HdL Companies & Beacon Economics California Forecast Report

Click HERE for our 4Q21 report on statewide sales tax trends and Beacon's national economic drivers. 

Q&A

Q: Does HdL foresee a reduction in sales tax receipts due to the pause in CPI on the Gas Tax per the Governor's announcement three months ago and most recently the Gas Tax Rebate? Will this affect SB1/RMRA and HUTA? How will the CDTFA make local agencies whole?

A: For the fuel sector, we're projecting solid growth through third quarter of 22 and then it's due to a combination of factors. It's a projected drop in the WTI crude oil prices, the prices at the pump very closely correlated with the oil barrel prices and then a gradual slowdown in the consumption and demand for fuel. There is the governor's proposal for the $400 rebate I think to potentially continue to stimulate the local economy but I also think that those that have the discretionary income will probably be counting on that stock market as we head into the summer months in terms of continuing spending, hopefully.

So we talked a little bit about the Governor's proposal to suspend the CPI adjustment. We are going to continue see sales tax grow because we're expecting higher gas prices. It won't be a surprise if I say we are expecting $5 a gallon, pretty much statewide average through the summer months all the way likely through Labor Day. So, get ready for it, but is it going to be $6 where it is now? Not likely. Probably sometime next maybe late April early May will expect to see crude oil come back down. We will still expect higher gas prices, which will mean greater sales tax growth. 

Q: Is growth within hotels sales tax close to the same trend of restaurants, or is that locals eating out is really pulling up the increase in Restaurant and Hotel?

A: Yes, the casual dining – sit-down restaurants, fast casual, and the quick service fast food restaurants – have definitely recovered more quickly than the other business types that are within that sector. And specifically with the hotels, that industry itself is recovering, but it's definitely lagging behind the overall growth of restaurants. So, we do have a couple of business types that are within the restaurant/hotel sector, leisure and entertainment, and we have those types of businesses that are also recovering and we had projected toward the end of the calendar year 21 full recovery and those business types as well. There's also restaurants with hotels and those are doing better and growing as well within the that overall 47% growth in the sector.

On that restaurant/hotel front, we still have yet to see the return of foreign travel. And so, I think hotels and whether it be restaurants at hotels that generate the sales tax or for you locally, it's the TOT tax, there is still more likely to come, as they return foreign travel to have per night stays at hotels is a real thing and inflation is a part of that, right? So yeah, there's some positive still to come I think overall in the category. What we've seen to date is mostly the indoor dining.

Q: How are the online sales comparing with in-store sales?

A: We talked about the growth, especially the brick-and-mortar in general consumer goods, 18% really strong growth again in this quarter following last quarter and the quarter before. And now the pool dollars beginning to flatten out. So that gap is going back up right now in terms of brick-and-mortar retail compared to the online sales through the pools. Yes, we've seen online continue to grow, but we've also seen a stronger rebound in from brick-and-mortar sales. So, they’re both experiencing continued growth, but the rebound is really strong for brick-and-mortar. 

Q: Do you think there will be a drop off in vehicle sales due to fleet purchases? Are rental car companies driving this demand? (Having to restore their inventory that they liquidated during Covid.)

A: Yes, I think there is going to be really, really tight inventory on cars and I think overall, our forecast on autos, we're still remaining fairly positive because buyers are likely going to be there. We are car country, California, so no real getting around that that. As prices continue to increase, fairly dramatically, even if the prices hold true, they're still elevated from where they were a year ago. Lower inventory means tighter demand and could even push those prices up a little bit more. But we're still going to see sales tax generated. That's a general statement. 

For your local sales tax, it's going to be highly dependent on your local dealer. How tight are they with corporate to be able to get the inventory needed to sell? Or are they getting kind of beat up and not able to maintain or withhold good inventory to where they're sales tax is going to go down because they're just not making the same volume sales? We think it's going to happen statewide, but at the local level, we've seen it very dependent on how a dealership is with getting inventory. So, it's a consideration most certainly. 

Q: How does electric vehicle purchases play into the overall auto perspective? 

A: We had a great discussion as you can imagine about not just looking at very specific merchants, like Tesla or even other major car manufacturers, there are a slew of new entrants into the market now with new electronic vehicles that are starting to pop up and really show themselves. The inflated gas prices during the summer is most certainly going to have some people shifting around. And so, if people do start transitioning over to available electronic vehicles, it's going to mean new money to the market, right? And they're going to sell their vehicle. And as they sell it to a local dealer, they're going to likely resell it because overall, demand is going to be tight for availability. So, we are anticipating the auto market right now to terrain for at least fairly steady because of all these different components.

Q: How do the returns of online purchases get reflected?

A: For most online purchases, especially from out-of-state online retailers, we’ll be looking for those all in the pool, but with the consolidation or with some of the changes reporting to the local agencies now, it's now reflected both B and I and the pools when we look through the details.

Q: Is there a five-year forecast by region on your site or statewide?

A: No five-year forecast. We do a longer term forecast for the state, but then once we get down into the region, we rely on the forecast we provide our clients individually where we choose not to even look at it at like a county wide or region basis because there's so many in particulars that we then just take it right down to the local level and hopefully that's a great benefit in a service that we provide to our clients directly is to not leave up to question that you've got to use a regional forecast for your results because we try to put the nail right on the head for you at the local level and what the outcome is.

Q: What is the outlook for the housing market and how does it impact sales tax/consumer spending?

A: I believe that, you know, the housing market should remain strong even with increased interest rates. It likely just means people won't be moving as much. There won't be a great demand. We had seen that impact back with the pandemic, right? Folks staying home, upgrading their properties. We saw that spike and building and construction results during the pandemic. 

Right through the pandemic, post pandemic. we saw double digit gains from the industry. Lot of people taking equity out, keeping contractors busy. That is still the case right now. If anybody is trying to get some work done at their house, don't be surprised if you hear a six-month waiting time as contractors are very busy. For us looking at sales tax, that means that sales tax generated as likely to be delayed a little bit, which then still gives us hope for 1Q. 2Q is going to be tough because of how strong 2Q was a year ago, but even flat, with post pandemic, means that the housing market has helped sustain sales tax. One - here on building construction growth, but then two - is for consumers knowing that they have equity in their homes gives confidence to still work through the increased prices on gas and inflation that. Yep. OK. I'm not losing on both sides. The weight of overall equity should help consumer confidence remain steady.

Transcript

Welcome, everyone. So glad you're able to join us for HdL's latest California Sales Tax Trends and Forecast Webinar. For a quick introduction myself, I'm Bobby Young, Director of Client Services here at HdL and I'm joined by fellow Principal, Bret Plumlee. We both work on the sales tax team meetings with clients each quarter to review and analyze the sales tax which your local communities receive.

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HdL has been serving communities for well over 37 years now. We currently represent over 500 agencies throughout the state, many of which are here, in California. These 500 agencies include cities, counties and special districts, and most notably, we are blessed to maintain a 99% client retention rate.

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Let's jump right into fourth quarter 2021 results, most notably the October, November, December time period. It is the holiday sales period. As you see bottom line, there was no delay in the response with over 15% growth. Fourth quarter 2021 was by all accounts a phenomenal quarter for the economy and the individual results.

