HdL Companies California Consensus Forecast Presentation.pdf [2.39Mb]
Uploaded Thursday, 16 November 2023 by Jim Brashears

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. 

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



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: 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. 



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