The Economic Outlook Full steam ahead but where are we going?

of Management Christopher Thornberg Senior Economist The Economic Outlook Full steam ahead but where are we going? www.uclaforecast.com

What s on the table? The National Economy: Why the future isn t what it used to be Houses: Now THAT S a FIRE Consumers and government need to join SA The State and Local Situation Short run vs. long run Education and the budget

First: a bit of history 6% 5% 4% 3% 2% 1% 0% -1% 90-91 Downturn Normal Growth Period Internet Rush 00-03 Doldrums -2% 89Q1 90Q1 91Q1 92Q1 93Q1 94Q1 95Q1 96Q1 97Q1 98Q1 99Q1 00Q1 01Q1 Recovery? 02Q1 03Q1 04Q1 Smoothed US GDP Growth

Why the doldrums? Three imbalances created by the Rush The corporate imbalance Investing without profit The saving imbalance Who is thinking about tomorrow? The external imbalance Massive trade deficits

The investment bubble caused the 2001 downturn and the doldrums Non-Res Investment (Black) $Bil 1400 1200 1000 800 600 400 200 Bubble Downturn 80 Q1 81 Q3 83 Q1 84 Q3 86 Q1 87 Q3 89 Q1 90 Q3 92 Q1 93 Q3 95 Q1 96 Q3 98 Q1 99 Q3 01 Q1 02 Q3 04 Q1 Recovery 1200 1000 800 600 400 200 0 Corporate Profits (Blue) $Bil

Why so mild? No Housing Cycle 7.0% 6.0% 5.0% 4.0% No Durable Cycle Just one big investment cycle 3.0% 54 Q3 10.0% 9.5% 9.0% 8.5% 8.0% 7.5% 7.0% 15.0% 14.0% 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 54 Q3 58 Q3 58 Q3 62 Q3 62 Q3 66 Q3 66 Q3 70 Q3 70 Q3 74 Q3 74 Q3 78 Q3 78 Q3 82 Q3 82 Q3 86 Q3 86 Q3 90 Q3 90 Q3 94 Q3 94 Q3 98 Q3 98 Q3 02 Q3 02 Q3 54 Q3 58 Q3 62 Q3 66 Q3 70 Q3 74 Q3 78 Q3 82 Q3 86 Q3 90 Q3 94 Q3 98 Q3 02 Q3

And what about outsourcing??? Blame India: The tech sector s attempt to pass the buck Outsourcing is nothing new to the US, especially to the tech sector Jobs are not created or lost -they are the result of labor market equilibrium It isn t the high value jobs that are being lost, its formerly high value jobs Efficiency in the US leads to more profits, more jobs, and more consumption in the long run. Outsourcing is equivalent to technological advancements The issue of outsourcing: equity Remember when Japan was going to buy up the US?

The Outsourcing Scare: Just That US Real Per Capita Income US Manufacturing Output $28,000 $24,000 $20,000 $16,000 $12,000 $8,000 120 110 100 90 80 70 60 50 40 59Q1 64Q1 69Q1 74Q1 79Q1 84Q1 89Q1 94Q1 99Q1 04Q1 72Q1 77Q1 82Q1 87Q1 92Q1 97Q1 02Q1 Disposable, $2000 Real, Index 1997=100

Manufacturing 5.0% Employment Growth 03-04 4.0% 3.0% 2.0% 1.0% 0.0% 0.0% -1.0% 5.0% 10.0% 15.0% 20.0% -2.0% Employment in Manufacturing

The Good: Production / Prices 120 115 110 105 100 95 Jan-97 Jul-97 Jan-98 Jul-98 Inflation still normal cur rent rise a blip (PPI, SAAR, smoothed) Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 10.0% 6.0% 2.0% -2.0% -6.0% Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jul-03 Jan-01 Jan-04 Jul-01 Jul-04 Jan-02 Jul-02 Industrial production up for now Jan-03 Jul-03 Jan-04 Jul-04

