A Capacity Building and Revenue Enhancement Training

Agencies spend on average 30%-40% of total program cost in indirect (soft) costs to support federally funded grant programs. These costs often end up subsidized by the already stretched and/or overburdened General Fund. Here’s the good news... grant awards allow for reimbursement of these indirect costs. So, it’s time to stop leaving money on the table and HdL can help! We can recover uncaptured costs and return them to your agency. Revenue - unrestricted - direct to your General Fund. Watch the recording (below) and download the presentation deck to follow along and find out how. 

Additional Resource: Stretching Local Government Tax Dollars: Indirect Costs and the Efficient Use of Public Funds

Transcript

Introduction

Hello and welcome to today’s webinar “Unleashing your Grant Portfolio to save your General Fund”. Thank you all so much for joining us today. We will spend the next hour together teaching you how you can unleash your grant portfolio and get some dollars back into the general fund.

We have the privilege of Nikki Lettini being on the call with us, to give us the insights that we are looking for. I am Kimberly Konczak and worked closely with Nikki in delivering our indirect cost recovery service. And we also have Jason Port, our manager for indirect cost services, on the call with us today. 

What is Indirect Cost?

Indirect Cost is hard to grasp for many different reasons. It is an unknown thing because there is no clear definition. We all call it something different. Are we talking the same language? Indirect cost is important to our organizations and understanding that process is important, so that we can be sustainable in our organizations.

If we are not identifying it, we are subsidizing it. This is the cost that is incurred in the general fund. Your central support departments, finance, H.R., I.T., all those services, their primary focus is to support all the departments and funds in your agency and not to support the outside.

On average, agencies spend anywhere from 30-40%, sometimes 50-60% in indirect costs and without knowing that it can really put a burden on that general fund.

Seek True Cost

Indirect cost exists whether we identify it. Understand that indirect cost would not be there if it did not have direct costs to support. In turn, direct cost cannot function without indirect cost supporting them. Look at things as a true cost. What does it really costing us to do this service? Separating it out implies that you can do one without the other and you cannot.

Understanding that the true cost of a service is what it is really costing. You can make the decision to subsidize but do it with the information of knowing what that subsidy is so you can make a more conscious and educated decision. 

We need to be fully reimbursed or recovering the cost for this program that we are choosing to do, because if not, we are taking it away from another program. If you are a city and county, you have taxpayers and they are putting taxpayers in there and it is for the public safety, the parks and rec. If you take the indirect cost and you do not get reimbursed from the federal programs, you are having to take it away from these public services. 

Direct vs. Indirect Cost

The indirect cost is the harder one to identify, and that is due to different factors that are involved in understanding what it is costing to support these services. It cannot be easily assigned to a particular program. We might need to use an allocation statistic. It is incurred for a common purpose. It includes all types of administrative costs. And then we have administrative and overhead and that is one step above a program or a function. Indirect is supporting everyone, the finance, the HR, regardless of the funding source.

Then it steps down to administration or overhead and maybe a handful of programs. So, you can identify those more specifically, but still administrative in nature, but you can identify that as a direct cost under the guidelines. In the end, the task of it is more of a supporting role rather than the direct role.

The Cost Allocation Plan (CAP)

Some people think that a cost allocation plan is the same as an indirect cost rate because it is calculating indirect cost. The cost allocation plan is a part of the indirect cost rate, but it is not a whole cost rate.

A cost allocation plan is that 30,000-foot view of your organization, it is that one report that you can see what it is really costing to do everything directly in the agency. Looking at finance costs, H.R. cost, facilities cost. All of this results in an annual dollar amount of indirect cost supporting all the programs and funds within your organization. It does not matter about the funding source. This really helps to inform an organization of where our costs going. 

When was the last time you calculated a Cost Allocation Plan?

 Why a CAP?

There are two different types of cost allocation plans. They follow the same methodology, but you use them slightly differently. A full Cost Allocation Plan is typically used to charge the other funds and services within your organization, so they can then in turn charge the public for the services they are performing. 

The 2 CFR Part 200 cost plan is used for the federal and state grant reimbursements. Any programs that you want to charge an element of indirect cost, it must follow these guidelines. It is going to use this for actuals of your last fiscal year for use two years later as an estimate, there will be a true up.

Within a full cost plan, it is allowed to include more items and it is more representative of what it is costing to do these services. It excludes costs like marketing or publications or membership and dues and exclude anything council related. But those are very important indirect costs that are necessary and supporting these programs. 

Uses for a CAP

The two CFR plan is focused on federal and state reimbursements. The guidelines recommend a full cost plan. 

What is an Indirect Cost Rate Proposal (ICRP)? 

ICRP is indirect cost rate proposal. It follows the cost allocation plan, and it is calculating the percentage you apply to every dollar spent on a program.

You do not even bother to negotiate this rate. You have it for your uses internally or to charge the public. So, you create an ICRP, but if you want to use it on federal and state grants, you then must take it that next step to create the night graph. 

What is the Negotiated Indirect Cost Rate Agreement (NICRA)?

The NICRA is that negotiated indirect cost rate agreement.  Your cognizant agency goes through a process of reviewing and proving that rate, so you now have after that what that what that results in is a graph and that NICRA is a certification of your ICRP to say that it can now be used on federal and state grants.

U.S. Department of Justice

An extreme example was body cams when they came out. A lot of grants came out for body cams and what they were supplying the equipment for agencies to be able to get up and running with their body cams. What they did not understand is what it takes to maintain. 

They did not think about all those things that can put an organization in jeopardy of not really knowing where these funds are going to come from. For example, with the body cam you must think about the enormous amount’s internet storage required. All these recordings, those must go somewhere.

It increased the public records requests. This additional work for the IT departments as well. It increased the attorneys’ times for additional lawsuits. The cost goes on and on in terms of the indirect support of simply putting on these body cams on our police officers. It costs an additional $2.6 million to support this program. 

Where does this $2.6 million come from now? What you could say is at this point, if we knew this going into it before we applied for this grant, we could have taken it to the public should there be a vote, should we increase our sales tax to be able to cover the indirect cost?

Understanding the Indirect Costs are critical for an agency in in planning and being sustainable.

Who within your agency handles grants? 

 Indirect Recovery and Sustainability

Are you a finance person that is sitting here watching this finding out more about indirect cost? Can you answer the question of whether you directly work side by side with your grants administrators or are you feeling like the grants are kind of out there and you do not have a full grasp on where all of them are coming from or don't really have the conversations prior to going into applying for those grants? 

Do you know if there is an indirect cost rate, do you understand what that means for your organization? 

Indirect Cost Recovery

There are opportunities out there to capture as much available funding by leveraging that indirect cost rate. Looking at an average indirect cost rate, if we were just looking at this 600 billion on average, there is about $180 billion. 

What is typically unspent on these dollars? For many agencies out there, I have never come across one that has spent every single dollar. We have opportunities now to leverage that indirect cost rate and go back two years to say; Were there any unspent dollars? Did we have any dollars left over in these awards that we could take our indirect cost rate?

Get those dollars back in because you did subsidize, you supported every one of those programs with your general funds and did not get it reimbursed. Those dollars are representative reimbursing the general fund. So now it becomes unrestricted funding. Are there dollars that you guys can access by simply leveraging that indirect cost rate? Because as I said at the beginning? Remembering that you are subsidizing.

Match Requirement

You can now use your indirect cost rate if it is negotiated as your match component. This was the federal government's acknowledgement that indirect cost exists. 

If you submit, you must get prior approval. Every dollar you spend the match is your indirect cost. That is a big deal, because it allows agencies not only to free up some of those dollars that were set aside for cash, but it also allows you to go after additional grants that you might have passed up because you did not have the cash to apply for the grant. 

Using Indirect Cost to Meet Match Requirements

Workforce innovations grant your match requirement was 25% on $1,000,000 grant. So, it requires 250,000. You set aside those dollars but let us say you had a 22% indirect cost rate. That would cover 220,000 of that match. You would only have to come up with 30,000. So, 30,000 would be the cash that needs to be set aside. You should represent your indirect cost rate exactly as it is.

You calculate it based on the guidelines. Let us say your rates 54%. But you also have a chance at that point in time to say, “I do not want to charge the full 54% to the grant”. You can make that policy decision internally and it does not have to be consistent across all programs. You simply say, “I want to on this program, I am going to charge 30%”. If you do not charge more than you can charge up to anywhere along the line, so keep that in mind as well. 

Indirect Cost & Administrative Cap

We have a $5 million grant that was awarded with an administration cap. Many grants have caps. Here is what we need to do. You have $500,000 that is allowable for indirect cost, but you only spent $2.5 million on the grant, and the grant was last year, and you only spent $2.5 million on your direct funds and 250,000 on your indirect funds. You collected the 2.75 and your rate was 37.5%. You spent and subsidized on that 2.5 million. You spent $937,000 supporting your direct dollars of this program. 

Because of the administrative cap of 10%, there is still $250,000 available to you for indirect cost. And with the negotiated agreement you could maximize that. So, you could still get that additional 250 that you had not spent. Those dollars were already done as far as you cannot spend any direct dollars on it anymore. 

Indirect Cost and Fiscal Recovery Funds

ARPA funding is a very big topic of conversation right now. Indirect cost is allowable on your ARPA.

What you can do is just reduce the number of projects that you are doing so that you can be a net zero with this ARPA funding. If you are not able to fully complete this work by 2026. You lose the dollars, so you want to collect that indirect cost. 

You do not have to be worried about 2026, because if you spent those dollars in indirect, you get those dollars in, then you can later decide as a general fund policy decision what you want to spend that on. But do not lose out on opportunities or the option of them taking dollars back because you did not get it spent by not leveraging your indirect cost rate.

Indirect Cost Rate Options

Does your entity have a negotiated indirect cost rate already? If the answer is no, here are your options. You can accept the 10% of minus, you can negotiate indirect cost rate, or you accept the 10% until you are able to negotiate. If you do have an indirect cost rate, does it meet your needs? Is it something that you have done a long time ago and you just quickly put it together? Are you maximizing and really interpreting and understanding what your real indirect cost rate is?

Make sure that you negotiate a new rate. Make sure that it does not expire. You want to make sure that you always have an up-to-date rate. The year after year of that is a much quicker and easier process once they know what you are what your process is, how you have been applying it. 

You can always request an extension. There are opportunities to be able to increase the amount of time you can use that rate while you are going through the process of reestablishing another rate.

Which of the following are you currently utilizing to capture Indirect Cost Reimbursement?

Indirect Cost “MythBusters”

MythBusters, I like to talk about these because there is so many reasons why people just do indirect cost, and they are just perception. 

Myth #1

The ones that are applying for the grant working on grant, they think by collecting indirect cost that they are taking money away from the grant. Whether or not you identify it, it's there. Ask yourself; If you are someone working on this program, are you going to go do your job and do everything and not get a paycheck? Are you going to be able to do your job without a computer? Are you going to be able to do your job if you do not have somewhere to be or sit or access tools and things that you need? Finance, Software, all those things are imperative and critical in performing on this grant. 

Change the way you look at the process as far as saying you are taking it away from the grant because that is simply not the case because the grant cannot be successful without these bits of information or bits of services that are critical to the program success.

Myth #2

People think if we do a cost allocation plan then it is just already covered. We are getting the dollars back. But again, with the cost allocation plan, we might be charging out to other funds and services or to the public, but it is only relative to the services that are being performed for them. There are still the amounts of dollars that are related to these programs or grants that you are supplying that are not being refunded by anyone unless you take this information and get an indirect cost rate using the cost allocation plan and then applying it.

Myth #3

A lot of people think it is done in a box in the finance department, and they just get this, and they have no idea what it is made-up of. If you have a consultant who does this, oftentimes even in the finance department, sometimes it is hard to grasp the total thing. Without a negotiated agreement, you cannot apply this to any of your grants, so you need to have that negotiated agreement going through the guidelines. 

Does your provider do that for you? Do they sit you down and say, OK, this is where we use the cost plan, this is how we maximize this dollar and dollar and this service you got to make sure that all those questions are being answered?

Myth #4

People are also shy about getting their indirect cost rate. Understanding that once you have your rate, you can charge anywhere up to the rate, and you do not have to be consistent across all programs and services. You can make a policy decision to subsidize.

Understand that by doing this negotiated rate, you are not pigeonholed into applying it consistently across the board. You can make those decisions as an organization of what makes sense for you guys and what areas you really want to subsidize and what other areas you do not.

“Don’t Try This at Home”

Indirect cost hit every area whether you are a grantee, whether you are a grantor, whether you are looking at all these things, you really need to look costs. There is help there that you can really find someone to help guide you through this process and make sure that you are maximizing every opportunity that you can.

Call to Action

Everyone should be updating their cost plan. It is important to understand because again, it is that 30,000-foot view across your entire organization. It does not. It is not limited to grants. It is any program regardless of funding source. Do you know what it is costing you?

Negotiate your indirect cost right. And while you are at it, go back to yours so that you can access any unspent dollars that are available to you. Then prioritize your funding. Know what you want to spend it on. 

 The intent is public safety, parks and rec and those services, the intent or those dollars were not to be used for chosen programs that people are wanting to do. Make sure that you look at your organizations as one big collective group. It is not just your department, and you are working in a silo by yourself. You need to be what is the best for the overall organization and what the best for the overall organization is, is to capture every dollar.

Cost Recovery

Why do you want a negotiated rate? The negotiated rate really frees up a lot of opportunities for cost recovery. The real cost that is incurred. There are a lot of programs that get left to the wayside. You know when revenues fell short. Make sure you are recovering wherever you can.

Compliance

It is critical to make sure that you are that fiscally responsible organization when going after grants. If you understand that the funders that you were getting those grantors, you are getting the funding from are responsible for those dollars. They must create risk assessments. You want to make sure that you comply. That helps you also to be that fiscally responsible agent.

Increased Revenues

Increase your revenues, your revenue opportunities. If you are subsidizing, then you are losing you know because again it exists whether you identify it. Making sure if you are putting forth the effort in these programs that you are getting, what you need to support the general fund for those services.

What's the biggest challenge when it comes to leveraging an indirect cost rate?

A lack of understanding and a timid intimidated by the process. So that is why we are here. That is why we are doing this webinar. We really want everyone to know about this so that you are educated and can be sustainable going forward.

ARPA Deadlines Got you Down?

The deadline we talked about this a little earlier with ARPA. You must have your all your cost obligated by 2024. End of 2024 and you must spend it by the end of 2026, or you lose it.

Making sure to leverage your indirect cost can really save these dollars and make sure they do not get any of those dollars back and that you can fulfill all the programs that you really intend to with these dollars.

Oh no, not with my tax dollars!

We talked about this in terms of the tax dollars not using our tax dollars to subsidize these grant programs. You are spending the dollars whether you identify them. So where is it coming from? It is obviously being taken away from something else to support this. 

Read Jason Portt's Stretching Local Government Tax Dollars: Indirect Costs and the Efficient Use of Public Funds article for additional insight.

So, how much money are we talking?

Visit www.hdlcompanies.com/services/indirect-cost-recovery to calculate your potential reimbursement. Now obviously there are a lot of moving and/or additional factors, but the calculation will provide a rough estimate. 