As you can see, we can start to break down and look at some of the subsections of the economy and where that 15% plus growth came from. Right at the very top, which we've been talking a lot about this the last few quarters is Autos and Transportation, which shows a 15% gain during that holiday period. That growth really caught us by surprise, if anybody remembers the forecast just last quarter, we weren't quite that optimistic because there were some headwinds at the time when we were considering. But lo and behold, the economy really showed up, especially on autos. We will have a lot to talk about with individual clients this quarter, especially those that are heavy on autos.

As you scroll down the list a little bit, you'll see Fuel and Service Stations plus 55%, not completely unexpected for us as we all started to see gas prices rise during that period, especially as consumption regained. We will talk more about that coming up here in the first quarter with conflicts in Russia and Ukraine really driving prices. But here, for the fourth quarter, gas stations were a huge part.

 If you look at the next two lines, we’ll focus a lot on General Consumer Goods. There was an extremely solid 18% rebound for brick-and-mortar locations. Restaurants too, caught us by surprise. We had seen a very strong summer both 2Q and 3Q from restaurants. This industry group had another 47% increase statewide with a great show all the way around. As you can imagine though, it came at the expense of somewhere and that place can be seen at the bottom line with the pools taking a little bit of a step backwards. 

We did have a continuation of a large retailer changing their allocations. We've spoken about this for the last three quarters now here. This is the fourth quarter for that. Plus, it has a lot to do with that 18% gain out of General Consumer Goods that you see given the return of brick-and-mortar stores. That activity locally stole a little bit from pools wasn't again completely expected by us but here it is, as far as actual results. 

What you might hear when we come out and meet with you, growth took place across the state. Regionally, Southern California had a strong 17% growth. The Bay Area saw a nice 13% increase over fourth quarter a year ago. Even as you look at the far North and Sierras, for the most part it has have remained fairly stable through this and remained stable through the pandemic. The rebound hasn't been quite as strong as what we've seen in some of the other more major metropolitan areas, but still positive all the way around the state.

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For Forecast consideration, there is a lot to unpack here. Most notably, when HdL discussed the fourth quarter results, all our conversations touched on the Russia and Ukraine crisis being right at the forefront of driving gas prices and thinking about what it is going to do inevitably to consumers availability to spend in the upcoming periods. Supply chain disruptions and delays - what did it mean overall for prices of goods? Interest rates, inflation and prices all play a role, and I am going to talk about some of that in the next couple of slides. 

As we think about all of that and some of the potential headwinds, I think our instincts are to go a little bit more conservative, but let's take into account some other considerations like most Recent Performance. There was a very strong summer and now very strong fourth quarter winter results.

Labor Conditions - even though the labor market is tightening overall, wages are going up and we should be thinking about that with regards to the likelihood of a positive effect on sales tax.

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Current Conditions. You can see how the wheels are connected here, but as we considered strong demand for consumer goods having upward pressure on pricing and assuming overall consumption stays the same, we end up with upward pressure on spending and sales tax dollars. It could have an eventual positive effect on sales tax, even supply chain and labor shortages, which may have downward pressure on supply and availability, but then, the impact there ends up having upward pressure on prices and then likely the same impact of upward pressure on spending and sales tax dollars generated.

This is a bit of an oversimplification, but as we think about sales tax, even with inflation, even with higher interest rates on the rise and higher gas prices, we’re still likely to see growth out of sales tax. 

And it has a lot to do with the fact that most of our spending in California is demand spending, the day-to-day items that we need to live, versus discretionary. And when we talk about discretionary income, a lot of consumers are into the stock market. It took its bumps throughout January and February then turned upwards again. This morning it was around 34,000 and that is still relatively in proximity to the 35-36,000 all-time-high that we experienced back during the fourth quarter which we are talking about today. So, there is a lot to take into consideration with our forecast.

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For results overall statewide – just for perspective and historical comparisons, this has really been helping us as we look back on 1Q and 2Q20, the depths of the pandemic which was very short lived with regards to negative impacts there.

Then, we see the dramatic rebound that we've seen throughout the entire calendar year 2021, especially 2Q and that has only continued. And then you get a glimpse at what our outlook looks like for the remainder of the fiscal year. For most agencies, the 3Q-2Q period will define your fiscal year 21-22 and you can see in the first quarter, we are still expecting about an 11% jump statewide. If you look back to last year, first quarter, we saw 11% and so the most recent performance really does lean in for us what first quarter results will look like.

2Q, and even as you glance at fiscal year 22-23, we are thinking that growth will start to taper off. This is where some of those headwinds and some of the overall depth and how much more can people spend in terms of dollar amounts may take hold and we may start to see a flattening or a deceleration of growth. Not a decline overall, just a deceleration of growth. 

So, we're softening up starting in 22-23. I think this was also what we were looking at last quarter for the forecast given that we've wanted to make sure that we're not overly optimistic, but I think given most recent performance, there's not yet a need to be more pessimistic to think about a pullback.

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Here, going in a little bit more, down to the nitty gritty and talking about local place of sale, think all kind of brick-and-mortar locals versus our pool impacts and most notably pools, as we talked about for quite a period of time now, online shopping especially by consumers. So, what you see is local place of sale, the POS line here, really damaged by the pandemic into the negative category had seen very strong rebounds, especially from those dramatic negatives, but here in 4Q20, a solid 20% plus for local place of sale. Then as you glance up, you see while overall statewide was much less, and that's the net effect of the for the pools, we had seen dramatic pool growth that helped sustain us back during the end of calendar year 2020 to offset the negatives. As we look outward, we do anticipate a local place of sale to remain strong and steady.

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Autos and transportation grew significantly in the fourth quarter of 21. The local tax receipts increased 15.3% and that largely outperformed expectations. We have a few graphs that we've included this time to date to show the dynamics that are playing out in the auto sector. In terms of this particular chart, the total vehicle sales, you can see a big drop that took place in the volumes of vehicles.

Early during the pandemic, they recovered very quickly and then as stores and businesses reopened, supply chains increased and that included a shortage of chips that we've been talking about. We talked about during the pandemic and have been talking about three or four quarters now – the chips needed to manufacture the vehicles and the dealers just couldn't possibly keep up with the demand.

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Then a big part of the story and we talked about this last quarter and again in the fourth quarter of 21, the prices definitely are playing a major factor in the overall increase in this sector. As supply became an issue and dealers were running low on inventory, the prices began to explode. We've talked about average price of new and used motor vehicles and that they have been at the peak levels highest level in the history and continue to grow every single quarter. Prior to the pandemic, the prices were very stable. They now appear to have started a plateau but are expected to remain elevated for quite some time. The industry experts are anticipating that supply will not meet demand until late 2023, early 2024 and that's going to keep the prices elevated. Consistent with upward pressure on pricing, the inflationary factor is playing a part in almost every major industry group.

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On the chart talking about the inventory and sales ratio dealers have almost no inventory on hand. That also began falling in 2021, and this suggests that dealers are selling vehicles very quickly – another upward pressure on overall prices and the story here inventory is low and that was the story last quarter as well. As we start to drill into the fourth quarter 21 results, what we can see is the biggest portion by far in terms of this sector in autos and transportation 64% is generated by the new motor vehicle dealers and once again that business type and within this sector doing really well, up 16% for the quarter. So, in spite of the lower volume units, increased prices are keeping the dollars at the peak levels and that is a big part of the story.