The Good: Labor Markets 133,000 132,000 131,000 130,000 129,000 128,000 127,000 126,000 Jan-99 Jul-99 Jan-00 Unemployment is low, historically Jul-00 Jan-01 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Payroll jobs increasing (SA) Jan-80 Jan-82 Jan-84 Jan-86 Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04

The Good: Income $63,500 $63,000 $62,500 $62,000 $61,500 $61,000 $60,500 $60,000 $59,500 $59,000 $58,500 $58,000 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Real per worker income $2000 $1,100 $1,050 $1,000 $950 $900 $850 $800 $750 $700 $650 $600 96Q1 97Q1 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1 Real Corporate Profits $2000 04Q1

Are oil prices going to sink the boat? $70 $60 Real Price of Oil West Texas Oil Imports as % of GDP $50 $40 $30 $20 $10 $- Jan-72 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Jan-75 1971 Jan-78 1973 Jan-81 1975 Jan-84 1977 Jan-87 1979 Jan-90 1981 Jan-93 1983 Jan-96 1985 Jan-99 Jan-02 1987 1989 1991 1993 1995 1997 1999 2001 2003

The Bad: Real Estate Then vs. Now: Real Appreciation in the 80 s and 90 s 84-90 97-04 84-90 97-04 Fresno -4.6% 44.5% San Diego 36.9% 72.5% Los Angeles 49.1% 59.1% San Francisco 58.3% 58.3% Oakland 42.7% 63.2% San Jose 52.2% 54.5% Orange County 40.6% 65.6% Santa Barbara 44.3% 73.0% Inland Empire 29.3% 59.6% Stockton-Lodi 29.5% 55.9% Sacramento 29.0% 58.1% Ventura 48.9% 63.0% Sonoma Prices

This is not a normal cycle Changes in employment and housing prices 8% 6% 4% 2% 0% -2% -4% -6% Housing Price Employment 70 Q1 72 Q1 74 Q1 76 Q1 78 Q1 80 Q1 82 Q1 84 Q1 86 Q1 88 Q1 90 Q1 92 Q1 94 Q1 96 Q1 98 Q1 00 Q1 02 Q1 04 Q1 Where s the cycle?

This is not a normal cycle US Real Home Prices and the Long Run Trend Log Scale 5 4.9 4.8 4.7 4.6 4.5 4.4 Trend.7% per year 69 Q3 71 Q3 73 Q3 75 Q3 77 Q3 79 Q3 Most of the the return from housing is in the coupon 81 Q3 83 Q3 85 Q3 87 Q3 89 Q3 91 Q3 93 Q3 95 Q3 97 Q3 99 Q3 01 Q3 03 Q3 Where s the cycle?

Real Estate is an asset and HAS a fundamental value Today s price should be the present value of the future revenues Value Today s Rent D - G Low mortgage rates aren t necessarily good for buyers! G: Future rental growth rates D: Discount factor: mortgage rates, depreciation, taxes, risk premium

Rental growth and mortgage rates $15.00 $14.00 Apartment Rents Mortgage Rates $13.00 $12.00 $11.00 $10.00 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 96 Q1 96 Q4 97 Q3 98 Q2 99 Q1 99 Q4 96 Q1 00 Q3 96 Q4 01 Q2 97 Q3 02 Q1 98 Q2 02 Q4 99 Q1 03 Q3 99 Q4 04 Q2 00 Q3 01 Q2 02 Q1 02 Q4 03 Q3 04 Q2

