Marin managers, adviser flag ‘tough’ economic forecast
Warnings about worrisome economic times in Marin as the new year approaches came from multiple fronts on Tuesday.
Marin County managers presented the likelihood that the county will see dramatic cuts in state and federal funding to county supervisors. In a separate briefing, Robert Eyler, chief economist of the Marin Economic Forum, presented a similarly dour forecast.
“Next year is going to be a tough year,” Eyler said during an online presentation he delivered to Marin Economic Forum members.
Marin County Administrator Matthew Hymel said, “A big challenge on the horizon is the state budget.”
Last month, the state’s Legislative Analyst’s Office issued a report projecting that the state will transition from a $100 billion surplus in fiscal 2022-23 to a $25 billion deficit in fiscal 2023-24.
“Because the state is so reliant on income tax and the capital gains market, they’re seeing a significant reduction in revenue,” Hymel said. “We are expecting reduced levels of state and federal funding going forward.”
The county administrator said 34% of the county’s budget comes from state and federal revenue.
“We couldn’t continue to expect the level of federal and state funding that we have seen over the last couple years given the influx of federal stimulus money,” Hymel said.
In June, supervisors approved a $716 million budget for the 2022-23 fiscal year, a 5% increase over the previous budget.
The budget authorized $56 million in one-time expenditures and $5 million in new, ongoing spending. The money for the $61 million in new spending came from two sources. Fiscal year 2021-22 expenditure savings, increased revenue from local and state taxes, and lower pension costs accounted for $31.1 million.
American Rescue Plan Act (ARPA) funding was the source of the remaining $25 million. The year before that the county received $25 million in American Rescue Plan Act funds.
Hymel said many economists are projecting a recession within the next two years. He said higher interest rates have resulted in a slow down in real estate sales in Marin and lower sale prices from homes.
Local real estate sales between January and October were 33% lower than during the same period in 2021 and trail pre-pandemic trends. Property taxes account for about 36% of the county’s general fund revenue.
In fiscal 2022-23, the assessed value of Marin property grew 6.55%. During 2023-24 the assessed value is expected to increase by 5%, which is the 20-year average.
In addition to lower revenue, the county is expecting its costs to rise. Employee pension costs, which account for approximately 10% of the county’s expense budget, vary depending on investment market returns.
In fiscal 2022-23, the Marin County Employee Retirement Agency (MCERA) realized investment returns of 30%, which, at least temporarily, resulted in the elimination of the county’s portion of unfunded pension liabilities. In fiscal 2022-23, however, market losses are expected to result in losses of at least 9% for MCERA. That means the county’s contributions to the pension plan will increase.
Hymel said he also expects higher levels of non-salary spending because of inflation and utility cost increases.
Talia Smith, an administrative analyst for the county, said, “We have heard from our state lobbyists that there is a possibility of the state pulling back out-year funding for grants. We haven’t seen that quite yet but we’re prepared.”
In his briefing, economist Eyler stopped short of predicting a recession next year, but he made a number of other unsettling predictions.
Eyler said nationally the expectation is for slower job growth, higher unemployment, continued high interest rates and “relatively high inflation.”
“Those four things coming together suggest a much slower economy in 2023,” he said.
Eyler predicted that housing prices in Marin will fall 10% to 15% next year, but noted that comes after average gains of about 40% across the United States over the last three years.
“Overall,” Eyler said, “the gains of the last few years are not going to be given back.”
The economist said the U.S. experienced two consecutive quarters of negative growth in the first and second quarters of this year.
“We were in technical recession after the second quarter, but that ended because we saw a pick up in gross domestic product growth in the third quarter,” he said.
Despite the negative economic news, Hymel told supervisors he is not anticipating any budget reductions next year. He noted that the county has a $5.8 million reserve to compensate for lost state revenue, which will prevent residents from being “impacted in a knee-jerk way.”
Hymel said county staff will present supervisors with a multiyear budget projection after Gov. Gavin Newsom presents his new budget in January.