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Overall, we had projected actually 5% and the results came in much better again in this quarter at 15.3%. The long-term forecast keeps the growth about 24-28% above the pre-pandemic level of fiscal year 2018-19, and we're 24-28% above that. And again, the main factor pushing the sales tax upward is the ongoing increase in the prices of vehicle and combining that with strong demand, not only in autos and transportation, but almost every sector.

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Moving on to Building and Construction, this industry group has done really well. It stabilized very early on during the pandemic and continued to have a very solid quarter in the fourth quarter of 21. The actual results, 5% growth compared to the 8% projection. The lumber prices rose to three times the pre-pandemic prices, and that's definitely had a big impact on the sales tax generated because of that business type in building and materials within building and construction. The permit values in this quarter rose a modest 2% in the final months of 2021.

The rising mortgage interest rates that we're seeing now start to grow as the Fed is ratcheting up the increase of federal interest rates – that's not yet dampened in the fourth quarter and even on into the first quarter that we're living in right now, not yet dampening the demand for new homes. The plumbing and electrical materials, which is a business type in this sector, will increase by 15% in the first quarter of 22, which is on the heels of three straight quarters of double-digit price jumps. The forecast is in keeping with the same as last forecast, so the same prior estimates and we're anticipating that material prices will decline and that's going to offset any gains in the construction activity. As a result, we're projecting flat forecast as you can see starting in second quarter 22 all the way through the first quarter of 23 and then modest increases ranging from 2% to 5% all the way out to 2026-27 fiscal year.

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Food and Drugs is the smallest sector of the seven major industry groups and moves the needle the least statewide. It does have a significant impact on those cities that have especially a significant percentage of their sales tax generated by cannabis-related businesses. The three different business types primarily that are in this category are grocery stores, and drug stores, and cannabis-related activity. Grocery store prices and e-commerce sales are up several quarters in a row now, including fourth quarter, and that has contributed to a flattening out of the sales tax that's generated.

The drug stores that were hit hard in the calendar year 2020, have recovered in the later months of calendar year 2021. The cannabis-related activity was very strong during all four quarters of the pandemic in 2020 and now have plateaued. We saw that happening last quarter and that is flattening out the sales tax that's generated by these types of businesses. For those of you that do have a significant percentage of the cannabis type, business is definitely starting to flatten out and that's flattening out the overall growth in the sector. Long term, we're continuing to project stability with an annual forecast 2% all the way out to 26/27.

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One of the key movers in the quarter and especially right now that's taking place with the Russian Ukraine crisis, is retail gasoline. Comparing the crude oil prices to the prices at the pump there definitely is a direct correlation.

The crude oil is expected to reach levels that haven't been seen since fiscal year 2013/14, and it literally fluctuates not only weekly, but daily, and often by the hour. At the time of this slide, cost is $114 per barrel. Right before the presentation started, it was at $113. So, it really moves a lot and it really has significantly been moving the needle in terms of the prices at the pump which is causing another upward pressure on the sales tax generated. 

The overall sector fuel and service stations is expected to have strong growth in this quarter of 50%. The actual was even a little bit better than that at 55%, but now because of the crisis that's taking place and the upward pressure, strong demand is causing a spike in the short term in the sales tax collection caused by an increase in consumption and demand for fuel. We're ratcheting it up even more over the next couple of quarters. That industry completely recovered in the later part of 2021 and early into 2022. Consumers have been paying, as you know, record prices at the pump increasing almost daily for regular and diesel gas. Combine that with higher jet fuel costs that are linked to a surge in air travel, especially in the quarter that we're talking about. It started last quarter and has continued on into the fourth quarter of 21 with upward pressure on sales tax. The crisis has restricted the global supplies of fuel that has pushed the WTI crude oil barrel prices up significantly. That started in early March. So, when you combine all these factors, the estimated revenue boost over the next three quarters is very solid last quarter. Fiscal year 21/22, aka the rebound fiscal year, and post 21/22, were definitely starting to talk about a slowdown in the growth - not a recession - but a slowdown in the growth. So, in this sector we are projecting a slowdown starting in the fourth quarter of 22 and all the way through the end of fiscal year 22/23. 

When we talk about those macro factors, it is impacting not only the fuel and service stations, but most of the other sectors. So, we see the increasing fuel prices and that will mean higher prices in other areas such as delivery of online products, other products, and the cost of food which is going to impact the grocery stores. It's also going to impact restaurants and hotels and that the cost of food is being passed along from the farmers. And in terms of the fuel, the increase in the cost of the fuel is impacting products that are made out of plastic.

Airline fees are affected as well, so what we definitely are seeing right now is the overall positive inflationary factor because of the demand. We are aware and we have built that into the forecast. The slowing down of growth, and a big contributor right now, is this increase in fuel. Long term forecast is consistent with most of the other major industry groups as mentioned about the traditional normal annualized cost. In this sector, we're projecting 2% growth all the way out to fiscal year 26/27.

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In restaurants and hotels, we've had three quarters before fourth quarter of 21, very solid, and once again you can see 47% growth in the quarter where we had projected 40%. So, we had a big forecast out there and it did even better than anticipated which is continuing to help many of your cities and agencies grow in the second quarter of your fiscal year. The pandemic created stored up demand for food service and leisure experiences and Omicron did not detour the restaurant customers whatsoever. For the past two quarters, the sales for on-site, sit-down dining establishments have now surpassed the fourth quarter of 2019 and are projected to outpace the quick service fast food restaurants as the consumers continue, at least in this quarter and the one we’re currently living in, customers are focusing in on the experience of eating out and they're happy that they can do it once again.

And comparable to the story we're seeing with inflationary pressure, the rising menu prices in this sector, it's going to mean right now further gains in the sales tax that's associated, but the growth in this major industry group could be curved if the consumers start to react negatively to the volatile fuel prices. So once again, fuel is generating a kind of ongoing impact on all the other sectors as well. But overall, definitely a positive environment and almost in every sector this quarter. 

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Shifting gears to General Consumer Goods… Holiday sales in fourth quarter 2020 is the green line. The largest category within the general consumer goods sector is discount department stores such as Costco, Walmart, Target, Sam's Club and the like. They definitely had an exceptional holiday period. Plus we started to see gas prices go up and those major retailers that do also sell gas, they report it here under general consumer goods. They don't separate out the two. So that too helps really boost up with the numbers and what it looks like even when you compare back to fourth quarter 2019 there in the blue.

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The sub sectors that you know don't have maybe that that fuel component to possibly skew the results, Family Apparel, TJ Maxx, Ross, Marshalls, DDS, and the like, have been doing exceptional all the way through the pandemic as folks steer their attention away a little bit from down the list department stores and maybe into a lower cost option to still get their needs.  But Family Apparel had a very nice fourth quarter, as well as specialty stores and then the traditional department stores, Nordstroms, Macy's, Bloomingdale's, and others not yet back to where they were pre-pandemic, but a very nice rebound from where they were just one year ago, fourth quarter. So great showing for department stores when many of us had been questioning “Are malls dead? Are people going to go back to in-store shopping now that they've had the online experience?” and the results that we see here at a holiday sales do kind of solidify that consumers like to be in person. They like the in-store experience and it's not going to go away.