Where are the hottest spots? SAN DIEGO 129.5% MILWAUKEE 54.7% SAN FRANCISCO BAY 126.6% ATLANTA 50.3% ORANGE COUNTY 120.9% PHOENIX 42.5% LAS VEGAS 105.8% KANSAS CITY 40.7% FT. LAUDERDALE 100.6% PORTLAND 37.9% SACRAMENTO 98.9% OKLAHOMA CITY 37.7% MIAMI 97.7% HOUSTON 37.6% WEST PALM BEACH 89.4% PITTSBURGH 37.2% LOS ANGELES 86.5% ST. LOUIS 31.7% ORLANDO 72.4% NEW ORLEANS 30.5% NEW YORK 71.5% PHILADELPHIA 29.8% BALTIMORE 71.0% CINCINNATI 29.7% TAMPA/ST. PETERSBURG 69.9% SAN ANTONIO 29.7% WASHINGTON, DC 69.4% GREENSBORO/WINSTON 26.6% MINNEAPOLIS-ST PAUL 67.2% DALLAS FORT WORTH 26.0% RIVERSIDE-SAN BERN. 62.4% COLUMBUS 24.0% SEATTLE 60.9% BOSTON 21.7% DENVER 60.7% SALT LAKE CITY 21.2% JACKSONVILLE 60.3% INDIANAPOLIS 16.9% CHICAGO 56.2% BIRMINGHAM 11.2% Change in Leamer Housing P/E Ratio 1997-2004

Over Priced or Over Built Prices and Building: 1998 to 2003 Housing Appreciation 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% California 0.00 1.00 2.00 3.00 4.00 New Pop / New Homes

Who s at risk when it does pop? Annual Housing Appreciation 89-94. Employment and Prices by MSA 1989 to 1994 10% 5% 0% -5% Inland Empire Ventura -2% 0% 2% 4% 6% 8% Annual Change Employment 89-94 Those cities that saw employment losses also typically experienced nominal housing price declines

The market effects So-Cal Total Unit Sales: Three months ending in month Source: Dataquick National Housing Completions 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 2,500 2,000 1,500 1,000 Apr-88 Oct-88 Apr-89 Oct-89 Apr-90 Oct-90 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Oct-96 Apr-97 Oct-97 Apr-98 Oct-98 Apr-99 Oct-99 Apr-00 Oct-00 Apr-01 Oct-01 Apr-02 Oct-02 Apr-03 Oct-03 Apr-04 500 68Q1 70Q4 73Q3 76Q2 79Q1 81Q4 84Q3 87Q2 90Q1 92Q4 95Q3 98Q2 01Q1 03Q4

The UGLY consumers out of control 130 120 110 100 90 80 70 R-3 R-2 R-1 R 0 R+1 R+2 R+3 R+4 R+5 R+6 R+7 R+8 R+9 R+10 R+11 R+12 R+13 R+14 2001 1990 1973 1980 Index values of consumer durable sales and residential investment through past recessions

But consumer spending is good, isn t it? 9.0% 6.0% 3.0% Spending in the short run can pull an economy through a downturn, but spending has to be constrained by income in the long run And those tax cuts? Straight to spending, reducing public and private savings even more. Net National Savings as % of GDP $300 $100 -$100 -$300 -$500 Government Deficit 0.0% 80 Q1 83 Q1 86 Q1 89 Q1 92 Q1 95 Q1 98 Q1 01 Q1 04 Q1 -$700 Jan-80 Jan-83 Jan-86 Jan-89 Jan-92 Jan-95 Jan-98 Jan-01 Jan-04

Consumers out of control 100% $27 98% 96% 94% 92% 90% 88% 86% Jan-59 Jan-64 Jan-69 Jan-74 Jan-79 Jan-84 Jan-89 Jan-94 Jan-99 Jan-04 $26 $25 $24 $23 $22 $21 $20 $19 $18 91Q1 92Q3 94Q1 95Q3 97Q1 98Q3 00Q1 01Q3 03Q1 04Q3 Spending as % of Disposable Income US per capita spending Real, $2000

How and why? Trade Deficit as % of GDP Real Interest Rates (Short Term) 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% -5.0% -6.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 50Q1 63Q1 53Q1 66Q1 56Q1 59Q1 69Q1 62Q1 72Q1 65Q1 75Q1 68Q1 71Q1 78Q1 74Q1 81Q1 77Q1 84Q1 80Q1 87Q1 83Q1 86Q1 90Q1 89Q1 93Q1 92Q1 96Q1 95Q1 98Q1 99Q1 01Q1 02Q1 04Q1