Q&A

Q: Who is the cognizant agency to obtain approval for 10% de minimums indirect cost for ARPA?

A: There is no cognizant agency for 10% to minimis. If you choose to use the 10% minimis, that is what you apply on your budget. With ARPA on your funding, you can just apply that 10% across the board. Ensuring that it is only on a modified direct cost basis. You can only apply 10% on the 1st $25,000 of that. Say you have $100,000 pass through. You are only going to get $2500 as the administrative component of that. 

Q: We are doing Clean California Grant with Caltrans and they made us get the 10% approval from DOT...

A: For the Dominus, that is incorrect, and so you would simply have to go back to them and quote the guidelines with the 10% of minus that says that it is allowable. It is just it is flatly prized to everyone. So even if you calculated a rate for some reason and I do not know whose rate it would be, but if it were 8 you still could apply a 10%. That is an inaccurate statement from them.

Challenging that is something that we do when we are negotiating, and we certainly encourage you all to do.

Q: If ARPA funding is designated toward a project, is it considered obligated per ARPA and Treasury or do we need a contract/PO to qualify an ARPA amount as obligated.

A: If you have obligated ARPA through Treasury and your Council has approved, then as far as finding the person is not, as necessary. It is necessary for it to be spent by 2026, but it must be assigned and obligated through a formal process of Council to approve that this project is in line, and this set up and set forth through your organization, but not necessarily the PO already associated with it.

Q: How do we apply to use the 2CFR rate? Is approval required to apply the 2CFR rate to ARPA?

A: It is required that you do a 2 CFR Part 200 rate to use for your indirect cost on ARPA. However, the process that sometimes overlooked is the fact that if you do not have $35 million in direct federal funding, then your requirement is simply to do the rate and put it on your shelf. 

Q: In regards to using Indirect Cost to Meet Match requirements... The IDC can be applied to either the Match or as IDC. But can't be used for both. Correct? So, you can't claim IDC for reimbursement and then also use that same IDC for the Match.?

A: It can be used for both. You cannot get more than what your indirect cost rate is, but you split it and it both fully capture what your costs are, so now you can use it on both sides.

Q: Are we able to negotiate a higher indirect cost rate than what is outlined in a grant program guideline?

A: Yes. Let us say they have some type of requirement says 10% admin cap. That means is that is your direct administration. Your program indirect cost has that 10% match, but if you have a NICRA a negotiated agreement that is your agency wide indirect cost and so your agency wide indirect cost can also be applied in addition to that 10% administrative cap.

Q: Do the methods of NICRA result in higher cost rates percentage then a cost allocation rate? My cost allocation plan results in about 10 rate anyways.  

A: The rate is what the rate is... BUT, determining the rate depends on the methodology used to calculate the rate. Many people don't have the experience necessary to maximize their Indirect cost rate. Often times the rate they are using is too low. 

HdL presents an update on California’s retail economy based on current 4th Quarter 2022 data. Watch the recording below and follow along with the presetnation deck and transcript.

Additional Resource:

• Sales Tax Trends & Economic Drivers Report

Transcript

Introductions

I’m Bobby Young, Client Services Director here at HdL. Along with me are Bret and Tracy, both fellow Principals on the Sales Tax team. We meet with clients every quarter to provide what the results are locally and also to talk about statewide and some of the bigger trends.

4Q22 Statewide Results

This quarter we were up 4.7%. We are talking about 4Q22 sales results today. That’s the October, November, December time period, normally the holiday shopping period. But it is in the span of an entire calendar year.

It's when sales tax revenues flow the most. While we were up 4.7%, 3 categories took us by surprise. Some of this we were expecting, but it is what helped the bottom line. At the top, Autos & Transportation were up 5.6%. Holiday shopping and the buying of cars, especially higher-end cars, helped the most. Gas prices were still high here in 4Q and we saw a 10% increase in Sales Tax Revenues. Restaurants and hotels were up 8.7%. Business and industry are also up 7.4%. General Consumer Goods during a normal holiday shopping period are only up 1.9% compared to a year ago. The pools were only up .3%. They are not growing as strong as they've been recently. That pulled back these other categories that had seen growth.

The Bay Area and Southern California saw the most dynamic growth in 4Q. The return to workplace environments, normal spending habits, changes from post pandemic. These areas have continued to grow the most and thereby support the overall bottom line.

County Trends: Local Tax

Over the last three calendar years you can see 2020 on the left, 2021 in the middle, and then 2022 on the right. During the pandemic, you could see a lot of growth of the green areas outside of the more heavily populated areas, especially Southern California and the Bay Area. North grew quite a bit, and Central California also saw that that same strong growth. In CY21 we saw a lot more of the fulfillment centers and online money where that was coming in.

Here you can see outside the Bay Area. Sacramento, Foothills, saw dynamic growth. Central Coast continued to expand, returning down to Southern California. For all of CY22, spending up in the Bay Area and then heavy on Southern California and Southern California coast. The far north did not see much fall during the pandemic, and as such is not growing as much.

Online vs Brick & Mortar: Allocation

Data that we have been tracking for quite a while now, is online vs brick & mortar. Large box retailers especially have always trended online. That component ran low through the early part of the 2000s. It then took a big jump back when AB 147 was adopted and implemented. Remember that are out of state online retailers, and their requirement to collect and remit. Then we had the pandemic in CY20, which shot up.

These 2 lines will not cross again as the pandemic has ended.

Consumers are not going to buy in bulk online as they do in stores. This has returned to a normal trend since the pandemic. Good results there.

Forecast Considerations

Some of the key points that are on our minds. Interest Rates. The Fed treasury has been working to calm down inflation and thereby calm down some consumer spending, We’ve talked about how inflation relates to Sales Tax, but now it starts to trickle over into what consumers are going to be doing. The savings trends, household savings, what has been going on there?

Supply chain issues are not nearly what they were post-pandemic, but it still is affecting a few sectors. Mortgage Rates are less concerning, except for the fact that that takes up disposable income for households that will be making changes to their mortgages or looking to get into new properties.

Interest Rates

Interest rates since March of last year are up 475 basis points. Just yesterday the Feds tapped interest rates again up 25 basis points. A lot of good information is coming out of the Fed treasury right now with where they are overall for the rest of the Calendar Year. They might touch it again, but they are only anticipating now just one more bump. They are being mindful, they do not wish to push the economy into what might otherwise be considered a recession or an extreme pullback. The Fed treasury is trying to keep its finger on the pulse of our economy.

Savings & Disposable Income

We can all acknowledge the amount of money that came out of the Feds ended up immediately spiking personal savings rates. That’s been tapped into as we've seen so much dynamic growth, especially on the Sales Tax side here in California, people spending that money. Folks have been tapping into that savings, but now we've buoyed around this 3%-4%. Over the last decade, it has usually been somewhere between 5%-10%. A slight uptick from where we were just a couple of quarters ago.

Consumer Spending

Month over month changes are shown here. The months themselves are shown in different colors and range from September all the way to February. This is total credit and debit card spending per household, with percentages here noted on the left. We've got the total down below and December spending down a little bit. Month over month, October became little bit more positive, but it did trend down. January and February have returned to a positive category.

This growth that we see in February shows more spending on services again. A sign of what is to come.

CA Unemployment

Unemployment has been the underpinning for the economy and why we haven't pulled into a full-fledged recession, as the Fed treasury spiked interest rates to calm inflation. You see historically low unemployment is likely to continue for quite some time as we talk about CY23. Throughout the entire state, unemployment remains fairly low, with the exception of a couple of hot spots, in areas that may be a little bit more heavily dependent on certain types of industries. These might be pulling back different from our more populated and dense county areas.

HdL Statewide Trend Quarterly Outlook

Overall statewide is up 4.7%. You can see when our team believes that we are going to squeak out a little bit more positive growth out of Q1, the January, February, and March time period.

As we go through the rest of CY23, the statewide growth from Sales Tax levels off. This has a lot to do with the continued effort of the Feds, raising interest rates to calm inflation, consumers having to readjust overall, and household spending. We are not in a recession, we are in a continued slowdown.

You can see a little bit of a trickle over into the remainder of what will be FY23-24 for most of you. A little bit more ticking up, getting back into new spending or new growth.

Local Place of Sale (POS)

You can see we have gotten the total year-over-year sales tax generated up top. Breaking apart the local place of sale and noting that the difference between these two is the growth out of the pools. Most importantly for what local businesses may be experiencing, as we go longer in CY23 we’re expecting a negative dip. It is the pools that may still grow a little bit to keep us flat overall.

Auto Prices

The first chart that we have here is about the prices. The increase in prices in this sector has pushed the associated Sales Tax up significantly over four or five quarters now. This chart shows that it is still increasing, but it is slowing down. Looking back at 2Q22 we had a little more than 13% growth and 3Q a little bit less than 10%. Now we're all the way to 3.7%, which is slowing down significantly.

Autos: 4Q22 Trends

In terms of trends in 4Q, we are continuing to see an increase in registrations. That's slowing a little bit as well, but it is expected to grow in 2023. Supply is expected to catch up with demand, and that's going to have a downward pressure on both the prices of vehicles and the sales tax associated.

Affordability is continuing to weaken and it's not getting better. Inflation combined with an increase in interest rates and falling trade-in values, means affordability is not there.

Autos & Transportation Forecast

In terms of the overall forecast, we had estimated 5% and the actual results were 5.6%. We have got one more quarter, 1Q23, that is projected to be up. We still have continued solid demand for vehicles in this quarter. In terms of affordability, the prices of vehicles are continuing to go up, especially luxury vehicles.

Auto dealers, with their inventory dropping, are taking advantage and selling the vehicles that they can to increase their bottom line. We are seeing an uptick, a continued uptick in luxury vehicles, which is interesting. We have seen that pattern over four quarters now.

We are going to see a reduction coming up. As you can see in the four quarters coming up, we've got negatives in 3Q23,4Q23, 1Q-2Q24. All of FY23-24 we are projecting a 3.3% drop in this sector. Barring any major recession, when we get to those out years, 24-25 through 27-28, we are projecting more comparable levels of annual increases, ranging from 3-3.5% as we go out into the future. We want to get past 23-24 and get back out to normalcy in those out years.

Oil Prices

Let's talk about the Fuel and Service Stations sector. Pricing is a factor in driving the Sales Tax in this sector, just like in Autos amd Transportation. This particular chart is intended to show a reduction anticipated in both the West TX intermediate and the WTI oil barrel prices, a key factor in determining and helping to benchmark the prices at the pump.

We are showing a downward trend in WTI prices anticipated in 23-24. On the right side, we are looking at actual prices at the pump. You can see in 23-24 we're anticipating continued reduction of prices. That is going to be downward pressure and the opposite of what we've been experiencing, where we've had upward pressure on prices, oil barrel prices have been up, demand and consumption has been up. It is starting to come back down, and is anticipated to be down in 23-24, more than 6% overall. When we get to the out years we will be back to normalcy.

CA Retail Gas Price Per Gallon – Quarterly Average

Here we see the prices again, looking at the downward trend. Pump prices peaked back in 2Q22 and now, the quarter that we're living in, the average 1Q prices are 9% below where they were one year ago. With prices continuing to fall, this will have a downward impact on the sales tax associated consistent with our forecast.

Fuel & Service Stations Forecast

We ended 4Q22 with positive results. 10.2% was very consistent with our forecast at 10%. Then the negatives start. The quarter we're living in downward pressure and -5% , -10%, all the way out through 23-24 we have negatives. That is what consists of that 6.4% overall reduction.

In 1Q some refinery breakdowns and maintenance have been pushing the prices up a little bit. We are anticipating them to come back down and demand and consumption of fuel reducing. Overall, when we get to the out years, we've got one flat year in FY24-25 projected at 0% and then back to 2% annual increases in FY25-26 through FY27-28.

Construction Factors

We are going to talk about Building and Construction. Overall, the trends are showing a flattening out. The nonresidential projects are offsetting single family residential activity. Interest rates are having an impact and slowing down new housing projects.

We are continuing to project home improvements with people staying home and not purchasing as many new homes. We are anticipating that the activity in the building construction will offset the reduction happening from new homes. Statement statewide permit values are slowing, and weather is going to be an offsetting initial boost to spending. A combination of factors that are offsetting each other.

Building & Construction Forecast

4Q22 was very solid. We had forecast 8% with the actual results coming in at 5.4%, flattening out when we start in the quarter we're in now. .3% all the way out flat through FY23-24. There is stability in this sector. We need to get past FY23-24 once again, and we will anticipate normal levels of increase, ranging from 4%-5% when we get to those out years.

Food & Drugs

Food and drugs this sector continue to be very consistent. It is still the smallest sector on average throughout the state. This quarter was a little bit better than anticipated. Showing 3% positive results and anticipating an ongoing stability in this sector, with 2% growth all the way out. Modest improvement in Sales Tax for this current Fiscal Year and next Fiscal Year.

General Consumer Goods: 4Q22

Particularly for 4Q22, General Consumer Goods is a big one. This is the retail sector of Sales Tax. It is up 1.9% for the quarter. However, looking at some of these key sectors like home furnishings, department stores, jewelry stores, even women's apparel, we are seeing a slowdown in spending even during the busy shopping period.

So why is it up 1.9%? Discount department stores are up 7.7% and they comprise over 33% of this group. One of the primary reasons that discount department stores are so positive is many of these have fuel pumps located at their locations. The gasoline revenue gets reported alongside the retail revenue, so they all fall into this General Consumer Goods category. Gas prices are supporting the General Consumer Goods group for 4Q returns. From a holiday quarter perspective, we're seeing a decline in spending for 4Q22 compared to 4Q21, possibly in part because a year ago it was it was inflated.

General Consumer Goods: Growth Trends

When looking at the growth trends for this group this graph pulls out the discount department store group. All of the other categories, department stores, electronics, home furnishings etc., a big spike for 2Q21. A lot of pandemic spending leading to a general decline in retail spending in 4Q22.

General Consumer Goods Forecast

We had anticipated the slowdown. We projected 1.5% growth, and it came in at just under 2%, again supported by that discount department store/gasoline Sales Tax revenues.

Anticipate a slowdown in the upcoming quarters. Very flat personal consumption, contracting nationwide. We are seeing retail sales slowing down in California as well. These are not big declines. These are coming off of big inclines in these prior periods. People spent through the pandemic last calendar year, slowing down a bit in 2023, and growing again in the beginning of 2024. Going into the subsequent Fiscal Year, you will see some growth of about 2%-3% year over year.

County Pools: Trends

This is a key group. The countywide pools are a big part of your local sales tax and continue to be. On this graph the green represents the General Consumer Goods group. In the General Consumer Goods group, retail sales, largely ecommerce that are indirectly allocated, are a large part of the pools through 4Q-1Q21.

This is a big representation of the pandemic ecommerce spending. All other groups in the pools are represented in the blue trend line. General Consumer Goods dominated the pools all the way up to about 1Q21. Then we had a big shift. As you'll recall, there was a change in some of the structures statewide and revenues that were previously reported in the pools are now being shifted to direct allocation. The impact started in 1Q21 and continued to today.