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As we see right here on our most recent graph, major retailers and major mall locations need to continue to reinvent themselves in the experience, leading in obviously to restaurants within those. But you know a very nice diverse presentation of merchants that they're providing to potential customers. Here is a chart that we've been tracking for an extended period of time. We've been watching this dynamic of brick-and-mortar versus online.  As a client you'll be receiving this graph. It's a statewide look at it, but we don't have the ability to really dissect down to the local level because of all the dynamics that happen with the online component… think county pools and how that gets allocated. But keeping it a bigger picture statewide, we saw this dramatic drop in 2020 because of the pandemic.

And there by the exceptional continued growth out of online, now we see the return of brick-and-mortar in the in-store experience and what it looks like compared to any time prior before. We’re well in excess. And so, it's a good mark there for brick-and-mortar. The online jumps – we leave in little reminders here – the AB 155 (the initial regulations on out-of-state sellers) and AB 147 (most recently online out-of-state marketplace facilitator) – all those components going in definitely had the major jump up in the tax rate growth here in calendar year 21. Probably as we go outward, we will expect even this trend to eventually start to level off or become more normalized with people able to buy online but then also for especially volume shopping needing to go in store, and so the green line here is also expected to level off as we go forward.

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Fourth quarter 2021 sees 18% growth out of general consumer goods overall. You can see the great results throughout calendar year 21. And what does that mean? When you look at this current result compared to fourth quarter 2019… just different ways to look at it visually, definitely a higher peak. Most will probably hear as we come out with results this quarter, if you are heavy on general consumer goods, I wouldn't be surprised to see a lot of your categories or for a lot of you, the general consumer goods category, in excess of where we were fourth quarter 2019.  And then as we turn our attention to fiscal year 22/23 and even looking forward, it is a category that we do anticipate will level off fairly quickly, a little bit more than others.

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Then, as we talk about the next couple of categories, both Business and Industry and the Pools, we know that they have been both impacted by the same change and shift in the local tax, which was previously coming by way of the pools, now coming by way of local tax distributions from a major retailer. So that's along with AB 147 and that's kind of the where the two paths cross. AB 147 new online collections from out-of-state retailers that had this dramatic jump, but then the local shift really poses the 21% gain out of B and I.

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Let’s spend a little bit of time talking about fulfillment centers, because that's where this biggest shift had occurred back in the first quarter of 21. So the jump here is from fourth quarter 20 to this 162% growth and 1Q21 had a lot to do with the change in reporting by a large retailer that continued throughout the calendar year. 

Moving on to calendar year 22 – when we look back, (so not when we meet with you this quarter, but going past this), we’ll expect to see a little bit more normalized activity or level of activity comparing to the prior year because we're no longer talking about the reporting change. Thank goodness. I think we beat on it a lot. So now we get past that, but most evident here, you could see fourth quarter 2021 with an 80% growth over the last year from the fulfillment center side.

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And to put things into perspective, because business and industry is such a diverse category overall, you could see how much fulfillment centers specifically move the needle here on the category. Medical biotech, which as a result of the pandemic have been doing great, is starting to taper off. Then I think we would all take a nice sigh of relief knowing that numbers have changed statewide, as a lot less mask mandates of the fear of the pandemic definitely decreasing now and even at the fourth quarter and so some of this medical and biotech money is starting to dissipate compared to the high point of a year ago. And then other categories - small growth just kind of depends on the timing and seasonality effect when we think about a garden/agricultural and warehouse/farm/construction equipment. Sometimes they rise and fall depending on the time of year.

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Going out further overall on a statewide best basis, just returning to normal historical growth of about 3% and it has a lot to do with the cost of goods getting more expensive. But remember business and industry as a lot of business-to-business transactions, little less impacted by consumers sediment with regards to purchasing. So, if demand is there for consumers than the business-to-business transactions will likely continue at a steady pace with the cost helping benefit sales tax at the end.

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Then Pool performance, as the offset when we talked about that lead up to fourth quarter 2020 – that show of AB 147 having its impact here, then the change of allocations really pulling it down. And we did see the pools dropped 2% this quarter. While some aspects of the pool were up, especially during the holiday season, we saw some online retailers where we have good comparison data to a year ago they were up, but other functions and other pieces were down just a little bit.

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How are the pools made up? You can see the general consumer goods and online shopping does contribute a heavy mark. But B and I and those business-to-business transactions that do funnel money back through the pools, they do make up a considerable amount of the overall pool category. And you can see fourth quarter 20, the green bar is up a little bit higher than a year ago.

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We have seen strong double-digit gains taper off. As we go forward, they should normalize. The cost of goods and inflation, as we've talked a lot about, will inevitably, have a continued positive effect on the overall growth of the pools.

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Statewide – how does it all come into play? Just with the Governor's announcement yesterday on a new package to help drivers and residents of California with higher gas prices, it has a lot to do with the results that we're seeing here and much of what we heard out of the state and their results overall. We really hadn't been negatively impacted on a sales tax base. You can see here it definitely was down 2%, only 2%, during the depths of the pandemic. But then in a very strong 11% growth with all of this considered in now for fiscal year 21/22, you can see we're expecting another 12% growth and that just continues to give us an overall dollar amount that's in excess of any time prior to. So not completely out of the question that we are, we've not just hit our marks from pre-pandemic, but now continuing up above and as we had talked about that deceleration of growth really softening up over the next coming two years, 2022/23 and 23/24 really around the 2.5 to 2% mark to take into account consumers adjusting to higher prices. 

Inflation hopefully will be starting to taper off at some point. But that balancing act will likely take about two fiscal years from our perspective. For some of you it may feel like a slowdown or a recession you might experience or even flat growth at the local level, or a decrease depending on the local makeup of your sales tax base, but overall while we experienced only a 2% drop during the pandemic where we shut down the economy, it wasn't nearly as bad as what we experienced during the Great Recession. As we go forward and if everything holds true, we experienced this slow down. It's going to feel like a recession. But on paper, we are anticipating it still to be slight positive growth overall. Once we go out further, a longer-term forecast, would then just be a return to normal historical growth somewhere around 3% overall statewide.

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So final thoughts, 2021 tax receipts grew 11%. Year to date is up 17%. So, as you're adjusting for midyear and hopefully for clients that we prepared budgets for last quarter, you've already had a look at it and this really may not be a surprise, because we were anticipating overall a really strong 21/22 year. 22/23, we are looking at everything, especially the headwinds.

Take them into consideration, but then also understand the dynamic impact that it's going to have back to consumers. As you may have heard me mention, as a part of the Governor’s plan is also a rebate of $400 per registered vehicle back to consumers, I think then we have to consider that's more money into people's pockets. Most consumers are fairly healthy with strong savings, with equity in their homes, and no fear that home prices are going to completely drop, even with higher interest rates. People may stay in their homes, there's just not an incentive to move as much. Those that remain keep some equity in their pockets. And the stock market – as we talked about, yes, it's taken a hit the last couple of months and the crisis in Ukraine is definitely having its impact day-to-day with the fluctuations in the market, but overall, I continue to watch to see as soon as we get back solidly for maybe a week to two week period of time (back up to DOW being 35,000 or even in excess) really then leads us to believing Wall Street and investors have now taken into account the impacts and it may end up leading us to a solid summer period with the stock market. Then as we come back, when we think about discretionary spending at the local level, it could likely, as we've already built into the forecast, stay steady during the summer months, even with higher gas prices expected.

