Intersections: A monthly go-to for reliable facts and analysis about California's debt, investments and economy

Treasurer�s Office Looks Toward More Funding, Innovation, Transparency and Accountability for 2016

Making cars and airplanes has been part of California�s manufacturing DNA since the 1920s.

Dozens of plants located across the Golden State created steady, solid, middle-class jobs for tens of thousands of skilled workers. Unfortunately, the bonanza, while prolonged, petered out.

Consider these two iconic, heavily publicized closures:

In November, the final C-17 Globemaster III cargo plane rolled off the state�s last, big assembly line in Long Beach. Four hundred people lost their jobs. Five years earlier, a bankrupt General Motors pulled the plug on a 4,700-worker auto factory in Fremont, near San Francisco. The plant, operated jointly with Toyota, was the last remaining maker of gasoline-fueled cars in California when it shut down on March 31, 2010. (Electric car maker Tesla Motors subsequently moved into the shuttered Fremont facility.)

Now, that negative trend is starting to turn around. The Golden State is experiencing a revival in research, development and manufacturing of low-and-zero-emission motor vehicles and rocket components, satellites and space-payload delivery systems.

An economic development agency chaired by State Treasurer John Chiang is playing a key role in the resurgence, providing financial incentives to help companies expand. On Dec. 15, the California Alternative Energy & Advanced Transportation Financing Authority approved nearly $40 million worth of sales tax exclusions for California�s leading electric vehicle maker and a fast-growing space satellite manufacturer.

The action underscores the Treasurer�s commitment to help cutting-edge employers, such as Palo Alto-based Tesla Motors Inc. and Millennium Space Systems Inc. of El Segundo.

�The State Treasurer�s Office is excited to play a role in the success of these two companies,� said Chiang. �The financial incentives we provide help to ensure that California is the base for precision manufacturing. Such investments have the potential to create tens of thousands of high-paying, permanent jobs. The upshot is an economy that is bolstered; an environment that is cleaned, and a national defense that is strengthened.

Last month�s awards made 2015 a record year for a program that began five years ago with the passage of a state law that earmarked up to $100 million annually to help companies involved in non-fossil-fuel energy, advanced transportation and sophisticated manufacturing. The law was expanded earlier this year to include firms that process or use recycled materials.

In 2015, for the first time, the Treasurer�s Office issued the full $100 million authorized by the Legislature.

Tesla accounted for most of the latest exclusions, about $39 million on the purchase of $464 million in goods, spread out over 2015 and 2016. Millennium will receive an additional $361,000 on $4.3 million in purchases.

Tesla, founded in 2003, designs, manufactures and sells plug-in-electric vehicles and powertrain components, including the Model S sedan and the recently launched Model X sport utility crossover. In a happy turn of events, Tesla is building its electric cars in the same Fremont factory abandoned by General Motors.

Millennium, operating since 2001, produces high-performance satellites for military, national security and civil space applications for customers, such as NASA and the Department of Defense. The sales tax exclusions granted to Millennium are the latest to go to aerospace companies. The incentives are aimed at restoring the Golden State to its decades-long role as home to the nation�s aircraft and space industries.

Recipients of similar sales-and-use-tax exclusions include Space Systems/Loral LLC of Palo Alto, Rolls Royce High Temperature Composites Inc. of Huntington Beach and GKN Aerospace Chem-Tronics Inc. of Santa Ana.

The sales tax exclusions offered by the Treasurer�s Office drew praise from Millennium Chief Executive Stan Dubyn. The assistance, he said, �allows us to more quickly realize the additional infrastructure and personnel needed to maintain and grow the high quality and cutting edge performance of our products and services.�

Fed Raises Interest Rate:

The Federal Open Market Committee (FOMC) announced last month that it elected to raise the target range for federal funds by 25 basis points to 0.25%-0.5%.

The Federal Reserve uses several tools to implement monetary policy to produce a given level of short-term interest rates. One of the most important�and visible�tools is benchmarking federal funds. By changing this range, the Federal Reserve influences the demand for, and supply of, balances that depository institutions hold at the regional Federal Reserve banks. Because the targeted interest rate on fed funds transactions is sensitive to the level of reserve balances in the banking system, changes made through the fed funds rate also affect reserve balances and thus, the general availability and cost of credit in our economy.

When the Great Recession began in late 2007, the Fed moved aggressively to reduce rates and blunt the effect of the sharply slowing economy on the nation�s equity and debt markets. From its 4.25% level at the end of 2007, the federal funds rate dropped seven times to less than 0.25% and had remained there since. The markets had been expecting an increase in rates from the Fed for more than a year because of signs that the U.S. economy was improving.

Nevertheless, the Fed�s actions last month are both expected and modest. The move is apparently intended to be a first step in a gradual process designed to return interest rates to a more normal pattern without taking steam out of the economic recovery.

What�s in store now that the first move has been made? The Fed has publicly announced that it will ��assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation�� as it deliberates over future changes in the federal funds rate and application of its other monetary policy tools. The Fed stated in its policy announcement that �this assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.�

As a result, it is most likely that the federal funds rate may remain low for some time. Indeed, the Fed�s own projections of the rate indicate a range of 0.9% to 2.1% by the end of 2016. Possible challenges to raising the rate further might come from falling commodity prices�such as oil�or other events that would prevent the economy from producing a 2% inflation level on a reliable basis. In other words, it depends.

Bond Fund Accountability:

A task force of California�s leading finance and securities experts has concluded months of deliberations by issuing proposed �Best Practices� to ensure proceeds from municipal bonds sales are spent for intended purposes.

State Treasurer John Chiang convened the 12-person panel in February after being alarmed by media accounts of the alleged embezzlement of nearly $1.3 million in bond funds by an official of the Association of Bay Area Governments. The money, earmarked for public parks and street improvements in downtown San Francisco, was found missing by auditors.

The revelation, said Chiang, �raises concerns regarding whether there are sufficient safeguards at the thousands of state and local agencies which have borrowed nearly three-quarters of a trillion dollars from bond sales over the past 30 years.�

Chiang charged the task force with developing and recommending practices to monitor that bond money is properly spent, accounted, managed and secured in compliance with legal and fiduciary obligations. All spending should be subject to stringent internal controls with records made easily accessible to the public.

To that end, the task force on Dec. 14 presented 17 recommendations calling for voluntary compliance by local governments, school districts and special service entities in the areas of governance, oversight and internal controls.

But that action, alone, may not be enough. The Treasurer directed staff to engage immediately with the state Legislature to determine whether California needs stronger laws � and not just voluntary guidelines � to discourage potential fraud in the raising and spending of bond funds.

The Treasurer believes that such legislation, if introduced early next year, should require:

  • Annual reporting of outstanding debt, including uses of proceeds and bond fund balances.
  • Establishment of policies to specify bond purposes and performance measures.
  • Creation of compliance checklists to ensure adequate internal controls.
  • Certification from top local officials that required internal controls, oversight and compliance mechanisms are in place and fully functioning.