The result of that is now General Consumer Goods are no longer the dominating factor here in the pools. It is all the other groups. Business & Industry is a big part of what is driving some of this growth in the other sectors in the pools.

County Pools: GCG Dominates Holiday Quarter

Looking at the pools, General Consumer Goods still dominated the holiday quarter. We saw some growth. Even despite an 8% decline, General Consumer Goods in the pools, was the largest segment. it pulled back, we lost 8% compared to a year ago, In this ecommerce retail component of the pools. You can see Business & Industry is starting to grow compared to a year ago. A bit of a shift in what the largest contributors are to the pools.

County Pools: Major Categories

County pools looking at the major categories, these are the top 10 business types in the pools. Contractors in the pools are growing, with general merchandise declining. This is that ecommerce retail story within the pools contracting. We saw a contraction in the pools with used auto dealers and biomedical had a slowdown. General merchandise and electronics had a big contraction during 4Q and those are two key areas. All the increases are related to the Business & Industry group.

County Pools Forecast

We do anticipate ecommerce to stay here. Even though we are seeing some inventory changes here in California, with relation to whether these revenues remain in the pools. Indirect allocations versus direct allocations continues to shift in the pools with the Business and Industry group.

We do expect ecommerce to continue looking at 4Q22. For the pools we came in at .3%. This is a dramatic reduction from what we thought we were going to see when we did our projections last quarter, we had projected 7%. We missed in part due to a number of new fulfillment centers coming online and direct allocation then being attributed to those centers instead of indirect into the pools. That continued shift of revenues had an impact in 4Q.

Looking forward we anticipate growth. The rest of this calendar year will be a little slow at 1% growth. Then going into CY24 and beyond into the future fiscal years, we’re looking at 3%-4% growth in the pools pretty consistently. This is effectively establishing a new baseline in the pool revenues.

Fulfillment Centers

These are those big warehouses that are truly fulfilling orders, often with robotics, and across the state of California. They are the largest component of the Business & Industry group. There are over 30% now, used to be about 20%. This has been growing consistently each quarter as more fulfillment centers come online. Sales out of those fulfillment centers are considered places of sale, then becoming direct allocations. Those revenues come into Business & Industry as a group and come out of the pools.

Dramatic growth in fulfillment centers, starting in 4Q19 -4Q20. This again is AB 147. It is pandemic spending. It is just ecommerce continuing that upward trend. Then in 1Q21 we saw everything coming down because it all came into fulfillment centers.

We see a big boost all through CY21. Now we're at a new baseline starting with 1Q22 into 4Q22, the quarter we're talking about today. This is reasonable growth. This is 11.5% growth for fulfillment centers. This is anticipated to continue and then level off at 3%-4% growth in the out years.

Business & Industry: Top BT’s

Looking at Business & Industry and the top business types that drive this group, I'm pulling out fulfillment centers, Look at these other sectors within the Business & Industry group, medical, biotech, light, heavy industry, electrical equipment often associated with big solar projects are big battery storage projects, business services, warehouse construction equipment, and then office equipment.

These top 10 business types average growth of about 5.1% in the quarter. Seeing a lot of growth in this sector. As a reminder, there's 21 very diverse business types in this group and it's going to be very unique depending on your agency and your tax base. It is going to vary agency by agency

Industry Trends

In the industrial sector, we're looking at a bit of a contraction in the ISM manufacturing index for the 4th consecutive month, so a little bit of a slowdown. Inventories are growing, prices are high, demand has come down a little bit. All that being said, even in 4Q, we still saw increases in sales tax results, and we anticipate that output in the second half of this year will continue to be relatively strong.

Business & Industry Forecast

Looking at the forecast we projected 6% growth came in at 7.4%. We will still see growth through the rest of this calendar year. Fairly strong numbers first, second and third quarter. Again, these are statewide forecasts, not individual agencies. Slowing down a little bit as we get into CY24, only a 2%-4% year over year growth average.

Restaurants: Industry Trends

Restaurants came in slightly under forecast in the 4Q at 8.7%. Still significant growth is going on in restaurants. What drives some of these trends? Working from home is impacting the restaurant industry. As our schedules have changed, so has how we eat food. We're eating a little bit more at home, a little bit less in the restaurants.

Operators are challenged with labor shortfall and the ability to have solid service. Foot traffic is starting to slow down a little bit. We’re shifting more to buying less stuff and looking to do more fun stuff. Leisure and entertainment are still in demand. Hotels daily rates are almost 14% above the pandemic levels and we expect that to continue to increase. Travel is increased surpassing 2019 levels this year.

Restaurants – CDTFA Cash Receipts

Looking at the CDTFA website, we can see that January and February results are very strong. 13% year over year results for February or January and then 7% for February.

Restaurants & Hotels Forecast

Restaurants and hotels are still going to be strong going into 1Q. As I mentioned, we are up just under 9% for 4Q results. Looking at the balance of CY23, it is fairly strong going forward all the way into the outgoing fiscal years 3%-4% growth. We will continue to be visiting restaurants and looking for experiences and fun and travel, anticipating that those revenues will continue to be strong.

HdL Statewide Trend – Annual Outlook (FY)

Especially for General Consumer Goods in that pool, we have seen dynamic growth over the last 2 years. Is the growth over? Yes. As we start to look at the upcoming fiscal years, we're not expecting to see that continue. It would be unreasonable to think it would. Higher price of goods which caused inflation is built in there.

For the rest of this fiscal year statewide 3.7%. Then cooling off to just .5% in FY23-24. A year ago when we were here presenting our 4Q results, we were only expecting about 2.4% growth out of FY22-23 and 1.8% out of FY23-24.

For about the last year or so, we've been anticipating this slowdown. At the back end of FY24-25, expect to start seeing normal historical growth return. This is that trend that we're expecting as a one year slowdown, then return to 3.5% growth that that we've normally been experiencing before.

Last quarter when we met with our clients, we provided a Sales Tax update. We will be doing that again by default. So as we meet with clients through the end of this month, all throughout April, and the beginning of May, as you finalize your forecast, we'll be updating our numbers and building on these trends.

I know for many of us the dynamic growth there of the last couple of fiscal years caught us by surprise and a very welcome surprise at that. But now we hope we are seeing things as they're happening. 

The banking industry... it sounds like the Feds are on top of really making sure that they're doesn't become a kind of mass hysteria around the banking. Our forecast at this point also considers that.

I think we've talked about this a lot in the past with us as consumers and when we're talking about things like general consumer goods, is that element of demand spending versus discretionary spending? And I think that's really as we go into a slowdown, it's the discretionary part that comes off 1st and most notably there as a part of FY23-24. But the demand spending and that which we buy day-to-day whether it be fuel or just General Consumer Goods from big box stores, we do expect that to continue.

A lot of that we do expect to continue. It's a reminder of what the pandemic caused especially there at fiscal year at the end of FY19-20 and the dips that we saw, what we've experienced most recently all the way up through the current Fiscal Year is kind of that rebound and a return. We are right there back on board with where we were before.

If we have a recession, what does that mean? What does that look like? Does it feel like we are going back to the Great Recession type of revenue? The sales tax world and the sales tax revenue generated is at a different point. And so even if we do get into a recession it may not even go back into where we were at FY19-20 from a total number perspective.

Q&A

Q. Any trend information regarding Business Travel?

A. Yes, the hotel and hospitality industry are expecting a return of business travel. A lot of hotels are anticipating both business travel and recreational travel this summer. The trends there are expected to help the overall industry. We are expecting the business travel component to increase this calendar year.

Q. Any impact seen from Russia, Ukraine and impacts anticipated for same reason?

A. I think we have seen it all. My expectations would be the immediate increase in crude oil prices globally, which definitely spiked our local gas prices. That's going to probably be about it. Everything else should be built in now. Nothing with regards to California sales tax on that end.

Q. How might weather impact CA Sales Tax?

A. The impact is felt, most notably by folks staying in and not getting out. Snow seasons are going to be extended all the way into the summer because of the amount of snow that that they all have, which will likely help generate more Sales Tax as folks get out and spend on “services”. But the ancillary spending is on restaurants.

The other is in the Building & Construction sector as we see it with weather impacts. Where the rains and flooding cause damage. As a result of the damage, there's going to be repairs that need to be made and then Building & Construction goods and supplies that will need to be purchased to help fix the damage. So, while impactful we're probably going to just see more continued spending.

Q. Do your charts reflect percentage change?

A. Our monthly projections whether it on the sales tax side when we provide all of our clients like a cache projection monthly, there is still some variations. It's very difficult for us right now as we've talked about it with clients and the CDTFA uses a an advanced methodology.

The new component is with its most with the cross reporting system it has allowed CDTFA to also allocate in any given month revenues from prior periods. That's the piece that really  throws off our forecasts on a monthly basis, because we don't know exactly how much CDTFA might be allocating given a prior period. If we roll back before the cross system they used to do it at the end of the quarter.

Q. Any impacts to technology with semiconductor shortage?

A. Yes, but also difficult to identify exactly where we would see those sales tax impacts. Different supply chain issues where the auto industry is still impacted. We're not going to see it in the dollar amounts from sales tax directly related to those shortages. So I'd say the same over on the semiconductor side.

It might be a temporary impact of businesses not being able to buy certain pieces of equipment. Eventually, there will be semiconductors available and thereby they will be able to make the purchase. So it might just end up kind of skipping or delaying the inevitable sales tax that we see.

Q. Had we considered the impact of the Supplemental Nutrition Assistance Program ending in March, the SNAP program?

A. Yes, though I don't have metrics related specifically to that program, our forecast definitely accounts for all of the funding that got poured into the economy over the last year. That is a big part of the spending pullback and definitely considered as we're forecasting forward. Snap is part of that is part of you know that supplemental income that was kind of pumped into the economy, all the stimulus funding. We are anticipating that to now pretty much be gone and that is part of our projection.

Read the "2023 California Retail Analytics" report on expanding retailers along with retail stores sales estimates. (HdL uses a mix of similar stores to estimate sales per gross square foot for each category. Actual results will vary based on store size, location and market area characteristics.) If your jurisdiction has received a site plan and prospective tenant list for a new project, contact us for a revenue estimate at This email address is being protected from spambots. You need JavaScript enabled to view it.. 

Related articles:

• 2022 California Retail Analytics

This guide will assist you in determining which construction projects may qualify for a direct allocation of local 1% tax. A temporary allocation of local use tax associated with construction projects can provide an agency with a much-needed boost in local tax revenue. Learn the different rates that make up the total statewide base sales and use tax rate, who is and is not eligible for a jobsite sub-permit, how to apply for a jobsite sub-permit, contract wording, and more. 

Related

Case Study: SoFi Stadium Construction Contracts and Sales Tax Revenue

_{As presented at National Grants Management Association 2022 Conference}

Maximizing and sustaining revenue is more important now than ever. Fiscal recovery funds and federal grants are a chief source of revenue across the board for state, local, and tribal governments. Agencies spend on average 30-40% of total program cost in indirect cost to support federally funded grant programs. However, much of this indirect cost ends up being subsidized by the general fund. It is critical that agencies understand their true costs in order to support their programs long-term. 

_{A CSMFO Educational Series}

The Fundamentals of Municipal Revenue series presented the basics of key revenue sources.  

• Module I provided an overview of California local government revenues and in-depth coverage of property tax.
• Module II focused on sales tax including discussion on tax rate components and allocations, and how sales tax revenues are administered.  In addition, the course covered revenue trends, how remote (online) sales taxes work, as well as tools for forecasting and maximizing sales tax revenue.
• Module III covered other taxes and fees that are important revenue sources for public agencies such as documentary transfer and property transfer taxes, hotel occupancy taxes, utility users taxes, franchises, royalties, rents, and licenses.

_{As presented at the MMASC Annual Conference}

The past couple of years have been anything but fiscally predictable, forcing organizations to think outside of the box when it comes to fiscal sustainability. HdL, Oliver Chi, Irvine City Manager and Dan Fox, Diamond Bar City Manager discuss how the pandemic affected local government and how it will change the way fiscal preparation is done.    

Executive Summary

Determining which construction projects may qualify for a direct allocation of local 1% tax is complex. A temporary allocation of local use tax associated with construction projects can provide an agency with a much-needed boost in local tax revenue. If a contractor or subcontractor does not elect to obtain a jobsite sub-permit however, local tax will be allocated to the countywide pool based on the jobsite location, and the agency would only receive their proportional share of the countywide pool allocation for that project, a mere fraction of the 1% local tax.

Throughout the construction of the City of Inglewood's SoFi Stadium, HdL worked with the general contractor to determine qualified contracts and ensure proper registration and tracking of the local 1% sales tax revenue.

The Challenge

Ensure the City of Inglewood received the maximum amount of local sales and use tax revenue from the SoFi Stadium's construction materials and retail, food, and beverage sales.

Background

Stan Kroenke, owner of the NFL's St. Louis Rams, planned to move the team back to Los Angeles (the team’s former home from 1946-1994). The City of Inglewood, with its rich history as a sports and entertainment mecca, was the logical choice for the next state-of-the-art venue. 

In 2014, Kroenke purchased a 60-acre parcel of land adjacent to the old Hollywood Park Racetrack. The acreage, however, proved not large enough for a stadium and parking. In 2015, the Inglewood City Council scrapped plans to convert the old track into a large office/retail/residential project, and instead, approved a plan to incorporate the land into a 70,000-seat football stadium.

The SoFi Stadium would be unique in that it would be built using 100% private funds, requiring zero taxpayer dollars. It would guarantee countless jobs – both during construction and upon opening. 

The City of Inglewood, already a HdL sales tax and property tax client, turned to HdL for additional support in capturing all local tax dollars associated with the project. 

Analysis

HdL met with project developers, contractors, and City staff to determine the best methods of tracking the new revenue stream and ensuring the City would receive the maximum amount of local tax revenue. Tax for construction contracts can be complex; oftentimes, contractors are both consumers and sellers of taxable goods for the same project. 

When contractors are merely consumers of materials, they pay the sales tax to the supplier of the materials which is allocated to the jurisdiction where the supplier’s sales office is located. If, for whatever reason, the contractor has not paid sales tax on the materials or is both the seller and consumer of the material, they are required to consider the jobsite as the place of use. As the jobsite is not a permanent place of business, the tax revenue is allocated via the county pools.

A contractor who enters into a construction contract equal to or greater than $5,000,000 may elect to obtain a sub-permit for the jobsite of the qualifying contract enabling the contractor to make a direct allocation of tax to the local jurisdiction in which the jobsite is located rather than through the countywide pool. The qualifying contract price applies to each contract or subcontract for work performed at the jobsite, not the total value of the prime contract.

Solution

HdL is well-versed in maximizing local tax revenue for construction projects and always encourages contractors and subcontractors to participate in use tax programs. We worked closely with the stadium’s general contractor, Turner-AECOM Hunt, to create a system that… 

• identified 50+ unique contractors or subcontractors, 
• determined if each contract was eligible for direct allocation of local tax, 
• and guided qualified contractors or subcontractors through proper registration and tracking of the local 1% sales tax revenue.