FAQ  

Q. How is the pool calculation calculated and distributed?  

A. It's based on point of sale cash, as a percentage of the total point of sale cash, within your county, and that's done each quarter. So, it's 1/4 at a time. You always want to look at how well your cash is doing in comparison to the cash within the county.

A. There's three industry groups that have a slightly higher projection in those out years: building and construction, restaurants and hotels, and food and service. We have slightly higher growth in those out years. Those last three fiscal years and that's what is attributable for that slight difference between 23/24 and then all the way out. And Bobby mentioned, you know there's a number of factors that go into our overall statewide forecast.

A. That's more of a macro factor. We do definitely take into account significant long-term changes that we may be anticipating. I would say in terms of population growth, our forecast at this point, it's just really steady ongoing typical growth that we've seen in the past. We don't have any anomalies that we've factored into long-term in terms of the projections related to sales tax and population loss or growth.

It's a tough one for us to even try to quantify as well. Even if we see population numbers decrease, but the cost of goods increases, we’re still going to see either the same or an increased amount of sales tax overall generated. So, we haven't had experience with past analyzation of data to really say, “Oh, here's how sales tax ebbs and flows with population.”

Now, obviously over the last 70 plus years here in California, we've only seen population increase, but I think most recently I think there's other dynamics that play into that will help offset any changes in population. One is, I don't believe that we're going to have a dramatic drop in our population overall. However, locally in certain communities as businesses come and go, that may be the case. But we'll take your local sales tax projection and will customize it for it to include that that dynamic. 

However, we still live in a beautiful state with beautiful weather and especially during the winter months. If anybody got a chance to watch the Rose Parade, the San Gabriel Hills down here in Southern California, we're just showing off, tempting everybody to come back to California.

But what we've seen out of not just the increase in prices, but more especially the increase in the stock market and the effect that it has, especially on our maybe our 1% communities, our very high-end earners, or high-end spenders, that the increases in the stock market actually have a more tangible effect than, say, population back on sales tax. And it that's pretty fascinating for us to watch. So, I would say there’s the likelihood of mitigating factors with the question of a reduction or you know, decrease in population overall.

A. So, for us, CPI, while we include it into our thinking, it's not so one to one. We do analyze for the expected increase in cost of goods, but we also mitigate it. CPI most recently got reported and I believe it was at 7 or 8% somewhere around there. So, then we go, “Okay, we can't just expect sales tax go up by that amount and so we do mitigate that a little bit by expecting consumers will peel back a little bit if the cost of goods goes up.

That, I think, is where you'll see us still have a positive outlook and this question was asked earlier. You know, seeing such positive expectations for even 22/23. Still 3.6% growth…is that cost of goods is going to go up. At some point, we anticipate that consumers will peel back a little bit as much as they buy. I think that has a lot to do with say a variant or a little bit of more of slowing in 23/24. Eventually, that all catches up, but more specifically we don't have CPI tide back into our sales tax amounts generated because we do consider other things in that in that picture for the forecast.

TRANSCRIPT

Welcome everybody, so glad you're able to join us for HdL’s latest California Sales Tax Trends and Forecast webinar. Before we get started, just to let everyone know, the presentation will be recorded and available alongside the slide deck on our website, hdlcompanies.com very soon. All registered participants will receive an email once it gets posted.

We'll have a Q&A session at the end of the presentation.

By way of formal introduction, I am Bobby Young, Director of Client Services here at HdL Sales Tax and I'm joined today along with Brett Plumlee. We both work on the Sales Tax team and enjoy meeting with clients and going through the sales tax analysis with you all, the revenue that comes into your local agencies, especially at this vital time through the pandemic and being able to navigate it. But as we come out, what's to come? It's going to be very important and we're really looking forward to meeting with all this next quarter especially.

Just a reminder for anybody that may not be as familiar with HdL, we are proud to have been serving local communities for over 37 years. We are 100% employee owned which we take a lot of pride in. We really try to focus heavily on superior service that allows us to increase revenues for our clients and local communities while efficiently decreasing costs. We are thankful to have over 500 clients that we serve right now, and we are blessed to have a 99% overall client retention rate, which we value heavily and appreciate you as clients.

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Let's go ahead and jump right in. We do have the third quarter 2021 statewide results here. You'll see at the very bottom here, there is an overall positive 18%. This is phenomenal news for the third quarter. Think the calendar year third quarter, July, August and September time period. At the end of the summer months the economy was roaring, along with the stock market going up and we saw all these expected results.

These have been positive results that we had been forecasting. There's going to be a couple of categories that exceeded our expectations. We had forecasted about a 15.5% positive increase or growth over last year for the third quarter and what we saw was 18%. Specifically, there's three categories as we go through our meetings with you this quarter that we're really going to be focused on pretty heavily – autos/transportation which is right at the very top with positive 16%. It's been phenomenal to see consumers and their interest in autos. Bret is going to be talking about that more specifically here in the webinar.

As you as you look down a little bit, you'll see fuel and service stations at 54% increase. We also saw more people back on the road and increased gas prices helping there. The one that's caught us by surprise and was so welcomed for many of our communities and even us as consumers was to be able to go and dine out. We saw restaurants and hotels with a phenomenal 48% recovery. This was a category that had been expecting a very long recovery timeline, so we saw some good results this quarter. The other thing that we've been doing is focusing on different regions in California. There are some regions that were not as heavily impacted by the pandemic, and certainly those that were much more so.

What we saw this quarter was very, very balanced. Whether it's Southern California, the Bay Area at about 15% in line with both the San Joaquin and Sacramento regions here, all the way out to the Sierras. As you can see, great results statewide which were again so very welcome and a continuation of what we had been seeing through reopening and the reemergence of consumers back into the marketplace and especially brick and mortar locations.

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Breaking that down a little bit, right in the middle of the screen, at the very top is where you'll see third quarter 2021 positive 18%. The complexities within this slide are really to give some perspective historically, where we've been coming from on a percentage basis. You'll see really the depths of the pandemic, 2Q20 down almost 16% statewide. This is when everything was closed. A lot of us were sheltered in place and buying things mainly online. Come third quarter-fourth quarter, we saw what ended up being a very welcomed response as we just saw flat results.

Then as we turn the calendar page back at the beginning of 2021, we started to see the positive gains in recovery and so that has continued here in the third quarter. Then as we looked here to just past, these are our forecasted quarters that we have coming up. It really starts to tell the story of what we've been reading, taking in, and then trying to apply back to sales tax.

We are anticipating a very solid fourth quarter period. So, that would be the October, November, December time period we just lived through with holiday sales. Even though you'll hear us talk throughout about supply chain issues and overall consumer increase in prices, we are still anticipating on many fronts to see positive results. You'll hear that through the webinar. But about almost a 15% forecasted for 4Q21. Then, as we turn the calendar is where you'll start to see us be a little bit more cautiously optimistic about the future. Obviously, there are some headwinds which we’ll touch on those again at the very end of what we're forecasting.