What does it mean? 16.0% 15.0% 14.0% 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% Consumer Durables and Residential Investment as % of GDP! 54Q1 57Q1 60Q1 63Q1 66Q1 69Q1 72Q1 75Q1 78Q1 81Q1 84Q1 87Q1 90Q1 93Q1 96Q1 99Q1 02Q1 We could be setting ourselves up for a regular consumer-led cycle in 05 or 06

The slowdown--beginning? 2100 US Housing Starts Real Retail Sales 2000 1900 1800 1700 1600 1500 Jan-02 $350,000 $340,000 $330,000 $320,000 $310,000 $300,000 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jan-02 Jul-03 Apr-02 Oct-03 Jul-02 Jan-04 Oct-02 Apr-04 Jan-03 Jul-04 Apr-03 Oct-04 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04

Don t look for a big pull from businesses $55,000 7% $50,000 $45,000 $40,000 $35,000 $30,000 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 6% 5% 4% 3% 2% 1% 0% -1% 93Q1 94Q3 96Q1 97Q3 99Q1 00Q3 02Q1 03Q3 Real Capital Stock per Worker Labor Productivity Growth

Any Silver Lining? 6 5 4 3 2 1 0 02M1 02M5 02M9 03M1 10 Year Treasury Fed Funds 03M5 03M9 04M1 04M5 115 110 105 100 95 90 2001M1 2001M5 2001M9 2002M1 2002M5 2002M9 2003M1 2003M5 2003M9 2004M1 2004M5 2004M9 Interest Rates falling, despite Fed tightening The $US is down and will stay down

The US Forecast An 80-year old economy in a 20 year-old body Look for so-so growth rates for the Q4 2004, early 2005, not a return to the go-go nineties. 3% at best Economic growth to be centered around exports and business spending. Slower growth in structures, houses and consumer spending. Job growth will continue, but be moderate (150,000 per month) Those two outstanding imbalances are a big worry. Is a consumer cycle coming down the pike? Keep an eye out. Another downturn won t be as hard on the tech sector however Interest rates have no where to go but up: but slowly

California compared to the US? Payroll Jobs 100.5 100.0 99.5 USA 99.0 98.5 98.0 97.5 California 97.0 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Household Jobs 103.0 California 102.0 101.0 100.0 USA 99.0 98.0 97.0 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04

California: A tale of two states Payroll Employment Indexes 03=100 101.5 101 1.7% AR 100.5 100 99.5 1.8% AR 99 98.5 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 US California So-Cal Bay Area

Employment and Unemployment Mixed Messages Payroll Employment Unemployment 03 03-04 04 2002 2003 2004 Feb-Aug Aug-Feb Feb-Aug Q3 Q3 Q3 Los Angeles -0.4% 0.2% 0.2% 6.6% 7.2% 6.1% Orange County 1.1% 0.0% 0.3% 4.3% 3.7% 3.1% Inland Empire 0.4% 1.5% 0.8% 5.9% 5.9% 5.4% San Diego 0.8% 0.1% 1.3% 4.4% 4.2% 3.8% Ventura 0.1% 0.4% 0.0% 5.5% 5.0% 4.6% East Bay -1.6% 0.3% 0.3% 6.3% 6.2% 5.2% San Francisco -1.9% -0.1% 0.3% 6.0% 5.5% 4.5% San Jose -2.1% -0.9% -0.5% 8.6% 7.9% 5.6% Saccramento 0.2% 0.8% -0.7% 5.4% 5.5% 5.2% Fresno -0.1% 1.2% -0.4% 14.2% 14.0% 12.9%

Business Activity: Solid So-Cal Non-Residential Permits $800 $750 $700 $650 $600 $550 $500 Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Office Vacancy Statistics 16 14 12 10 8 00 Q1 00 Q3 01 Q1 01 Q3 02 Q1 02 Q3 Los Angeles Orange County 03 Q1 03 Q3 04 Q1 04 Q3 4,300 4,100 3,900 3,700 3,500 3,300 3,100 2,900 LAX Passenger Traffic Jan-00 Domestic Jul-00 Jan-01 Jul-01 International Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 1,600 1,500 1,400 1,300 1,200 1,100 1,000 Trade through L.A. Customs $23,000 $22,000 $21,000 $20,000 $19,000 $18,000 $17,000 $16,000 $15,000 Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04