As with a project of this size, we were actively involved throughout the four-year construction timeline. We created specialized geographical area reports to capture all the local tax allocated to the project. We shared this data with Turner-AECOM Hunt quarterly (sometimes onsite donning hard hats!) to ensure nothing slipped through the cracks and with City staff to keep them apprised of the project’s progress, as well as current sales tax revenue to date. 

“It has been a great privilege to work with HdL on the SoFi Stadium. They are very knowledgeable and answered all of our teams and subcontractors’ questions. We could not have done it without HdL’s support on this mega job!” said Juanita Diaz, Turner-AECOM Hunt representative.

Conclusion

HdL continues to provide geographical reports to track SoFi’s ongoing revenue and insight on sales tax projections. “HdL has been a vital strategic partner and instrumental in assisting the City with expert analysis and innovative data collection services. They assisted Inglewood in evaluating the effectiveness of various contractual agreements,” said Christopher Jackson, Sr., Director of Economic and Community Development for the City of Inglewood.

These agreements include the SoFi Stadium - home of the Los Angeles Chargers and 2022 Champion Los Angeles Rams - and the Intuit Dome - the soon-to-be home of the Los Angeles Clippers – which will open in 2024. HdL assisted the City in its effort to make prudent financial and fiscal decisions which ultimately helped maintain their title as the “City of Champions.”

Additional Resource

Sales & Use Tax Guide for Construction Projects

HdL presents an update on California’s Retail Economy based on current 3rd Quarter 2022 data. Over the last few months, slight inflation improvements materialized in various industries, however real change has yet to take hold. Households remain nervous about the economy sliding into a recession. Nevertheless, customer spending remained strong through the holiday season. Experts vary on whether a recession will occur and to what extent. Unemployment rates remain a key indicator of whether this adverse economic situation will occur. From a sales tax perspective, the forecast does reflect a slowdown in taxable merchandise spending to 0.4% in FY 2023/24 as the higher cost of utilities, food and other necessities limit dollars available for discretionary and non-essential items. Watch the recording below. 

Additional Resource: HdL & Beacon Economics' Sales Tax Trends & Economic Drivers Report

Transcript

By way of introduction, I'm Bobby Young, Director of Client Services here at HdL Sales Tax. I'm joined also by Bret Plumlee and Tracy Vesely, fellow teammates on our Sales Tax team. We are all, along with quite a few others, responsible for meeting with clients every quarter to deliver your local sales tax information.

We’re very pleased to announce that later this year, we're going to be celebrating our 40th year in service for clients throughout California. It is quite the milestone for us. We're happy to have been able to help. We have over 500 clients Statewide. We’re very blessed to have a client retention rate of over 99%. 

3rd Quarter 2022 Statewide Results

3Q overall bottom line, we experienced an 8% growth. This is 3Q calendar year, the July, August, September period. This is when gas prices were higher and up 22%. Consumers were spending. Most notably, you see these two big categories at the top. Autos & Transportation, Building Construction. Summer months are usually the time when the economy is booming with those types of transactions happening, even with the feds raising interest rates and working through financing being a little bit more expensive. 

Autos & Transportation and Building & Construction still grew over last summer of 2021, which was that post pandemic rebound that we experienced. And here again in 3Q22 with another big jump. Restaurants & Hotels spending, and economy recover and rebound strongly since the pandemic.

Remember, as we're talking through this forecast, 3Q Is the start of the Fiscal Year for many of you, with a July to June fiscal period. 3Q is the very beginning of what will be Fiscal Year 22-23. 

At the start of the 2022 – 2023 Fiscal Year, we see a strong 8% growth. The major metropolitan areas continue to expand and grow. Bay Area, Southern California, get the biggest nods here. San Joaquin and Sacramento continue with their consumer spending, but then also, we get the consolidation of distribution centers and that online component that is still helping benefit through the summer of 2022.

Forecast Considerations

Major considerations.  We can't avoid inflation and the higher prices of goods, interest rates and what the feds have done all throughout 2022. Some of the positive aspects, is employment or unemployment rate being where it's at right now. Very positive momentum there, but also debt, personal debt, and savings. This is going to be a big reason for that post pandemic boom that we experienced. The never-ending supply chain issues. It seems to be a little more on the marketing/reason for higher prices. Leaving consumers with anxiety or fear of missing out. We've got issues at the port like we experienced last year or distributors from outside the United States, with goods coming in. 

All of this leads back into us as individuals and the greater overall spending economy, as consumer demand and consumer sentiment, and how consumers are going to feel moving forward.

CA Unemployment

Through November, unemployment rate was 4.1%. Extremely low with everything considered. You can see the continual decline that we've been experiencing. Those folks who want a job likely to have a job. There are a lot of jobs still available. Certain industries can't staff up enough and that speaks to the restaurant industry. So, unemployment is actually a great thing for our economy, really allowing for folks to continue spending. 

Historical comparison of unemployment. You see the dramatic rise that happened during the Great Recession in 2009, 2010, and 2011. Where we are now is where we were pre-pandemic with regards to unemployment. 4.1% is exactly where we were at the end of 2019, before COVID came into our lives and started to dramatically affect unemployment. A good thing overall for our economy, the spending economy, and as we think about what's to come out of 2023. 

Savings & Disposable Income

Personal savings and debt are going in an inverse relationship, and it is rather low. Our focus on this period is where we saw dramatic increases in personal savings and disposable income. As we try to contextualize what happened after the pandemic and why we saw this immediate boom. and that fear that consumers are out spending themselves. And maybe they weren't. Maybe they saved quite a bit to then be able to spend. 

Interest Rates

Interest rates overall, the unavoidable factor of what the feds have done. Throughout 2023, all the rate changes that they've put in place, added up to a total bottom line change of 425 basis points increase in 2022. Overall, this is what the Feds have done for interest rates. When they start to talk about slowing the rate of increase, this is what we must remind ourselves and why. If in 2023, the feds might raise overall rates maybe 3/4 to 175 to 100 basis points. That'll be dramatically slower than the 425 that we just experienced in 2022. Setting this as our benchmark to keep in perspective when we talk about interest rates going forward. We've already seen likely the most dramatic parts here in 2022.

Inflation & Sales Tax

When we talk about inflation does it mean a bad thing for overall sales tax receipts? As I start to change the demand feature from strong to more steady demand, it still may otherwise have upward pressure on pricing, which will have upward pressure on overall spending and sales tax revenue over receipts. Supply chain bottlenecks, which we talked about, but also labor shortages, could have downward pressure on supply, which would then have upward pressure on prices, thereby still having upward overall upward pressure on spending and sales tax receipts. These things are intertwined and it's not until we see one of these wheels come to a complete stop where we'll see revenues take a dramatic drop. Inflation is not always a bad thing when it comes to sales tax receipts.

Credit Card Spending

Those other parts were setting the tone for some of the optimistic and some of the pessimistic sides of the economy. Obviously, interest rates, but then also credit card spending. Yes, it has dramatically jumped overall for our consumers. Here, in these 30 to 59 ranges, not quite back to where we were pre–Great Recession, to a big drop during the Great Recession. But all credit card spending is up across the ranges. A dramatic drop happened in credit card spending again, because consumers had the savings there to be able to spend on the credit cards to then be able to pay off the bills. It doesn't necessarily mean that everybody is overspending within the economy.

We're watching this and mindful of where consumers are headed.

Inflation Adjusted

We do take inflation into consderation, but not necessarily on our annual forecasts. It's more on a cash basis and the activity and the levels of revenue that you're receiving that we focus on. We've got calendar years focused on the bottom. Once we get 4Q22 data, then we'll be able to solidify that. But this is the lead in for our forecast. Once we inflation adjust it back to the year 2000, you can see this blue line here over these last five years, if we look in comparison, we had eclipsed or gone back to where we were pre–Great Recession. Then as we come out, we're going to be forecasting that all the inflation changes we've experienced, were higher than where we were back in 2006. So just for a perspective when it comes to inflation.

HdL Statewide Trend Quarterly Outlook

What happened in 3Q? 8% growth overall. Just as a reminder, where we were forecasting 3Q just last quarter, we were at 8.3%. A smidge softer than what we were expecting, but I think it as we talk about it around the table, hopefully we're experiencing less volatility, less surprises within the economy. 

We do watch cash receipts that have come into date, but you can see overall we are expecting a solid 4Q. 5.5% overall for 4Q. Normal holiday shopping period. You can see where we're going to be anticipating certain things from this time, October, November, December, still good. As we start Calendar Year 2023, it’s starting to level off as we finish the Fiscal Year 22-23. 

Then you start to see it overall negative, you'll see a longer sustained decreases and negatives that we've built in by sector. Towards the back end of the Calendar Year is when we expect a lot of the inflation and interest rate increases to have a bigger affect back on our overall results as an economy. 

We're not in a position nor do we have data or feel like the economy is in a full pull back recessionary state, more of a slowdown. As we prepare budgets for our clients, that's what it's going to be looking like. It's a little bit more of a slowdown, rather than a full recession. Getting back to something a little bit more positive, as we as you see here on the report, going out to 2024.

Breaking that down between the place of sale, which is POS and those local results throughout 2023 there’s a slight decrease to flat results expected, where total overall is up above. And the reason most notably, is still sustained growth out of the pools versus your local businesses directly.

Autos Prices

We're going to get into all the major industry groups now. We have positive news in every sector in 3Q22, starting with Autos and Transportation. This first chart about prices. Pricing has been the biggest positive impact on the Sales Tax in this sector.

Looking at 3Q22, prices are still going up, but the increase is slowing down year over year. Growth in prices slowed. 2Q22 was up 13 1/2% and 3Q22 up 9.6%, but it remains significantly elevated. The increase is the past two quarters were slower compared to 1Q22 when the prices were up 22.8%.

Autos: 3Q-2022 Trends

There is now clearly evidence of a slowing of demand. But the California Auto Outlook is anticipating more than 5% increase in registrations in Calendar Year 2023. We've been talking about the drop in volume, and it overall significantly dropped vehicles in 2022, but we do anticipate that an easing in supply chain issues, combined with higher interest rates, is going to moderate the prices in 2023. 

Autos & Transportation Forecast

When we look at the overall forecast, we had projected 8%. The actual was very positive, an almost 6% increase in the quarter, and the overall summary is inventory is finally increasing from historic lows due to that easing of supply chain disruptions. Lack of inventory which had caused prices for the new and used vehicles to soar. It's not as much of an issue now.

We're seeing expensive branded trucks for those agencies. Those of your agencies that have a significant amount of Sales Tax being generated from trucks that are in strong demand and we're looking at an increase observing that in the dealer lots. Used car prices are now declining. Financing costs are continuing to escalate. 

This is expected to crimp auto demand and result in a minor dip. We've had significant growth going all the way back to the pandemic and post pandemic and another positive quarter. We are anticipating one more positive quarter. You can see 4Q22 a 5% growth and then a flattening out in the first couple of quarters of this calendar year that we're now living in, and we are going to experience. We're anticipating in the forecast a 3% overall reduction in this sector for Fiscal Year 23-24. Then when we look at the out years 24-25 all the way out to 27-28, we're back to more normal annualized levels of growth, 3% projected all the way out into the long term.

WTI Crude Oil Price

Fuel and Service stations, another positive impact on the overall forecast is coming from this sector.

The global inventory of oil, when we look at crude oil prices, they're expected to fall slightly in the first half of 2023 and pick up throughout the second half. The WTI, or the West TX intermediate crude oil that we base the pump prices on, is expected to average roughly $85 in 2023. This fluctuates so significantly. It was at $80 a barrel yesterday, down to $77 by the end of the day, and $73 about half an hour ago. So, it demonstrates how significantly the fluctuation is in the WTI prices. The forecast calls for an average production year for US refineries and there has been the ban on Russian petroleum products. That is going to continue to provide some price uncertainty. 

CA Retail Gas Price Per Gallon – Quarterly Average

The average pump price, that has played such a significant role in continuing to boost the Sales Tax generated, that's a common theme. Consumer demand really has driven up the Sales Tax in almost every major industry group. And this is one of those key categories where the pricing has significantly contributed to the Sales Tax. The pump prices peaked in 2Q22, but they're still well above year ago levels and the prices are continuing to fall. They've been falling and that we can expect to have some local tax declines in this segment as it rebalances from 2022 price impacts.

Fuel & Service Stations Forecast

Looking at the overall forecast, we can see the actual results were almost a 22% increase in 3Q22. We had projected 35%. So, we didn't quite hit that mark but still growth.

In summary, the sector is experiencing downward pressure and all factors. Prices at the pump got to the lowest point at the end of Calendar Year 22. Other factors pushing Sales Tax in this sector down, are reduced oil barrel prices, diesel, and jet fuel prices have been down. There's been a paring back on the consumption and demand for fuel and the volatility tied to those Federal Reserve rate increases. As a result, we have lowered our forecast for the next 3 quarters.

We've got one more positive quarter in the 4Q22 and then, five quarters, six quarters in a row there of drops. First and Second quarter of 2023 down 10 to 15% and then all Fiscal Year 23-24, we've got an almost 8% reduction built into our statewide forecast.

Long term, when we're looking at the out years 24-25 that is flat, and then back to normal annualized increases, between 25-26 all the way out to 27-28, we've got a 2% projected increase there in this sector.

Construction Factors

Real growth was experienced in this sector once again, due to many factors. The Federal Reserve Bank has continued to increase federal fund rates at 4.5%. 

They're at the highest level now since 2007, so they're at 4.5%, prime rate at 7.5%. What that means in this sector, is we’re anticipating homeowners are going to stay put and invest in the nest, and that's going to lead to positive results from home improvements. In this sector, mainly in Building and Materials, the biggest business type within Building & Construction and an anticipated increase in the Sales Tax associated.

Higher mortgage rates are good for home improvement centers. We have the 30-year, 15-year rates increasing and higher than they were last quarter. And we also are expecting new projects in 2023 resulting from the Infrastructure Investment JOBS Act. So that's going to play a positive factor throughout this calendar year. 

Building & Construction Forecast

Looking at the overall forecast, you can see growth that we experienced. 7.8% and we had projected pretty much hitting the target throughout most of the sectors this quarter, we had 7.5% projected and came out 7.8%. 

We've had one more positive quarter anticipated. 8% is forecast in 4Q22. Inflation has been driving the results now. Prices for concrete, steel, copper, electrical, system components, and lumber are still elevated, and they're well above the pre-pandemic levels. The demand for the home improvement sector is still very strong. Prices of material are expected to decline in 2023, and that's why you see a significant flattening out six quarters in a row there, and through the remainder of Calendar Year 2023 and on into the next Fiscal Year.

As housing starts to slow, infrastructure projects which offset those drops, are going to expand with that Infrastructure Act federal funding that I mentioned.

As a result of the combination of all these factors, we have that one more projected quarter of growth followed by a flattening out through 23-24. And then when we get out to the out years 24-25 through 27-28, we have normal annualized levels of growth projected 4.5% to 5% annually from 24-25 through 27-28.

Food & Drugs Forecast

Food and drugs. This is one of the most stable sectors and it has been going all the way back to the pandemic. It also is, as a reminder, the smallest sector throughout the state. We had projected 2% growth. The actual results are very flat in the quarter at .4%. The sector is flattening out. There was again in 3Q22 coming from grocery stores, and that was offset by a drop from the cannabis related businesses and those sales.