 Overall, for what many of you are looking at for fiscal year 21-22, which is right in front of us on the screen, right in the middle. These first two quarters may end up solidifying the overall results for the fiscal year. Where even 1Q, 2Q might start to really slow down and pull back a little bit compared to recent activity. But these first two quarters are probably going to set the tone for the overall fiscal year. The line below here, is just to give us a historical frame of reference where we were before the pandemic and how we trenched through that and the depths that we had. And now, where we're at and where we believe we're heading.  And as you can see, these outer quarters, getting a little bit flatter, and I think we could all kind of feel comfortable in that in that area.

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So, that was the statewide overall with everything included. Here, we really focused on local place of sale. When we're thinking local place of sale, think brick and mortar stores on the general consumer side. Think restaurants, gas stations, those types of things that really took a hit through the pandemic.  I've kind of highlighted it over here on the red for local place of sale of how much they decreased and even that part of it continued. 

Statewide we saw results that were fairly flat which has a lot to do with pools. Think online sales activity that we've spoken so much about in helping out the state. But now here, we are really focused on the calendar year 2021 and you can see all of the positive results that we've been experiencing and what we're forecasting for the fourth quarter 2021 period. So again, hopefully this just gives some frame of reference or some perspective on how we break down and look at different pieces of the sales tax revenue. I am going to turn it over to Brett and he'll be talking about a couple of categories. More specifically autos, building, and I believe fuel.

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We're going to start, as Bobby mentioned, going through all the major industry groups starting with autos and transportation.

Here is what is happening in the 3Q21 with autos and transportation in this particular sector. This story is volume is down, while sales tax is up. The national prices continue to grow to record levels. New car prices are up 10% and used car prices are up 26%. We've been talking about this throughout the pandemic. They actually set record levels in terms of increases in the middle of the pandemic last year and are continuing to grow. We are seeing continued strong demand for luxury purchases and we've talked about for some time now that in past quarters supply has been constrained, especially with the chip shortages. But it now appears to be slowing in terms of the data that we've analyzed, at least in the first month of 4Q21.

It's going to take some time to get back to normal levels and we may never see the previous levels of inventory. Dealers are now shifting, or at least potentially shifting their business model to allow consumers to pre-order the vehicle and pick it up later. So, that's going to likely allow less need for inventory on the lots.

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In terms of National Auto sales, what we can see here in the chart, is that the volumes were constant until the pandemic hit in that 1Q20, then they dropped dramatically. That was then followed by a quick recovery, and the volume started picking back up. Then the industry experienced shortages in terms of the supply of chips and that coincided with demand which was slowing which as well pushed the volumes back down in the middle of 2021. But why are these headwinds not being reflected in our sales tax data?

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The real story is in the prices. Nationally, prices have increased more than 17% in the third quarter and look to remain high for some period. From this data, the prices are increasing very significantly and that is having much more of an impact than the decline in the consumption. Keep in mind that while the prices are high, the dealer incentives are pretty much nonexistent at this point in time. The dealers just don't have the budget or negotiate on prices, and that goes for both new motor vehicles and used motor vehicles. They can sell it at whatever price they are listing at this point in time.

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In terms of overall growth, we had projected flat in this quarter at 2% growth and the actual results were much better than anticipated at 15.6%. That mostly is due to the price increase that I'm talking about here. When you look at this particular sector, the autos and transportation auto sales and leases make up 78% of the total and the tax receipts have trended similar pre-pandemic levels fairly flat. Supply constraints are now being overshadowed by these dramatic price increases and continued strong demand for inventory that's available.mWe are expecting the tax receipts to remain elevated while supply chain issues and demands keep prices high all the way through 2022. 

Bobby had talked about fiscal year 21-22. That's the fiscal year that you're most interested in right now as you're preparing your mid-year reviews. And for autos and transportation, 7.7% growth for 21-22 and then a gradual, slower growth rate after that. We are projecting long term growth to flatten out closer to pre-pandemic levels at 3% annual growth all the way out to fiscal year 26/27.

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Now, building and construction. This particular sector has continued to do well. We talked about it during the pandemic. It actually recovered much more quickly than all of the other industry groups of that, along with food and drugs, which I'll talk about in a moment, and the projection was 15% increase in this quarter. It finished a little bit lower than that at 8.2%. That percentage is mainly attributable to lumber prices slumped pretty significantly the first two months of this particular quarter, 3Q21. Then they shot up again in September, mainly due to commodity availability issues.

Following the second quarter sharp rise that we have been talking about in terms of permit values, the third quarter reported a flattening out or a significant drop. But when we look year to year, we're still seeing comparable to 3Q20 in terms of flattening overall permit values.

Housing starts have been postponed until material prices dropped substantially and when that happens, the volume is going to then start to increase and that will replace the high prices of homes. An interesting observation that we're seeing is office space development is starting to grow again. That's been a surprise since during the pandemic there was a halt in the demand for this particular space. Overall, what we're projecting in forecast for 21-22 is 5.4% growth and then closer to pre-pandemic levels. 5% growth annually all the way out to fiscal year 2627.

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Food and drugs. I mentioned this is another sector that has been very stable, and that sector includes grocery stores and drug stores and cannabis related businesses. All which have done really well during the pandemic. We see very steady growth. We projected 2% growth in this quarter and the actual results were fairly flat at just under 1%, .8% for the quarter. Cannabis receipts have now plateaued at the rate of $12 to $14 million a quarter which is really after years of substantial growth.

We are projecting continued ongoing steady growth in this sector, then starting to slow because people, as Bobby mentioned, are eating out again and they want to be out at sit down restaurants. That's having an impact on grocery stores which we're starting to see flattening out and dropping, and so 2% annual growth has continued to be projected all the way out to fiscal year 2627.

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Now fuel and service stations. As we anticipated, we had another really solid quarter. Bobby talked about good news which was really all throughout the economy and all the major industry groups that we're talking about today. This is one of the ones that he highlighted at the beginning of his presentation. We had almost 75% growth in the second quarter, and that was followed by 54% in this quarter, which was better than our actual projection of 40%. All signs in the sector are pointing to upward pressure on the sales tax received.

The demand for fuel is much higher than it was a year ago. The average price of a gallon of gas has now exceeded the record level that was set back in October 2012 at the $4.75 a gallon, which is pretty incredible and really, it's continuing to ratchet up a little bit since that $4.75. Diesel and jet fuel prices and airline travel are all up and more people are hitting the road in terms of going to the office, shopping, taking their kids to school, taking vacations, and you see that increased congestion. It is really back to pre-pandemic levels on the road at this point. All factors are pointed to upward pressure in the next three quarters as well.

 So, in 4Q21 Bobby said we're going to have a really positive quarter which is very likely because we're comparing to 4Q20 and the economy is going to continue to go full steam ahead. We have 50% projected growth in 4Q21 followed by 20% and 7% in the first two quarters of 22 in this particular sector. Then long term increases back to pre-pandemic levels of approximately 2% annually all the way out to fiscal year 26/27.

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The other industry group that Bobby highlighted at the beginning was restaurants and hotels. We expected positive performance, and that's what we saw statewide with the actual results at 47.6%, a little bit better than our projection of 42%. And what we're seeing is continued pent up demand for restaurants and leisure activity. Casual and quick service business types included in this sector have recovered and those are the two biggest categories statewide, so that is good news for the overall industry. We're expecting fine dining and entertainment to post strong recovery for the next four quarters. 

