6. Revenues and consequently expenditures have been affected by economic downturns in individual years, but the overall level of spending had kept pace with the economy until the upsurge in the last few years.

The surge in expenditures came as revenues pushed into surplus territory in FY 2021 rather than falling into what was otherwise expected to be an historic deficit. From the previous high in 2007-08 to currently projected 2023-24, revenues from state taxes have grown 119%, or at an annual average of 5.0%. Revenues from state fees grew even faster at 252%, or an annual average of 8.2%. In this same period, inflation as measured by CPI-U grew at an average annual rate of only 2.4%.

The numbers in the chart are as of passage of the Budget Bill. The actual results are likely to be higher. The figures for 2023-24 appear to include the SDI tax increase enacted to go into effect this upcoming January. They do not include the additional MCO and guns/ammo taxes separately approved in legislation after the Budget Bill. These two taxes are estimated to yield an additional $1.56 billion annually. Also not included are tax increases related to the ongoing crisis in the unemployment insurance fund as discussed below.

But Final Revenue Outcome Dependent on an Extremely Small Portion of Taxpayers

In the current Budget Bill, personal income tax is expected to cover nearly three-fifths of total general fund revenues. Payment of this tax and consequently the overall health of the state budget relies on the economic well-being and residence choice of an extremely small share of the taxpayer base.

In the recently released Tax Year 2021 data from the Franchise Tax Board, high income earners paid 49.2% of all personal income tax (PIT) from resident returns, up from 44.7% from the previous year.

Breaking this number down for 2021:

  • Only 0.88% of taxpayers (158,444) with AGI of $1 million or more paid 49.2% of total PIT.
  • Of these, only 0.11% of taxpayers (19,471) with AGI of $5 million or more paid 30.4% of total PIT.
  • Of these, only 0.05% of taxpayers (8,511) with AGI of $10 million or more paid 24.36% of total PIT.

Note that in 2021, Elon Musk was still a California resident for at least part of the year.

And Expenditures will be Affected by Current Reliance on Deficit Spending

Even with revenues remaining near record levels, the current Budget Bill projects deficit spending in the 5-year Multiyear projections. Rather than increasing reserves in light of the revenue risks from a potential softening in the economic picture, the Budget Bill anticipates using the fund balances built up from the temporary surge in revenues to cover spending in the immediate term. Deficits, however, begin building in 2024-25, further increasing pressures for yet additional taxes and fees beyond those already enacted this year.

Enacted Budget Deficit Spending Estimates
Source: Department of Finance, General Fund Multiyear Forecast; $ billion Source: Department of Finance, General Fund Multiyear Forecast; $ billion Source: Department of Finance, General Fund Multiyear Forecast; $ billion Source: Department of Finance, General Fund Multiyear Forecast; $ billion Source: Department of Finance, General Fund Multiyear Forecast; $ billion Source: Department of Finance, General Fund Multiyear Forecast; $ billion
2022-23 2023-24 2024-25 2025-26 2026-27
Revenues $205.7 $208.7 $207.3 $206.2 $212.2
Transfer to Budget Stabilization Account 0.5 0.0 0.2 0.2 0.5
Expenditures 234.6 225.9 225.3 222.4 227.0
Operating Balance -$29.5 -$17.2 -$18.2 -$16.5 -$15.3
Prior Year Balance $55.8 $26.4 $8.1 -$9.1 -$25.5
Ending Balance $26.4 $9.1 -$10.1 -$25.5 -$40.8

Unemployment Claims Begin to Rise

Initial unemployment insurance claims (4-week moving average) have begun again to rise somewhat above the comparable period in 2022.

Insured unemployment—a proxy for continuing claims—remained elevated above both the 2022 and 2019 trends, continuing a drag on overall employment and jobs expansion potential.

The California program also continues to cover a substantially higher portion of the labor force than in other states. In the latest results (4-week moving averages), California produced 19.5% of all initial claims and 23.1% of insured unemployment. In contrast, California contained only 11.6% of all nonfarm jobs.

California’s federal unemployment fund debt accounted for 73% of all monies owed by the states, rising to $19.0 billion as of October 18. EDD’s most recent fund forecast projects further deterioration in the fund’s conditions, reaching an expected $20.3 billion deficit by the end of 2024. This fiscal weakening is expected even under a forecast that does not anticipate a new economic downturn in this period.

CaliFormer Businesses—Another Fortune 1000 Company Moves HQ from California

Additional CaliFormer companies identified since our last monthly report are shown below. This month’s entries include another Fortune 1000 company—Advantage Solutions—which recently announced moving its headquarters from California.

The listed companies include those that have announced: (1) moving their headquarters or full operations out of state, (2) moving business units out of state (generally back office operations where the employees do not have to be in a more costly California location to do their jobs), (3) California companies that expanded out of state rather than locate those facilities here, and (4) companies turning to permanent telework options, leaving it to their employees to decide where to work and live. The list is not exhaustive but is drawn from a monthly search of sources in key cities.

Companies From To Reason Link Date
Advantage Solutions Irvine Missouri HQ move

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2023
Boeing Long Beach various Relocation of some C-17 operations

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2023
Joby Aviation Santa Cruz Ohio $500 million manufacturing facility

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2023
Oak View Groups Los Angeles Colorado HQ move

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2023
Professional's Choice El Cajon Oklahoma HQ move

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2023