The prices of food, although they're increasing, most of food sales are nontaxable. The higher cost of groceries is pushing the consumers to eat out more, and we'll see that when we talk about restaurants. Long term, we are continuing to forecast annual 2% growth in this sector.

General Consumer Goods

It's mostly good news for 3Q. I am going to talk about a few of the bigger groups here, starting with General Consumer Goods. This group encompasses retail statewide. Comprised of about 28 different categories from discount department stores, which is one of the largest, down to jewelry stores, pet stores etc.. We’re close in our forecast with General Consumer Goods. I think we forecasted growth of 2.8%. It came in at 2.9% for the 3Q results. 

Discount department stores are at a 10.6% growth over a year ago. If you pull them out of the mix overall General Consumer Goods would be down .5%. 

Consumer spending slowed in 3Q and it was trending that way a little bit in 2Q. Discount department stores is propping up this group in a big component of that is fuel. So, we have a lot of big discount department stores that have fuel pumps on premises and are a part of their sales tax reporting. That is what is driving a little over half of that 10.6% growth. If we pull fuel out of the discount department store mix, its growth is closer to 5% and partially boosted by some brick-and-mortar stores filling online orders. 

So, a shift in brick-and-mortar shopping starting in 2Q. It's slowing down, but it's coming off some big highs. So, it's that negative.

Preliminary Holiday Results

This is MasterCard spending pulse. They have a pretty good hand on the pulse of what spending is looking like, particularly online, but with credit card transactions, they were looking forward into preliminary holiday results. 

A couple big takeaways here, a balance of spending related to goods and experiences. The consumer is not all goods anymore we were, during the pandemic, that's all we could do. Now there's certainly a shift to experiences as we see on this chart. Restaurants up projecting to be up by MasterCard 15.1%. Restaurants were up in 3Q, projecting that going forward as well. And that's more on the experience side. 

A little shift away from spending on goods like electronics and jewelry. Some of these industries really had their 15 minutes of fame during the pandemic. Now coming back to some more normalized levels.

General Consumer Goods Forecast

General Consumer Goods growth trends had a big jump here in 2Q21 and a big spending surge, and then coming back down in 3Q21 and leveling down up until the current quarter that we're talking about, 3Q22. Seeing flat or contraction in some of the larger categories, including department stores, family apparel, home furnishings, and specialty stores. Specialty stores include things like pet stores, beauty stores, some of those odds and ends that don't really fit in the bigger categories.

Some slowing happening there. Looking at the forecast for general retail or General Consumer Goods, and again we're talking brick and mortar here, this is going into the store and buying stuff. As I mentioned, 3Q came in at 2.9%. We projected 2.8%. Looking forward at 4Q growth of about 1.5%. So, we're coming down in that forecast. This is coming off some big double-digit growth the year prior, right when we look at 4Q21. 

So really starting to pull back. A lot of things are impacting buyer choices right now. Bobby discussed most of these. Interest rates are high, and our spending is now being dictated by available cash. So, we don't have as much in savings, and we are depleting that, and now we're putting more on credit cards. So, I think there's some purchasing decisions around that bubble of spending that is driving our forecast a little bit. So, coming down to 1.5% growth, again it's still growth flat in the 1Q23 and then we see a step down of 1% going forward.

A lot of this not only is just local spending in the stores, but it is also a decline in gas prices. Discount department stores are one of the largest categories in this group, and gas prices are driving a lot of those positive results. As we anticipate gas prices to continue to come down, we'll see that impact on the net sales tax. So, that is one of the factors that are contributing to that 1% decrease all through Calendar Year 23 and then we slowly start to come back as we go into Calendar Year 24.

County Pools: Trends

General Consumer Goods, brick and mortar shopping countywide pools. This is indirect allocation of spending. Each agency gets a proportional share of the pool based on their Bradley Burns sales tax. 

We can see General Consumer Goods, from 3Q19, a huge boost in sales tax growth here from 4Q19 to 4Q20. This is AB147. Marketplace Facilitators Act. and it is also our frenzied pandemic spending during that period. General Consumer Goods were the lion share of revenues coming into the pools. 

Then 1Q21, we cross. Part of this is attributed to a chunk of the pool revenues now coming out of the pools going into direct allocation. So, we see this decrease here, but we're also seeing a big growth in the other industry groups here compared to General Consumer Goods. A big part of this is a related to Business & Industry and its impact on pool revenue.

Looking at Business & Industry, it is growing more than the other groups that contribute to the pool. Pool revenues, we break them out by the same major industry groups we do for the Bradley Burns sales tax. Business & Industry up 10% in growth compared to a year ago. General Consumer Goods down 1.5%. General Consumer Goods are still the largest chunk of revenues in the pools, but growth is negative compared to the Business & Industry. Now just to clarify, not to be confused with the 2.9% in General Consumer Goods, in the brick-and-mortar Bradley Burns that I just spoke about. This is General Consumer Goods in the pools and largely related to online activity, if not entirely. 

County Pools : B&I Major Categories

Focusing on Business & Industry, the big categories that are driving the pool revenues. There are 6; Medical biotech, light and heavy industry, office equipment purchases, as well as a big electrical equipment purchases, often related to the energy sector. And then lastly office equipment.

A lot of office equipment purchases this last couple of quarters, largely attributed to people coming back into the office. Businesses refiguring there office models and part of that too is infrastructure for IT. So, we're seeing a lot of IT purchases in that area as well. So, you can see Business & Industry very, very strong this last year and a half in the pools.

Country Pools Forecast

Again, we closely projected a 6% growth for the pools. We came in at 7.4% for the quarter. Very similar to preceding quarters, private party auto sales strong are very strong. So that is a big component of the pools, is private party auto sales through the DMV very strong. We're seeing auto sales starting to soften. Anticipating a little bit of softening going forward about third party sales, we can see 4Q still strong at 7%, and then coming down to 4% and 5% in the succeeding quarters.

As a point of reference, ecommerce makes up about 1/6 of the total county pool revenues. We do anticipate ecommerce is here to stay. It will continue to grow. And as part of this growth here.

Fulfillment Centers

Let's shift gears and talk about the Business & industry group as part of the Bradley Burns sales tax. I went from Bradley Burns to the pools. Now I'm back to Bradley Burns, focusing a lot on Business & Industry. This is a group that has been front and center of this last year. Fulfillment centers fall into this group. They are the largest business type in the fulfillment center group. They comprise about 24% of the revenues for the entire Business & Industry group. It grew 11.5% for the quarter. This is the one group where our projections were a little bit different.

Looking at fulfillment centers. We see big growth from 4Q19 to 4Q20. This is a AB17, this is marketplace facilitators, this is pandemic spending. Then we get into 1Q21, and it shoots right back up again. Huge growth. This is related to that shift of some pool revenues coming out of the pools into direct allocation, related to California fulfillment centers in orders being filled for California in these fulfillment centers. Therefore, they are considered a place of sale. 

This really changed the complexion of the Business & Industry group, with fulfillment centers taking up almost 25% of the total revenues.

And then coming down to 1Q22, we see a stabilization for growth. While we still saw growth in the 3Q22, we expect going forward stable growth in fulfillment centers.

Business & Industry: Top BT’s

Looking at the Business & Industry group, the top business types in this group are on the screen. The group itself has 21 different, very diverse, business types that contribute. Ranging from motion pictures, equipment, winery equipment, to medical biotech, industrial business to business. 

Medical biotech, a huge in the group, along with heavy and light industry, I tend to group them together. Pretty much every key group saw growth in the quarter. These top ten averaging growth of about 9.4% in 3Q. The only group in this top ten that did not grow was Garden and Agricultural supplies, down just a little bit, and farming construction equipment was up. So, there's a little bit of a distinction between those two.

Industry Trends

California fulfillment centers continue to grow. We are filling more and more online or remote seller orders out of our California fulfillment centers. This has boosted those direct allocations. Do anticipate that to continue at a pretty even trend line.

Pharmaceutical construction equipment continues to be in demand. That group was up in 3Q. I mentioned agricultural supplies down. These two groups are driven by seasonality and certainly now driven by the impacts of the drought. 

The drought is still there and farming and agricultural shifting their business models, buying equipment to accommodate that.

Pharmaceutical and biotech got a boost from COVID. And a huge boost from the vaccines and the research around that. Vaccine research is still very strong. And with that, something we don't talk about as much these days, but crop research is very strong in the biotechnology industry. We're seeing spending in that sector as well. In the industry, the ISM, which is the Institute for Supply Management, the manufacturing index is leaned on heavily in this industry. It contracted for the first time in 29 months. Part of that is just reporting a slight softening in demand. Partially a result of higher interest rates, more difficult to acquire affordable loans for big projects. However, even with this little bit of warning, the industrial sector continues to be strong.

Business & Industry Forecast

3Q22 came in at 9.7%. We projected 5%. So, this is the one group where our projections were far more conservative than the actual results. Part of that in Business & Industry. Fulfillment centers are up 11.5%. 

Part of what drove some of that change is some of those, preholiday sales happened in 3Q where in the past they've been in 2Q. So that drove a little bit of revenues higher than what we had initially anticipated.

Going forward, still seeing strength in 4Q up 6%, not double-digit growth, but strong.  Leveling down going into 2023, more modest growth, more in the 2% range going forward. Not seeing a rebound until we get into 24-25 Fiscal Year up into about the 3% range of growth. So again, 3Q was high. A lot of one-time projects buying still happening in 3Q.

Restaurants: Industry Trends

Cost for groceries continues to push consumers into restaurants. Food at home is at 13.2% and food away from home up 8% as far as cost. When Bret talked about Food and Drugs, how it came in and 3Q less than 1%, modest growth. Part of that is during 3Q, we were out at the restaurants; we were out experiencing the fun of going out to dine. 

Leisure and entertainment experiences are in demand. Overall spending, folks are certainly looking at experiences over goods or balancing the two. And I mentioned earlier the MasterCard spending plus report slide that I threw on the screen, restaurants were forecasting up 15% nationally. 

We're falling in line with that, and that just comes into that leisure and entertainment sector.

In California, wine is a big industry for us. Wine tasting fees more than doubled in the last six years. Part of that is related to labor costs, supply chain challenges, wine bottles, the inflationary factors. Wine tasting fees are up, wine costs are up still in area of purchasing though. We're still buying and drinking wine. 

Hotels are doing well. Occupancy is expected to reach recovery in 2023, pretty much close to pre pandemic levels. The only sector that is really struggling is Business. Recreational travel is back. We are out doing stuff back to that experience component, right? Business sectors travel a little slower. International travel into the country a little slower, but certainly rebounding. Hospitality industries margins are a little tighter than they've been previously. As folks travel more, we're seeing that that sector rebound. Huge increases in 3Q for the hotel sector.

Looking forward, this slide is looking at cash receipts as posted by the CDTFA for October and November. This is just raw gross cash. We don't have the data behind this. I can't tell you exactly what's driving this, but for their category of food services and drinking places, we’re up 9% in October, 8% in November, seeing growth in this sector of looking forward into 4Q. 

3Q was at 10.2%, we anticipated 9%. We're close looking at 4Q to be strong and we just looked at some of the cache data that supports that 10% growth and 4Q 11%, in this quarter that we're in right now, 1Q23 and this really leveling off at a higher baseline growth at 4% 2Q, and then 2%-3% going forward.

HdL Statewide Trend – Annual Outlook (FY)

Fiscal Year 22-23 on a statewide basis, almost 4% growth. It has just about everything to do with the first half of the Fiscal Year. Then the July through the December period, the growth cooling off as we start 2023. In the Red Circle, 23-24 is where we're getting down closer to what we're anticipating right now. More flat results out of that Fiscal Year. For many of you as expenditures continue to go up, if you experience flat growth out of Fiscal Year 23-24, it's probably going to feel like a recession, you're going to feel that slowdown.

It's why we're not talking about a recession even though slowing of revenues is going to is going to feel that way. Once we go out into Fiscal Year 24-25 and beyond getting back into normal historical growth patterns, I think it's constant reminder that, November 2024 is going to be another national election. We can't lose sight of the fact that the feds, as it works towards a national election, will want to keep the economy in good fashion. Now we'd be many who will want the economy even stronger than it is right now. In a lead up to 2024, I think we got to keep that in mind when we're talking about sales tax and what we expect out of receipts. I have then now I look to the feds and how much they've responded to cool inflation for the overall economy is.

If we do fall back, and if there are certain markers that that they don't like, there's more propensity to then reduce interest rates and probably try to stimulate the economy. As we look back and we've gotten a lot of these questions of; What does it look like failback? This graph right here is a constant reminder looking back into 2019 when we completely closed the economy there at the end of the Fiscal Year, 2Q and we ended up with down only 2%. Obviously, we've seen all this growth post pandemic periods.

Are we going to go back to 2019 levels? I think it's important to keep note of what dollars we're talking about now. Back in 1920, which is the mark here, we were about 7 billion overall statewide receipts. And you can see here for Fiscal Year 21-22 with that which was already wrapped up or in more of the 9 range. Are we going to go back to 2019 levels? Not likely. A higher price of goods. Wages likely. 

We talked about unemployment being low and employment being high, there's availability to be able to spend and buy at this at the level that we are right now, which then leaves receipts back up at this level. So that's how the overall dollar receipts trend out with these growth factors up above.

Q&A

Q: Do you feel like upward pressure on prices impacting essentials such as grocery, food, hygiene, dining, fuel, etcetera is resulting in reductions and desires wants, such as electronics and designer apparel and jewelry?

A: Most certainly. When we think about the California spending economy, there's two pieces to it: demand spending and discretionary spending. Demand is the everyday goods that we must buy just to live. It's where we're at when we talk about autos, we are car country, California. Everybody has a car to be able to get to and from and commute around. 

What is their demand spending and then how much will they have leftover for discretionary purchases? Likelihood more is going to be placed on demand spending, less on discretionary. So most certainly, I believe it's going to be the case. That's why we've cooled off our expectations for the economy or at least for receipts.

Q: Do you think consumer sentiment will eventually be affected by lower quality customer service impacted by tight labor and unemployment and low unemployment? 

A: That's a piece of the consumer sentiment perspective, right? It's that quality level of service. I see it a lot when I read feelings about tipping in restaurants. If you're getting poor service from one location, if you as a consumer shift to another location, you're still spending. And I think, when it comes to the forecast overalls, you've still spent. That's really what's going to keep sales tax going up. So, it's less of a tangible correlation, especially if the consumer still spends somewhere. 

HdL presents an up-to-date view on California’s Retail Economy based on current 2nd Quarter 2022 data. Though a new fiscal year commenced in July, many of the economic challenges seen in early 2022 remain prevalent. Inflation will continue to top historical norms into 2023. Despite a fourth interest rate hike, prices on taxable goods show no signs of lessening. More expensive mortgage rates will slow housing sales and cause weakened demand for appliances, furnishings and other related products. Crude oil prices have dipped from extraordinary peaks allowing consumers to budget in other areas of life. The shift back to experiences and services plays a significant role in the forecasted decelerated growth. Overall, consumer’s confidence in the economy is best described as uncertain. Watch the recording now. 