We're continuing to see very high spending. Consumer capacity and people are out there and continue to have discretionary income and they want to be out shopping and going to the restaurants. And there are fewer capacity constraints compared to one year ago. Another factor here in this sector, we are seeing it and you're experiencing it, is rising menu prices both at fast food restaurants and sit-down restaurants. Also, labor shortages have caused employers to increase the pay to try to attract workers. It's been very difficult to fill workers, especially in the fast food restaurants. 68% of the restaurants have reduced their hours due to lack of staff, so the demand is out there. But the restaurant owners are really having difficulty filling that demand.

There are spending upticks in business travel. The airline industry strongly believes that business travel will fully recover by 2024. The statewide results in this sector in the 3Q21 are actually, now half a percent higher than the pre-pandemic 3Q19. So, we're fully recovered in terms of this industry group and continuing to grow. Overall, fiscal year 2122, we are projecting 33% or 32.9% growth in the entire fiscal year, and that's followed by a gradual slowing of growth back to the pre-pandemic levels. 3% annual growth starting fiscal year 23/24 and all the way through 26/27 

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We're going to jump into a couple of the bigger and sensitive categories that we've been talking about most recently through the pandemic. 

Just a reminder, at this point in the in the webinar,  when we meet with you guys and we prepare forecasts for our clients, while we use a lot of what we look at statewide and the trends that are going on, we customize our forecast for you specifically. We bring it back to your business. If how your businesses are performing may be consistent with the statewide or maybe a little bit different, better or worse. And then we will home in that forecast for your community and what we're seeing locally. 

As you heard Bret talk about, auto dealerships and even restaurants, we’ve seen phenomenal results statewide. It may actually come down to inventory locally or the availability of both indoor and outdoor dining on the restaurant front. It will continue as we talk about general consumer goods or even the pools throughout. When we put together your forecast, we really do customize it to make sure that we're getting as close to possible for your community as we can.

Let's jump in now into general consumer goods and what has been moving the category. You can see, this is a line, specifically related to discount department stores. Think big box retailers, Costco, Walmart, Sam's Club, Target all the like within discount department stores. The trend overall, it’ll always peeks at the fourth quarter, and that's kind of what we're expecting in the next set of data we will get which is the normal holiday shopping period. You can see 4Q2020 just last year, as a result of the start and reopening from the pandemic period.

What we've been experiencing more recently and what we're anticipating of discount department stores is to continue to go up. Some of the larger big box retailers do also include fuel sales with their in-store sales tax which helps move the category along, as you heard Bret talk about how much gas prices have gone up most recently. We are anticipating discount department stores to be doing really, really well.

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Those that were hit the hardest at a general consumer goods. This is a big category, so we're going to break it down just a little bit. You can see the depths of the pandemic, most notably for the apparel companies, but what I want you to look at, much like restaurants as we saw, is the rebound and where we've come most recently. And then what we're expecting. There is almost a full recovery for many of the categories. For example, blue here is department stores.

From Online, the lose out to family apparel stores and discount department stores, traditional department stores may take a longer timeline to recover or just kind of flattened into their new normal, but pretty much everything else is expected to continue to rebound and recover from the pandemic period here on the apparel side.

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This category has been the specific businesses that have done really, really well. Probably no surprise to many, but as you can see, jewelry stores or most recently, sporting goods stores. As the pandemic and the shutdown happened, everybody was getting out. That's the green line right up top here. You can see how much they've jumped up and maintain. Then also variety stores. Lower costs came as price-minded consumers really kind of found another way or another place to buy goods. These categories most recently have done really, really well. For the jewelry stores, while it dropped off and you know think mall locations that were closed during the pandemic, you could see that in depth here.

The gains out of the stock market, which I think could apply more generally, have given folks the ability to invest in other places as well. This goes in line with jewelry, whether it be diamond or gold, it appears as though consumers are really pushing to invest, make purchases and have an opportunity to buy goods that maybe they couldn't buy before. The overall increase in flood of federal money and availability of funds, much like autos, have allowed consumers to kind of tweak and jump into things maybe they couldn't afford before. This has been pretty fascinating to watch because it may have a shorter run. You can kind of see our long-term forecast, for jewelry, it will always kick up on the fourth quarter, but it may end up peeling off just a little bit from the place where we've been. Then the stores that usually also kind of hold the line, whether it be electronic appliance stores, home furnishing or specialty stores and some of the other more specific retailers, we dump into the specialty stores. You can see obviously they also took a hit during the pandemic and have since recovered. Specifically, with the electronic appliance stores. That's the green line that you may see here, hasn't yet recovered.

A couple of large retailers, as you can imagine, just aren't quite back to where they were, or consumers have found another way in which to buy the goods. This process may end up impacting them and lead them into not quite recovering to the levels that we've seen in the past. So, we are kind of cautious with some of these. We're watching them very closely. Home furnishings being the yellow line here, has taken a nice rebound, especially with the increased property values, especially home values. Some consumers feel like” hey, maybe it's time to reinvest it back into our property by some new furniture.” And we've seen the yellow line recover, but how long is a question there.

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Overall, for the for the general consumer category again, you see great results, 22% increase here in 3Q21. We are still anticipating a strong fourth quarter overall holiday shopping period. 1Q and this 8%, for us we're looking back at the  1Q21 period and realizing maybe there's still a little bit of growth to happen there, but you can see pretty quickly once we hit the summer months, for general consumer goods, we’re going back to more historical normal growth or a move back to maybe consumers get a little bit cost conscious, not feeling like they're going to spend like they have most recently. So, we do anticipate general consumer gross to slow down.

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Here's a line graph just to kind of reiterate what we've been talking about the last couple of quarters. As we've seen a reporting change in deporting, it has shifted away for a couple of major online retailers away from the countywide use tax pools, which is the green line here. Reporting to local jurisdictions where they have the fulfillment centers, we see an increase or an uptick on the light green line, which is business and industry. Within that major industry group is where it will show fulfillment centers. We've got a slide to here in a bit to reiterate that.

From the pandemic periods, which is the second quarter through the fourth quarter 2020, you could see how much online spending had increased. There was probably really no way that we expected that to continue at that level. You can see here, throughout the calendar year 2021, we've seen it tail off from where it was, but still remain rather strong. From third quarter 2020 on average to third quarter 2021 only a 2% growth out of the pools again. There was no way we could really keep up that pace, but because of that reporting shift we had seen business and industry jump up 18%.

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Then some of the trends overall. Obviously, as we've talked a lot about the return of consumers back into stores, now that that's available there would be a decrease overall in terms of growth for the pools and fulfillment centers. But an uptick for brick-and-mortar stores. For many of you, you can also appreciate this welcomed recovery where your local brick and mortar stores are getting the full 1% Bradley Burns rate versus just a percentage of the pool. Many cases it's much, much less such as somewhere between 5 and 10% of that 1% versus the full 1% value. This just kind of restates what our expectations are with consumers coming back in brick-and-mortar.

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Let's start with business and industry because we've seen that dramatic growth. This gray period which goes back to 4Q2019 and all the way up through the pandemic where you could see we're almost there. So 3/4 into the reporting change, that started back in 1Q21, and  you’ll see a 23% gain on the business and industry side which had a lot to do with the change from new reporting to fulfillment centers. We've seen a consistent dramatic gain. 

We are anticipating once the initial fourth quarter period is done, future gains will start to level off back to their normal historical growth. There is not too much more to go when it comes to business and industry and our future outlook is definitely leveling off.