Additional Resource: HdL Companies and Beacon Economics: Sales Tax Trends and Economic Drivers Report

HdL’s Best-of-Breed Local Tax Solutions with the City of Oakland

Enterprise resource planning (ERP) software solutions are a necessity for modern municipalities. However, as local governments quickly recognize, ERP solutions do have their limitations. These constraints can adversely impact your team’s performance in critical areas unless they are strategically supplemented with best-of-breed solutions. Locally administered revenue programs are one such area that is critical to local government operations but underserved by an ERP. HdL offers proven solutions to agencies unwilling to accept the limitations of an ERP.

ERP CHALLENGES AND HdL’s BEST-OF-BREED SOLUTION: PRIME

Margaret O’Brien, former Revenue and Tax Administrator for the City of Oakland, CA explained the dilemma of ERP limitations for locally administered revenue programs: “An ERP tends to rely more on the accounting end of things. The benefit of [HdL] Prime is that it is a comprehensive point-of-sale software solution which collects and processes revenue activities. The ERP system does one thing well but doesn’t do everything our revenue department needs. Prime lets City staff work to their strengths and not be limited by weaknesses in the ERP system.” O’Brien selected HdL to assist the City of Oakland out of several solution providers to meet the unique and sophisticated needs of the City’s municipal revenue administration programs.

HdL Prime’s superior ability is a reflection of how it was designed - by and for municipal finance leaders. HdL employs and consults with finance directors, revenue managers, certified revenue officers, business license/tax supervisors and even city managers. This incredible source of expertise, along with guidance from HdL’s 600+ municipal clients, ensure that our solutions excel in improving all aspects of the revenue administration process, including:

• Easy-to-use online taxpayer portals to apply, renew, pay, close, search and more
• Tax, license and registration processes for all locally administered cyclical revenue programs (such as business license, occupation tax, lodging tax, utility users tax, parking tax, rental unit registration, liquor tax, tobacco or cannabis tax and others)
• Internal and external communications including emails to taxpayers and municipal staff

HdL clients identify many benefits from utilizing HdL’s best-of-breed solution over an ERP module, including:

• Improved ease of use for businesses, the public and the municipality’s staff
• More responsive and higher quality customer service
• Higher return on investment, both through lower software costs and higher team productivity

EASY TO USE AND HIGH QUALITY CUSTOMER SERVICE

As a best-of-breed solution provider, HdL’s Prime local tax software was designed in every respect specifically for this unique area of municipal revenue operations. As a direct result, Prime is user-friendly, has a streamlined workflow to coordinate communication with various departments, and reliably captures the revenue and data needed to support daily operations. Prime is a cloud-based solution which eases the IT burden while securely storing and backing up data. Municipal staff agree that the software is easy to use, and taxpayers compliment the simplicity and flexibility of the online filing and payment process. Contrary to experiences with ERP provider support, municipalities find HdL’s customer service to be highly accessible, knowledgeable, and responsive.

One client reported, “The reliability and ease of use [with our ERP] were not there and the problems we encountered were not rectified by the provider in a timely manner. We were constantly calling on our own IT Department. Now with Prime, we have very few issues and we can often handle them ourselves. When we do need to call on HdL, the company is very responsive and answers our questions quickly and accurately.”

HdL is highly unique as a municipal software provider, offering top tier municipal finance expertise, services and support, in addition to our software solution. From software to assistance finding unlicensed businesses within your jurisdiction to an analysis of the equity of tax codes, HdL’s experts are ready to answer the call.

IMPROVED RETURN ON INVESTMENT

The revenue collection module of an ERP looks very appealing at first glance. It is presented as being tightly integrated, low cost to implement and provide a better customer service experience (as you only have one vendor relationship to manage). In practice, our clients report that none of these advantages prove true over time.

ERP solutions are often pieced together from various independent software solutions which were the result of corporate acquisition and are far from the tightly integrated and easy to use solution which was promised. Even if the module itself is offered for free, after data migration, integration, configuration, and training, then consulting costs are incurred, and the free module ends up costing far more than the best-of-breed solution. When support is needed, other core modules in the ERP receive the lion’s share of development and service attention, leaving support needs for municipal revenue collection often significantly delayed or simply ignored.

HdL is able to integrate with most ERPs (and offers an integration API for specialized needs) to ensure that the municipality’s ERP experience doesn’t suffer from using our solution. There is no need for the revenue department to suffer inefficiencies and support challenges by relying on an ERP module. HdL’s solution is often the most cost-effective option, in addition to being the highest quality option available, offering high quality data migration, turn-key system configuration, flexible implementation processes, and highly responsive and knowledgeable customer service.

One client expressed, “When deadlines approach, Prime makes it easy to select out the nonpayers and email them again. With the ERP, we had issues with emails not going out when we thought. We’ve never had that issue with Prime. We also had to close out one-by-one with the ERP, but Prime lets us close out by group. Everything is automated and there are fewer chances for mistakes.”

These client accolades for Prime are common. Connor Duckworth, Client Advisor at HdL states, “Municipalities tell us that HdL Prime is the best local revenue license, tax, and registration software on the market. We have a robust online portal for taxpayers, complete integration with the agency’s ERP and offer support and service.“

In the rare event that a municipality switches local revenue administration processes from HdL to their ERP solution, most switch back to HdL within three years. They find that the promised ROI for the ERP module never materializes, and in fact, generates a negative ROI through increased costs and decreased efficiency. Before making the sizeable investment in time and money which is required to implement an ERP module, consider their experiences and see if HdL Prime is a better solution for your agency.

Decrease operational costs. Increase revenue. Increase customer support. The HdL trifecta.

This email address is being protected from spambots. You need JavaScript enabled to view it.

The Federal Government released the second tranche of American Rescue Plan Act (ARPA) funding, $33 billion in direct aid to every county, city, town and borough in America. Agencies have until year-end 2024 to allocate the funds and year-end 2026 to spend it. In this webinar, HdL and Yiftee discuss how communities are using ARPA funding and eGift Card programs to boost their local economies and strengthen small businesses for the future. Watch the recording below and download the presentation deck to follow along. 

• Get access to ROI case studies of simple, free community gift card programs.
• Learn how to run a 'shop local' campaign in your community, benefitting residents and merchants alike.

Recent successes with cities driving community growth...

• City of Lemon Grove Uses ARPA Funds to Offer Double Gift Card Values at Local Businesses
• Upland Launches New Gift Card Program to Support Local Businesses
• City of Lake Forest Unanimously Passed Community Gift Card Program
• Support City of Angels Camp Businesses with Frog Bucks
• Queen Bee Bucks Boost City of Orland's Local Economy
• Hercules Approves $300,000 in Business Assistance Programs Utilizing ARPA Funds

Q&A

Q: Did the participants you referenced in this webinar use ARPA funds? 

A. All the cities we discussed in this webinar did use ARPA funds. Oakley, for instance, is in a couple of rounds of this. Oakley is a small city, so when the Feds changed the ARPA rules, the City didn't have to show all that revenue loss. They didn't have any revenue loss originally, so they were able to move that to their general funds and that will fund future rounds of their Yiftee program. And again, there's no rush to allocate or even spend all of your money in the first couple of years. You can allocate it until the end of 2024 and spend it through 2026. We are able to stretch this out and do more with it and doing digital gift cards is something that you can continue to do beyond this year and in the future.

Q. Can nonprofit organizations apply for ARPA funds?

A. They don't get a direct allocation for it, but they can apply to the city that they're in. 

Q. Aside from covering the promotional money for a Buy One, Get One program, can ARPA funds cover administrative cost for a gift card program, for example hdl’s cost for assistance and administering the gift card? 

A. Absolutely. That’s certainly an eligible expense. Within the 20 communities that we're assisting, any cost for HdL is able to be covered out of your ARPA funds.

Q. Can you start at one level and then scale up?

A. Absolutely. We recommend a modest start. Once you see how successful the program is, you can go back and add more or tweak the program in whatever way needed. Building enthusiasm, especially for council members, that you've had some initial success, like in Oakley and Murietta, is really important. 

Q. If we are paying for the gift card balance, what does ARPA cover? 

A. ARPA can pay for the cost of the program, the Buy One, Get One free option, etc. They are all eligible expenses that can be structured however you feel is appropriate. Typically, we'll also help with determining who you want to target in terms of businesses. Restaurants, boutique retailers and service providers like nail salons, barbershops, etc. are common audiences. It’s helpful to look at what businesses were negatively impacted the most.

Typically the ARPA funds pay for the bonus cards. So, if a consumer pays their own money to buy a $100 gift card and there's a $100 match, that match/bonus card is paid for out of ARPA funds. So that's what makes this program pretty unique. We do have other sponsors for programs like this. We've seen banks and some corporations sponsor the bonus cards, but right now the big opportunity is the availability of these ARPA funds.

Q. Is there a digital connection with Apple or Google Pay platforms?

A. It's not available yet. We expect to be able to do so sometime next year.

Q. How do you determine what businesses can participate?

A. You can structure that to really fit the needs of your community. Typically the participants for businesses are going to be your small independent owned businesses, not the giant corporate companies like Walmart and McDonald's. A lot of communities have allowed franchisees, but they need to be local franchisees. Really focusing on the small, independently owned businesses can help provide direction. 

Also, any merchant that can process a manual entry MasterCard can participate. Bowling alleys and car washes for example. The card does work online, so if your merchants have ecommerce sites, the card can be used online as long as the value of the shopping cart is less than or equal to the amount of money on the card. (It's a prepaid card, so there's only so many dollars on it.)

Q. What are the fees for HdL and Yiftee?

A. HdL charges a modest fee with a not-to-exceed on an hourly basis to set up and structure your program. It will really depend on your community. As for Yiftee's fees, when someone buys a card, there's an e-delivery fee that's applied, just like a convenience fee if you bought a Fandango movie ticket. That fee is $1.00 and 5% of the face value of the card. Out of that fee, we're paying the credit card processing costs on that transaction. So about half of that margin goes to us to keep the lights on here at Yiftee. Also, when the bonus cards expire, there's a restocking fee of 10% of the initial card value. Whatever's left on the card after that is returned to you, to your ARPA pool, so that of helps fund the company long-term. The third component of the revenue model is that purchased cards do not expire as long as it is used once every 12 months. And Yiftee sends reminders every month to use the card. If it goes untouched for twelve consecutive months, then we can take an inactivity fee of up to $3.00 a month off the card balance, and that funds the company long-term going forward so that we don't have to charge you or the merchants anything for the program.

Q.  Can ARPA dollars be used in the marketing for the program? 

A. Absolutely. Marketing, design, structure, any administrative cost… all of that is eligible to be funded out of ARPA funds.

Q. Can the page that a person goes to purchase the card be in a second language?

A. Absolutely. HdL has the capability to provide translation for all your flyers, surveys, etc. - whatever your program requires, and all of that is eligible to be compensated with ARPA funds.

HdL presents an up-to-date view on California’s Retail Economy based on current 1st Quarter 2022 data. Watch the recording, download the presentation, and follow along with the transcript and Q&A. (The recording will be made available at the bottom of the page after completing the form to the right.)

Additional Resource: HdL Companies and Beacon Economics: Sales Tax Trends and Economic Drivers Report

Transcript

Welcome everyone! Let's navigate forward by way of an introduction. I am Bobby Young, Client Services Director here at HdL and I'm joined today by both Bret Plumlee and Tracy Vesely, fellow principals here with us. We all work on the team, meeting with clients each quarter to review and analyze sales tax revenue that your community has received. We've been serving communities for over 37 years now.  We currently represent and work with over 500 agencies that include cities, counties, and special districts and we're blessed to maintain over a 99% client retention rate. So, thank you all as clients, and even as non-clients, we are so glad you're able to join us and start walking through the latest sales tax results that we have.

---1st Quarter 2022 Statewide Results---

Alright, splash results! We are looking at 1Q22 data today. As a reminder, that refers to the calendar year, first quarter, so we’re looking at the January, February, March time frame right there at the beginning of the calendar year. A lot of dynamic things going on, but the splash there on the left side of the screen, very bottom circled for you, a large 17% increase over 1Q21. A year ago we had already seen the economy start to reopen, consumers back in shopping. We had already talked last quarter about the phenomenal 4Q results. It just continued. The economy. The beginning of the calendar year, roaring right straight through the holidays. We had anticipated even a bit of a slowdown we were forecasting about 11% gain, and you could see that it ended up becoming about 6% higher than what we were forecasting. So, no doubt as you were looking at your coffers and looking at the sales tax revenue seats that came in might be a little bit shocked and I can tell you right now our entire team was pleasantly surprised when we saw the results up 17%.

So, two big categories. We’re going to be talking about all these categories throughout the presentation today, but just taking note of a couple of very large ones, feel owned service stations, as we hit on, we all have been experiencing extremely high gas prices and prices at the pump 47% gain. This is 1 category that exceeded our expectations. And rightfully so, I think we weren't anticipating such surprises that we've been experiencing.

 Also, restaurants and hotels strong, very strong, almost 40% gain statewide. Tracy will be talking about later in the presentation, but a pleasant surprise for all our communities. We know that staffing has been short at restaurants. We know prices have been higher, but this 40%, almost 40% gain statewide, really a testament to us here in the state as consumers and our desire to eat out and patronized restaurant. So, it is a great result there. 

Then the one of the biggest surprises that that caught us this quarter, Autos and Transportation up an additional 15%. For many of you that have a lot of car dealerships within your agencies, we have been talking throughout the pandemic period and post pandemic period, about how well Autos were doing, and we know that there's limited inventory but statewide, up 15%. Again, this is most certainly a category that blew us away. It’s both the good and the bad, and we'll talk about that and those feelings that we all have. But here in 1Q, it contributed very strong to the overall bottom line gains that we saw.

Where did it happen? Where did it hit? Where did it come from? You can see there on the right side of the screen all throughout the state, double-digit gains for north as we all can understand as a little bit limited with regards to its sales tax generators and didn't take as big of a hit during the pandemic. So, the rebound and sense we have seen it just a nice soft steady gain but everywhere else strong double digits and no doubt the major industry group results, you see it a little to the left contributed very heavily to each one of those regions.

---Forecast Considerations---

As we go, we gave you the results and kind of what we are looking at what we've taken into consideration, this is just kind of all you know a microcosm of all the things going on in the economy, whether it be the continuing Russia and Ukraine crisis that's probably gone on longer than we had originally anticipated. Still, issues with supply chain and obviously that comes by way of demand, consumer demand and kind of as we will be talking about with regards to whether it be inflation and prices that you see just below that or interest rates and that all of that contributing there and working its way back through the supply chain then also wages is a consideration. You will hear me talk just shortly here about unemployment and why that probably benefits the economy, at least through the end of the calendar year is going to be benefiting he sales tax economy as we see it.

---Interest Rates---

So let's touch quickly on interest rates. Obviously, topic de jour for all of us continuing to watch the Fed treasury and what their anticipations are. And you can see more to the right of the screen here as we look at the most recent meetings that the Fed treasury has had in the dynamic games or jumps that they've been pushing up the Fed funds rate 25 basis points, 50 basis points, 75. Just here this month and with all anticipation of anywhere from 50 to 75 basis points next month and it's July meeting, all with the goal that the Fed funds rate should be around 3% come the end of the calendar year. So, get ready to continue to hear the Fed's talk about the Fed funds rate and increasing again. No surprise for us as they continue to try to control inflation. And this has a lot to do with us as consumers. We have to continually remind ourselves, we here in California are a bit different than the rest of the nation. A lot of population, a lot of income and therefore a lot of spending.

And so, the shock to us as consumers is a bit to tell us to stop spending so much. And the Fed, the Fed treasury is looking at the Fed funds rate and thereby interest rates to shock the system a bit. And those the term obviously we are all hearing, but it’s really to tell us to hey, cool off a little bit and then the dip may not be as bad, and we'll talk about that coming up. This is just that kind of look and where we were we expect to see it. So, it shouldn't be a surprise to those of us that continue to watch through the end of the calendar year, continue to hear about the Fed raising interest rates or raising the Fed funds rates, which then results in higher interest rates.

---CA Unemployment---

The bright side if there was one from the standpoint of how this trickles back, hopefully this is clear enough for everybody really. It is the lines here. So, for California unemployment. If we were talking about inflation and everything else and unemployment was still really high, then we would have a large concern over how that's going to generate sales tax going forward, given that in that overall California unemployment has been steadily dropping and relatively speaking, back to pre-pandemic points. 4.3% California unemployment rate right now, but the graph below is just give you some historical context. We're back down to where we would otherwise normally be and, with unemployment being so low means that folks are able to get a job. 

We know that wages are continuing to go up, even if moderately speaking those us may or may not feel those increases. We do know for the greater majority of our economy that wages are continuing to increase. Balancing out the cost of higher goods and that all means more money than to spend and keeps the sales tax economy fairly strong or at least. That’s then where we start to look at what we're anticipating. 

---Inflation and Sales Tax---

This is a chart that we had last quarter continuing again here. As we go with higher prices and strong demand, obviously that means higher prices of goods. But so long as we, the consumers, continue to buy either about the same amount or even a little bit less than what we did previously, we still expect sales tax revenue to continue to be generated and stay otherwise in a growth sector or a growth trend, it may not be nearly as strong as what we've been experiencing. You will see that here on the next couple of graphs. But it still should remain steady.

---HdL Statewide Trend Quarterly Outlook---

To give you a little context of this graph; far left you can see we are in the depths of the pandemic. To Q20, the double digit gains we've been experiencing and talked about all throughout Calendar Year 2021 and now 1Q22 show right here at this strong 17.1% increase. 

How do we see this going forward from any of you, as you look to 2Q and the wrap up of Fiscal Year 21-22 for a lot of your agencies? We are anticipating about an 8 1/2 percent growth out of out of 2Q. Given that 1Q was very strong, it probably means the forecast we did for a lot of you just last quarter are probably already on pace to exceed where we anticipated you to be. Obviously better to be on that end than on the reverse or underneath chasing it. But with all anticipation now we have Fiscal Year 21-22 to remain very strong.

Then as we go into Fiscal Year 22-23, you can see strong through the end of the calendar year. Again, as we talked about Fed funds rate and thereby interest rate and that shock of the system, it may take a while for us as consumers to start slowing down a little. So, we do anticipate the remainder of Calendar Year 22 to be fairly steady. 

The first glimpse, I'll show this to you again at the very end as we wrap up and we can see Fiscal Year on a perspective, but it's the back end of Fiscal Year 22-23 where we do anticipate these percentage gains to flatten down quite a bit. Start to flatten out a little and the perspective that I keep reminding myself and sometimes give to others is that, when we go from double digit and high double digit for some of you agencies, when we go from double digit gains on sales tax into single digits and then possibly low single digits, that pull back, that slowdown will likely feel like a recession. Especially when your expenditures are going to be up higher closer to the double-digit gains because cost of goods are higher, labor costs are higher. 

So now we get back into that. Wow, wait a second here. Are we building in a recession? Is the biggest question we keep asking ourselves. No, but that slowed down compared to your expenditures might end up feeling like what we've all known as a historical normal recession. So again, I'll recap this at the very end coming up.

---Local Place of Sale (POS)---

So again, percentage changes overtime, you can see just marking those periods of the pandemic and the rebound and the pool growth, the dramatic pool growth, that we've we had experienced during 2021. Now even that starting to cool off just a little. I think we got a little pop in here, and the difference there so, local place of sale was up 17.9%. So, the gap there, the difference would be the results on pool which Tracy will speak about in just a just a little bit.

So, you can see how that forecasts out, and now let's jump into the major industry group. I'm going to turn it over to Brett to start off with autos.

---Autos: 1Q-2022---

Thank you, Bobby. And as Bobby mentioned, Tracy and I are going to start talking about overall better than anticipated news for every sector. Most of the sectors in this quarter are very good news. Starting with Autos and Transportation in the Q1. As we start our discussion here on Autos and Transportation, we're comparing here the volume with the prices, and we continue to see record prices being set and volume declines, but the pricing is offsetting any volume declines in this group. 

Once again, the overall increase in new motor vehicles and used motor vehicles is combined with the really strong demand again, even better than what we anticipated as Bobby mentioned and that's primarily responsible for the overall increase in sales tax in this sector. So, as we go through each sector, we want to tell you the story as we do in the individual client meetings. We're doing this at the statewide level, but overall, very good picture.

---Autos: Prices---

The prices as I mentioned, record prices being set and continuing all throughout the pandemic. Ongoing post pandemic prices have increased and, in this quarter, we're talking about today nationwide prices increased 23% in the first quarter compared to the same period a year ago. So really that is driving the story of the increase in sales tax.

In terms of the outlook over the next 12 months, what we're going to see are production levels expected to drive the sales instead of the demand. So, we've had really strong demand, stronger than what we anticipated all through the pandemic post pandemic. And now as we head into future quarters and future fiscal years, we are definitely going to see combination, but more led by production levels driving the sales.

---Autos and Transportation Forecast---

When we looked at how that impacts the overall forecast, we can see that the actual results were 15% compared to 7% in this quarter and we are projecting two more quarters. So good news in those agencies especially that have the biggest percentage of your sales tax generated with Autos and Transportation, you're going to experience very likely, we're projecting above average growth in sales tax for two more quarters. Then following that, as Bobby mentioned, we're going to definitely see a flattening out, a slowing down of the overall growth and annualized levels 3% in this sector all the way out to Fiscal Year 26-27.

---Fuel Consumption---

So now we're going to talk about the Fuel and Service Stations sector. Bobby mentioned really contributing significantly to the overall statewide picture in this quarter and even better than what we had anticipated. And we had pretty strong growth built in, and what's happening is the consumption of fuel outpaced the production throughout the pandemic. And now post pandemic and that's really continuing to be the primary factor significant increase in sales tax received. We are anticipating this to remain high throughout Calendar Year 22 and we've had now seven quarters of drawing down on the stock of fuel. Now the EIA is forecasting consumption to be below the production through 2023 and that's really what we're showing in this particular chart. So, despite the consumption being below the supply, it is still expected to continue to exceed the factor here 

---WTI Crude Oil Price---

As we look forward in the big factor it also is driving prices and it's associated with the prices at the pump. The West Texas Intermediate crude oil price, their forecast as we can see in this chart here, is to remain above $100 a barrel through calendar year 2022. That’s still going to be up fairly high in our overall statewide forecast. We have it at $90.00 a barrel through 2023.

And what that means? How that translates to the sales tax, is we anticipate its projected. Each $10 increase in oil barrel is roughly a quarter increase at the pump. At a national level, crude oil prices determine at least half of the price of each gallon of gas. So, since the oil barrel prices are expected to remain high through the end of this calendar year on into Calendar Year 23, we are continuing to anticipate high prices. 

So, we get the question often; where we think that where they we think the prices are going and prices there's no indication right now that the prices are going to come back to normal any time soon.

---Fuel and Service Stations Forecast---

Overall our forecast then mentioned, the really good 1Q22 and every factor is pushing the sales tax upward in this sector. So that's including a restriction of supply coming from the Russian Ukraine crisis, continued record oil barrel and prices at the pump, and Saudi Arabia was anticipated and had made a promise to increase the production of global supply, but they have been slow to implement that increase in the production. 

That is continuing to provide upward pressure on the overall sales tax, and we're continuing to anticipate, and you can see it that the quarter that we're living in right now, we're almost done with 2Q, but really strong demand continuing in road and air travel and people that are out on the streets. And really, we're not seeing especially in California when we talk about global factors that Bobby mentioned the macro factors and then we drilled down to California. Our economy is continuing to visually and we're seeing the factors at the pump and the sales tax grow really strongly.

---Building and Construction Forecast---

So now I'm going to go to the Building and Construction Forecast this sector, as you remember had stabilized the quickest during the beginning of the pandemic and continued to remain stable throughout the post pandemic. Now in this 1Q22 we realize results that were quite a bit better than what we anticipated. We had projected a 6% increase in the actuals, 15%. 

So, when Bobby talked about every sector coming in very strongly, Building and Construction was somewhat of a surprise in this quarter as well. We've seen an increase in materials and plumbing and electrical equipment and that is getting passed along to the owners. So, the contractors have been passing this along. As a result, it's upward pressure on the sales tax received. The valuation of statewide construction permits in this particular quarter increased 13%. So once again upward pressure. 

At this point, our construction forecast shifts from neutral, what we had 1/4 ago to now more of growth over the next couple of quarters and that is reflective of those factors I mentioned the price inflation, and the uptick, that we've seen experienced with the statewide permit results. And as a result, we're projecting 5 ½ % increases now over the next two quarters and that takes us through the end of Calendar Year 22.

Two fairly flat quarters in the first half of 23, and on into Fiscal Year 23-24 after that in our statewide forecast, we have increases of 5% annually all the way out to 26-27. And we always mentioned in our individual meetings, we try to mention it during this webinar that we fine tune it to your individual agency when we're analyzing the results in any quarter and we're looking at future quarters as well.

---Food and Drugs Forecast---

Food and drugs. This has been a stable industry all throughout the pandemic. We have seen now, post pandemic drops in grocery store sales tax, drug stores, the cannabis related businesses that we had seen really growing strongly all throughout the pandemic. We've now talked about it for several quarters of flattening out that's taking place. So, the cannabis portion of this sector, the business sales have plateaued. They're back to pre-pandemic levels, and really, the only growth that we're seeing now is expansion of some the same market and it's just being shared by more retailers. 

So, we are continuing to project at the same forecast that we had the last several quarters, but 2% annual growth, fairly stable all the way out to Fiscal Year 26-27. And at this point, I am going to turn it over to Tracy.

---General Consumer Goods---

All right. Thanks, Bret. So, let's take a look at General Consumer Goods. This is a lot of the stuff we buy in a daily basis. And what you can see just said by way of introduction to the to the group, there are 28 different business types that comprise general consumer goods. What you see in this donut is just a depiction of each of those business types, what piece of the pie or donut they are of a percentage of the whole. Overall, the group increased 10.5% from last quarter. And as you can see the by far the largest sector in this group are discount department stores and they make up about a third of the overall group.

---General Consumer Goods: Growth Trends---

So let's look at this slide. I just mentioned that the group overall increased 10.5%. Yes, it did. Let's talk about what drove that and what didn't drive that. So, in looking at this chart,  this is tying each of these quarters back to 2019 using 2019 as a benchmark period. I'm really comparing each quarter back to the similar quarter in 2019. As you can see since 2Q20, you know that big COVID trough that we have all been you know we're all familiar with this. We've seen nothing but growth in General Consumer Goods. A lot of this is you know we bought a lot of stuff during the pandemic and at this period of time are still buying stuff. Many of the business types within General Consumer Goods have rebounded to pre- pandemic levels or gaining that momentum to get there.

But despite an overall growth of 10.5%, most of the core business types started to slow down. And interestingly, all but one business type slowed in 1Q22, which just kind of indicates some belt tightening as gas and food prices really started to spike during this period. So, I would say kind of the middle of that first quarter period in February is when we all really started to feel that pinch.

You could see this dip starting to happen here compared to 2019. So, for example, in 4Q21 the results compared to 4Q19 were 6% growth. When we look at 1Q22 and compare that to 1Q21, it really is only 4% growth. So that growth is starting to taper off a little bit and hence this little trend line that we see here.

---What about Discount Department Stores?---

Alright, I mentioned all but one business type started to demonstrate some growth in 1Q, except for one. Discount Department Stores. So, what's going on with Discount Department Stores? Well, they had a stellar 1Q22 performance and frankly they perform pretty well throughout the pandemic these are a lot of stores that we did most of our shopping at early in the pandemic as we were buying toilet paper and other things. But 1Q22, just a really, really big uptick. And why is that? Many of the retailers in this group also have fuel operations as part of their operations, and as Bret discussed with the high price of fuel and continued increases in consumption, 

A related sales tax revenue from gas really boosted up the discount department store results. The key take away there, is even despite the high gas prices that we're all we're all really feeling now and it's adding pressure to our discretionary income. We're seeing a positive impact on the general consumer goods group from a taxable sales perspective from gas. So even though Bret kind of covered that within the fuel group, we're really seeing some of that impact in the General Consumer Goods group as well.

---General Consumer Goods Forecast---

So looking forward, let's look at 1Q22. We had projected growth of about 9%. It came in at 10.5% as I mentioned, pretty close projection. Going forward in the upcoming quarters, low single digit growth from this group going forward, lifted a little bit in the short run here by higher fuel cost. As Bret mentioned, anticipating the price of gas to be higher, and that's again going to drive that discount department store revenue up. 

Then really coming down a little bit in the out quarters and fiscal years. Higher prices, growing wages, and wages continue to grow and spending, we're still spending. We haven't quite stopped, yet. Keeping those sales tax level levels pretty, pretty high through Fiscal Year 22-23 and really anticipating that slowdown here kind of the second half of 2023 Calendar Year going into the 23-24 Fiscal Year.

---County Pools: Performance---

Alright, so let's talk about the pools. I think we're officially in what the third day of summer. So, let's go swimming for a minute. Talk about these crazy pools. A lot has been going on in the countywide pools these past two years. We have had these discussions with our clients for the last couple of years. Let's take a look at this graph. We can really see and let's dissect this a little bit we can just almost as bell curve of growth in the pools. So, as a point of reference, the pools are comprised of revenues from all the sales tax groups. There's a couple that contribute more than others, and we'll talk about that in a moment. You can see this notable spike in the 2Q19 is related to the beginning of the implementation of AB147 and the collection of sales tax from remote sellers, which is frankly all new sales tax. 

Then you see a larger spike that started in 4Q19 and continued all the way to 3Q20 that this is largely the implementation of marketplace facilitators related to AB 147, and these facilitators collecting and remitting local taxes on behalf of their marketplace sellers or their third-party affiliates. This is all new revenue that came into California, and I guess on the upside, just in time for the pandemic. It really kind of boosted our sales tax revenues during the pandemic period.

As we all know, the pandemic really changed our shopping behavior and really propelled us into online purchasing, which has not stopped, nor do we anticipate it to stop. But it has slowed down a little bit. We saw it in the third quarter and fourth quarter results. You can kind of see that here slower than normal kind of slower than previous growth, but it's not just that that caused it. 