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Here, we are more specific on fulfillment centers through the first growth that you see, starting in fourth quarter 4Q2019. We've got a couple of notes over here to the right. Just a reminder, we had AB 147 and new tax revenue that began in fourth quarter 2019. We then had the pandemic that helped both second quarter, third quarter, and fourth quarter dramatically grow for those that reported locally. Then starting here in 1Q21 to now, 3Q21, through the shifts and reporting, we've seen the gains really jump overall for fulfillment centers specifically.

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Business and industry is also a very large category overall. There are a lot of different pieces to this puzzle. As you can see, this is just a quick line graph of some of the other categories here. Medical Biotech, as you can imagine with the pandemic, really took off through 2020 and has most certainly begun to level off as far as sales tax generated there. Light and heavy industrial businesses, now post pandemic, have remained steady and we do anticipate that trend to continue along.

The seasonal effects are shown through the light green line here. For garden agricultural, you could see really that second quarter has set a tone and even with in earlier 2021. With water shortages and others, garden agricultural suppliers actually had a nice second quarter. Now being able to see that and really frame it tells us a little bit about what happened during those summer months. There are just a couple of others here which we won't highlight too much.

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County pools are shifting away from business and industry in the fulfillment centers is now goods really coming in from out of state or from online retailers that are out of state. This tax is being allocated by way of the countywide use tax pool and you could see how much. Especially once we hit AB 147 and the new reporting requirement, you can see how much they jumped up. But with the change in reporting from the pools and back to the fulfillment centers, you can see how dramatically here in 2021 the growth has dropped considerably. 

This is a lead in for what we do anticipate out of the pools going forward. We will expect them to really not have as dramatic growth with seeing more over there on the fulfillment center side. These are just some notes as reminders of where we've been when it comes to pools performance.

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I won't talk too specifically because every county pool is a little bit different, but in general the county pools are made up largely of general consumer goods. Think online retailers here, of about 40%. Then with business and industry and kind of everything that's included there, whether it be medical, cultural, or electrical come into here on business and industry side with 30% plus. But again, every county is going to be a little bit different.

So, our forecast on the pools… as we kind of talked about the shift and this dramatic growth that we had seen previously, has most certainly tailed off in these most recent quarters. We're anticipating that to continue through the end of this fiscal year at least, 5 to 6% growth. When we look outward, we see a more consistent 8 or 6% by quarter growth. This growth probably has more to do with the increased cost of goods or inflation as we think about it which has to do with the driving up of the taxable portion of the goods or increasing the tax generated. So, pools should remain fairly steady, just not nearly the dramatic growth that we've seen previously.

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We will now bring it all together in the statewide trend and looking at it on a fiscal year basis. You could see how overall statewide we trended through the pandemic with really 19/20 being the depths with 2Q2020 having such a dramatic impact coming down to decrease 2%.

Then we had a nice recovery in fiscal year 2021 of 11% so 2Q2021 already ended. We've seen now the start of the 21/22 fiscal year, and we're anticipating right now, about 11% growth for the current fiscal year. It has a lot to do with the third quarter results that we just talked about.We are anticipating a very solid fourth quarter period to come. Overall, the economy hasn't really been hindered too much. 

We can talk about some of the headwinds. As you look outward of the fiscal year, what we're seeing with the most recent variant, omicron, numbers are going up. But it does not appear as though some of the other factors or statistics, such as hospitalizations, are nearly quite the same as what we experienced through the first COVID-19 pandemic.

That's giving us a lot of hope that while numbers may go up over the next, maybe month or so, by the time we hit February or March, we probably won't continue to see the sales tax impacts really hurting like the levels that we saw previously. With that, third quarter or fourth quarter should keep the current fiscal year really strong.

I know the variants and some of the headwinds are first and foremost on people’s minds. As we go out though, you can see us returning back to more of a 3% growth right now. We are not anticipating such growth like what we just experienced but also not expecting a dramatic drop off or a regular recessionary period. There are a few things that we believe have mitigated that to the benefit of the overall economy. It feels like some of those headwinds are starting to be already factored into everybody's expectations.

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Just a few reminders and talking points as you go. Many of you will be doing a midyear budget or financial update for your councils and communities. So, this is just a quick recap of all of the different federal packages that help support our economy through the pandemic and even through calendar year 2021.

The are trillions of dollars that they've pumped into the economy and there's still a few out on the horizon that will do the same. We believe that to be a positive that we're waiting on. Obviously, the question is what will happen once people have to go back to work, pay their mortgages, or pay their rent. It's not so much at the front of our radar right now, because we've seen such great results to date.

With the inflation, interest rates, and federal government starting to increase interest rates to offset inflationary factors, we have seen the cost of goods go up. We're really watching and listening. It appears there will be multiple interest rate hikes, but later in the calendar year 2022, which is actually the start of the fiscal year 22/23. 

So again, as we think about mid-year and what's in front of us for the current fiscal year there will probably not be as many lasting impacts. I would say that’s the majority of why we’ve started to level off those future growth expectations, it comes from the consideration of higher interest rates and what it will do for home value. Further, how it will affect consumers’ confidence to continue spending at an increased rate.

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Here, you can see what we anticipate with what fell off between both goods and services during the pandemic and obviously goods have rebounded much stronger than services. We know that services are to come, and again, probably as we reach into 2022 with folks getting back to traveling again, spending on non-tangibles or experiences, there will start to be an increase which will steal some of the money that would otherwise be spent on goods. So, we know this is to come. We feel like we've factored that into our forecast that there will still be a good amount of spending on goods, but it'll be mitigated compared to what we've just been experiencing.

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Online sales, we are always watching to see what the trends are. Mainly, on the black line where you see 2020 by quarter period and the peak that we experienced right there at the pandemic… there is no way that we expect to keep pace with that. So, we're watching to see what just happened in the fourth quarter with online sales. We do anticipate a bump up from prior periods. Is it going to equal or exceed what happened a year ago? Which again, just really help support fiscal year 2122 numbers.

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This is just another way that we look at data overall statewide and how we've been trending. The normal fourth quarter holiday shopping period really boosted up there.

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So, just for some final takeaways as we get towards the end of the webinar…

What we've seen overall, FY2020-21, local tax revenue grew in excess of 10% statewide, nearly 8% above the pre-pandemic levels. So, it was a great rebound there. 

The economy and spending appear to have remained strong through the fourth quarter 2021, which would be the middle of the 21-22 fiscal year. So, we are still anticipating and forecasting about 11.5% for the current fiscal year. But it's really starting in 2022 calendar year, where price and inflation is becoming a bigger concern for consumers.

Federal interest rates being on the horizon again but probably out another full fiscal year.

But as Bret really talked about, and we know that even though the ports are being offloaded as quickly as possible, the whole overall supply chain could still be a concern for consumers and restrict some spending that might otherwise happen.

So, for a short-term forecast, we are anticipating having more slower growth, beginning 22/23 and we'll kind of hold that line overall until we hear more about possibly a next recession or another factor that could thereby boost up our expectations for the future.

Hopefully this has all been helpful for you and your local communities as you are starting to put the pieces together for the current fiscal year and start your planning for next fiscal year. We do look forward to meeting with all of you as clients over the coming months to really walk through what we customized for you.