Part of it is, some taxes shifted out of the pools into direct allocation due to some business changes, and as a result we see that change here in the growth in the pools. So, we see some reductions in Pool revenues attributed to this change in allocation methodology. You can see in 4Q21, that this was actually a stellar fourth quarter return from buying during the holiday season period, but it dipped 3%. And again, this is in part because of that shift of revenues out of the pools into direct allocation, and also in part because we all got off our computers and we went into the stores, we got tired of looking at the screen and decided to actually be in the stores and touch things.

So, before you close off here, I mean, look at look at 1Q22 big, 13% swing up kind of flies in the face of the previous 3 quarters. What is driving that? What's going on in 1Q22?

---County Pools: Make Up---

So looking at the slide, as I mentioned, there are a number of business groups that really make up the pool revenues, Business and Industry and General Consumer Goods are two of the largest. And if you look at the business and industry revenues right here, you could just really see huge, huge disparity quarter over quarter. So, what is causing that? Largely related to an infusion of capital into a number of sectors like energy, medical, biotechnology, electrical equipment, and some of the heavy and light industry, a lot of big equipment purchases and in those manufacturing arenas. So huge fairly one-time revenues infused into that first quarter with that money to spend. So, that really boosted up the pool revenue. That stuff being purchased from outside of California and coming into the pools.

General Consumer Goods are a large contributor to the pool revenue as well and actually can’t tell by the graph, but they actually declined. That group declined half a percent compared to a year ago. Again, punctuating the fact that as consumers we did a little less online shopping and a lot more in store shopping during 1Q22.

One other unique pool revenue trend, I do want to highlight, and you can see it in this graph right here is related to restaurants and hotels. So, this is not normally a group that we talk about when we're talking about the pools, but it is now and it's because of food delivery companies. This is a new trend. It has really emerged during the pandemic period and candidly, we're all getting very used to it. These third-party food delivery companies are now complying with AB 147 and remitting there their revenues into the pools instead of as direct allocations. So, for those restaurants that are hiring these third-party companies for delivery, they're not receiving direct sales tax, it's the agency is not where the restaurant is located. It's actually going into the pools. 

That’s been a new kind of phenomena and we'll talk a little bit more about that when we look at the restaurant and hotels category. But you can see here they are not comparable; this is a new source of revenue into the countywide pools.

---County Pools Forecast---

All right. So, looking at our projections for the pools, we projected growth of 2% for 1Q22. It actually came in at 13.4%, OK, we undershot that one. And again, the business and industry group really were the culprit there. That is where we saw that big swing come in. But even with the 1Q22 increase, we are projecting moderate growth going forward. A  3 to 4 to 5% in the quarter over quarter in the pools and fiscal years going forward.

---Fulfillment Centers---

Fulfillment centers. All right let's shift over to the Business and Industry group. We've talked a little bit about this with its relationship with the pools, but now as a standalone sales tax group, Business and Industry, the fulfillment centers are 25% of that total group, so by far the largest. You can see in this graph this massive ramp up of growth in the fulfillment centers. A lot of it when we look at 4Q19 to 4Q20, that is really attributed to the marketplace facilitators as they're reporting very similar to the trend we just saw in the pools. These two kinds of mirror each other that way. 

Then up here, starting with 1Q21, we see an additional ramp up of revenue and that is that new infusion of revenue coming out of the pools, into fulfillment centers to direct allocations. So, due to some reporting changes from some retailers, those indirect revenues are now considered direct allocations and that is going into this business type within the business and industry group. So, you just see this really big growth here. When we look at 1Q22 results, it's a 1% growth, which is about what we had anticipated really normalizing where the revenues are year over year. We do anticipate a moderate growth and fulfillment center revenues going forward and 1 to 3%. But we do anticipate it to remain at this higher level now that you know we've made that shift in some of those revenues out of the pools into direct allocation.

---Business and Industry: Top BT’s---

Looking at the group as a whole, this is a motley group. It has general consumer goods, although these are a little bit more disparate. There are 21 business types, and they range from heavy light industry, manufacturing and equipment, farm and agriculture, electrical equipment, all the way to wineries and motion pictures. Really diverse and of course, very different for every agency. For each one of you. The top 10 business types are depicted in this slide, with the exclusion of fulfillment centers. We've pulled that one out. We’ve just spent a lot of time talking about those guys.

These top ten led by the medical biotech industry, then we have heavy and light industry in here electrical equipment. These are some of the bigger business types within this group. These top ten averaged 13% growth in the 1Q22. So pretty sizable growth in this group. Again, a lot of the infusion of capital for a lot of equipment purchases.

---Business and Industry Forecast---

For the group as a whole, we have projected Q122 growth of five percent, 5% came in at 10%. So, we were a little bit little bit low there. Looking at moderate growth going forward and averaging around 4 to 5% quarter over quarter. And 3 to 5% in subsequent fiscal years looking to slow down just a little bit with some of the supply and demand challenges that the industrial sector is facing. I know that Bret talked about that a little bit with regard to both the Auto Industry and Fuel. We definitely see it in the business and industry section too although, there's still a lot of demand as just supply that's been slow to respond. And so given that still anticipating some reasonable growth in the outyears.

---What’s Going on with Restaurants?---

Alright, let's shift gears entirely and talk about food, which is my favorite topic. So, what's going on in restaurants? A lot, a lot is going on in restaurants and it’s not all great. This is an industry that has been one the hardest hit during the pandemic, really struggling to come back again. You can see in the in the summary here, labor is one of the biggest headwinds that restaurants are facing. 

Labor Shortages. CNN indicates that 70% of restaurants are understaffed. It's a huge percentage, similar with hotels. There are also feeling that labor squeeze as folks have exited this industry, the service sector, and they're just not quite back again yet. Food delivery is another area that is impacting restaurant revenues. I mentioned this when we were talking about the pools. So, let's highlight it here again. Because food delivery now through marketplace facilitators, these third-party delivery companies, those revenues are going into the pools, they're not going directly into restaurant direct allocation. So, we're seeing a little bit of erosion there. Food delivery is here to stay. We're liking that. 

We like our food delivered to our house, and so we’re getting our food delivered to our home and the California Restaurant Association, recently got wine and beer permanently allowed to be delivered. And they're working on cocktails. So pretty soon you're going to get your Margarita delivered to your house too. And that really is just changing a lot of what's going on with restaurants. Less of us going into the restaurants now since we can get more of the good stuff delivered to our homes. Menu prices continue to rise but are not keeping up with the wholesale price of food, so that is definitely a headwind. 

All this stuff is just squeezing a restaurant. We're seeing closures. We're seeing reduced hours, definitely seeing service kind of erode a little bit, which is unfortunate. The industry as a whole is estimated to have lost $47 billion since the 1Q20, two years ago. 

---Restaurant and Hotels Forecast---

Looking at the forecast for restaurants. We had projected growth of 45% for the quarter. But it came in at about 40%. So fairly close, still growing of compared to a year ago, but starting to feel the pinch of some of the headwinds that I just mentioned. Menu prices are contributing to sales tax growth because we're paying more when we go. But later labor shortages are reducing service capacity hotels are lagging in recovery. It is an industry that's really feeling the squeeze, couple of things that restaurants have done to help boost and move them through this period, implementing technology in the restaurant. So many restaurants we’re paying on our own and using the self-serving kiosks to make payment that that is reducing the need for some labor. Menu options have been reduced. It’s a cost savings measure, less food that needs to be purchased. Streamlines operations in the restaurant kitchen. Personally, I appreciate the reduced menu and when I'm hungry and I go to a restaurant, I get decision paralysis if there's too much on the menu. 

But overall, the industry is just really feeling that the constraints related to labor, the cost of food. Definitely some headwinds, very moderate growth going forward. We've rebounded mostly from the lows and the pandemic and are looking at fairly moderate growth going forward for restaurants. And with that, I am going to turn it back to Bobby to just kind of tie it all up fast.

---HdL Statewide Trend – Annual Outlook (FY)---

Wonderful. Thank you, Tracy. Appreciate that. Restaurants category, definitely a resilient bunch. They were able to weather the storm of the of the pandemic and post. Right now, really seeing those dramatic gains. It'll be an industry that will make the changes necessary to keep thriving. And that I think is what we can all appreciate, especially out of our beloved restaurants. So, tying up a lot of what you heard me at the beginning, Brett, and Tracy. You can see here middle of the screen, where we anticipate Fiscal Year 21-22 to finish up. Strong statewide about 15% and to be honest, and I know a lot of you guys are in that same boat with us, sometimes we can be too conservative, or a bit on the conservative side, if it comes in higher, we may not even be surprised. Given the strength of the economy still even with some of those other pressures or potential headwinds, which I'll talk about next slide. 

Then looking forward to 22-23, you can see us slowing down our forecast. No longer can double-digit gain keep running at that. It is going to be later this calendar year when the Fed funds rate interest rate hikes start to really take hold.

The prolonged summer period of higher gas prices while generating more sales tax, could inevitably lead to consumers starting again that pullback. How much are consumers buying relative to high prices and everything? If they start to buy less, then we start to see sales tax growth pull off. Then as we look forward, you can really see here in the Fiscal Year 23-24 what might feel a little delayed there, you see us really slowing down into that 1% range and again reminding of what I mentioned earlier is when we're only growing sales tax statewide at 1%, but we know expenditures are likely to continue to grow at any pace, this will feel more like a recessionary period or slowdown that everybody's going to have to readjust their balance sheets or their budgets too.

So, strength through 22-23 cooling off in 23-24. Once we look outward, we're getting back to more of the historical normal growth range. Because we anticipate the feds will then temper the Fed funds rate as they see the economy cruising along and as consumers, we all start to then readjust to what otherwise might be prices at that time. I'll refrain from the comment that I think we all hate regarding the norm. 

So that's where we're at with our longer-term forecasts. As Bret may have mentioned during the presentation, any time that we update your local forecast, we're always taking in these bigger picture statewide type of trends and thoughts and breaking it back down to you, the local agency and what sales tax demographic you have or you have you on autos, heavy on business and industry, more reliant on restaurants. We'll consider all of that to really customize your forecast.

---Final Thoughts---

Going back, this will probably be the last time we really reference Fiscal Year 2021. Post pandemic, we grew 11%, many of us sat around forecasting 21-22 going, “Can it get any better?” Absolutely 100%! To date we're up 17% from over a year ago. That trend then continuing into the second quarter finishing off the fiscal year. The headwinds we will all acknowledge. Inflation remains high, gas prices, you heard Bret talk about that, we know there's upward pressure there. Translating over to consumer spending and dramatically rising interest rates playing a part.

What does it mean, then? Consumers have been saving less, drawing from their accumulated savings post pandemic. Credit usage is starting to go up. So overall household debt is there, but property values and thereby being able to tap into equity, is still available even within a higher interest rate environment. So, there's access there, allowing the consumer sentiment to not go drastically lower. Much like what we experienced back during the great recessionary period. So that's where we think most of the overall economy will remain strong, especially business and industry. As Tracy mentioned, the changeover that we've all been experiencing from overall pool, back into local direct allocations for fulfillment centers and others, would be modest growth for the next two years. Are we building in a recession? It's more related to just moderate growth, even in a cooling off from what we've been experiencing.

Q&A

Q: Regarding the Federal government's plea to a "Gas Tax Holiday" is California going to "pause" the proposed 7/1 increase? Is there any pending legislation affecting HUTA and SB1/RMRA funding? Slide 17/18 seems to have a positive forecast. 

A: California's Budget passed June 15. The gas tax rate increase for the year under SB1 went into effect as scheduled on July 1. There is no sign of any pause in the California rates. Keep in mind there is no guarantee that oil companies would pass on the savings of a lower tax rate - same with the federal proposal. In any case, under constitutional protections, local allocations of streets subvention revenue (HUTA, RMRA) from the state would be backfilled. How is it going to affect sales tax? Yes, a federal pause on the excise tax portion will cause gas prices to go down. That's likely to leave more money in the pockets of consumers and however they choose to use that, whether it be kind of reestablishing savings or going out to eat at a restaurant, especially if it hits during the summer period and summer travel. We've got a lot of people expected to hit the road, even with higher gas prices. If that gets cheaper, it gives them more money to spend wherever they might be going, and that goes back to restaurants and local tourism for a lot of our coastal communities where the beaches are always a draw. So, it could end up could end up helping sales tax receipts even though we feel this pressure, we know what it means when people feel like they can spend more. So, keep a watch out there, it'll only be a good thing for our economy as we see it.

Q: As it relates to the Cannabis Tax decline, is the decline related to the Excise Tax or actual sales tax? Also, does HdL have anyone that I can contact directly who specializes in Cannabis Sales and Excise taxes? 

A: We are seeing a plateau and flattening of sales tax back to pre-pandemic levels. Yes, we have a Cannabis team that specializes in analyzing the industry and assisting many clients we have throughout the state. Email This email address is being protected from spambots. You need JavaScript enabled to view it., HdLCannabis Compliance Director, for more information. 

_{An Institute for Local Government - hosted webinar}

California cities, counties, and special districts are embarking on annual budgeting activities. These budgets are based on projections around sales tax, property tax, hotel tax, and business license fees many of which have been impacted by continued uncertainty from the pandemic and the ever-changing guidelines and protocols. This webinar shared economic and fiscal trends, and how local governments are using this data to inform budgeting and long-term planning.

Speakers

• Ken Brown, HdL Companies, Principal
• Nichole Cone, HdL Coren & Cone, Vice President  
• Eric Myers, HdL Companies, Senior Operations Manager
• Sheila Poisson, Finance Director, City of Torrance
• Lydia Romero, City Manager, City of Lemon Grove

Moderater

• Melissa Kuehne, Senior Program Manager, Institute for Local Government

HdL presents an up-to-date view on California’s Retail Economy based on current 4th Quarter 2021 data. Watch the recording, download the presentation, and follow along with the transcript and Q&A. 

_{As presented at the California Society of Municipal Finance Officers 2022 Annual Conference}

This session discussed best practices for managing the utility users tax (UUT) portfolio in your agency, industry perspective and history on why the revenue fluctuates, and why local governments have seen significant declines over the last several years. The City of San Luis Obispo shared their experience, the benefits, and the frustrations of turning over the administration of a UUT to a third party in a public-private partnership. 

_{As presented at the California Society of Municipal Finance Officers 2022 Annual Conference}

From pandemic impacts to recent changes in the allocation of tax increment funds post-RDA, the City of Belmont CA was inundated with revenue challenges. This case study will illustrate the importance of utilizing a variety of revenue-raising tools, accurate long-term forecasting, and adaptability to the changing economy. For more information, contact Tracy Vesely, HdL Principal. 

_{As presented at the League of California Cities 2022 City Manager Conference}

California has one of the largest and most diverse economies in the world and has been an epicenter of innovation, entertainment, agriculture, and tourism in America for over a century. A combination of things, mostly stemming from the COVID-19 pandemic, continues to cause economic disruption and uncertainty. Municipal revenues are uniquely affected in turn. HdL provides an analysis and outlook of economic and financial trends for the year ahead in California.