1,500 1,400 1,300 1,200 1,100 1,000 900 Jan-00 The Growth Sector: Informal Jobs Jul-00 Jan-01 Informal Jobs: Household - Payroll Southern California Informal Jobs Seasonally Adjusted, Thousands Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 19% 17% 15% 13% 11% 9% 7% 5% 3% 1% -1% Informal Jobs as percent of Payroll Jobs Seasonally Adjusted Jan-92 Jan-94 Jan-96 Balance of USA Jan-98 Jan-00 Southern California Jan-02 Jan-04

Tech coming back Shipments: Computers and Electronic Goods Bay Area HQ Corporate Revenues $Bil SA East Bay 55 50 45 40 35 $45 $40 $35 $30 01Q2 Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 01Q4 East Bay 02Q2 02Q4 03Q2 Bay Total 03Q4 04Q2 Jan-04 Jul-04 185 175 165 155 145 135 Bay Area Total

Business activity on the rise Commercial Property Statistics Taxable Sales Statistics $Mil East Bay San Jose San Fran Industrial Vacancy Rate Q2 11.2% 9.4% 10.1% Net Abs. 04 YTD -0.70 M -.57 M 1.97 M Total Stock 188.4 M 87.5M 72.7 M Office Vacancy Rate Q2 17.5% 17.7% 19.0% Net Abs. 04 YTD.08 M.47 M 1.72 M Total Stock 28.1 M 53.7 M 122.1 M $10,000 $9,000 $8,000 $7,000 $6,000 00Q1 00Q3 01Q1 01Q3 02Q1 02Q3 03Q1 E.B. S.J. 03Q3 S.F. 04Q1

Aug-04 3-Month Change 1-Year Change Payroll Employment East Bay 1,026,600 700 0.1% 5,300 0.5% San Fran 953,000 2,400 0.3% 900 0.1% San Jose 842,000-2,700-0.3% -10,500-1.2% Sacramento 755,200-5,600-0.7% 300 0.0% Household Employment East Bay 1,208,100 6,600 0.5% 25,900 2.1% San Fran 862,300 8,100 0.9% 12,100 1.4% San Jose 819,800 1,500 0.2% 3,100 0.4% Sacramento 841,600 200 0.0% 14,300 1.7% Index: Peak = 100 102 98 94 90 86 Bay Region 2000 LA / OC 1990 Bay Area Jobs: Turning the bend Slow growth in 2005 0 6 12 18 24 30 36 42 48 54 60 Months past employment peak

Sonoma Employment Oct-04 Civilian Employment 255,900 7,600 3.1% Civilian Unemployment Rate 3.8% -0.7% Total Nonfarm 183,300 2,500 1.4% Construction 13,400 100 0.8% Durable Goods 12,700-200 -1.6% Nondurable Goods 12,300 100 0.8% Trade, Transportation and Utilities 34,200 400 1.2% Wholesale Trade 6,400 300 4.9% Retail Trade 23,900 100 0.4% Transportation, Warehousing and Utilities 3,900 0 0.0% Information 3,800-100 -2.6% Financial Activities 10,200 0 0.0% Professional and Business Services 19,800 800 4.2% Educational and Health Services 22,900 300 1.3% Leisure and Hospitality 20,100 300 1.5% Other Services 6,100-100 -1.6% Government 27,600 1,000 3.8% Federal Government 1,700 0 0.0% State and Local Government 25,900 1,000 4.0%

Bay Area: Poised for LR Success 2003 Demographic Data United States California Contra Costa Alameda San Fran. MSA San Jose MSA Total population 282,909,885 34,650,690 989,855 1,433,586 1,653,855 1,648,486 % < 18 25.7% 27.0% 25.9% 24.8% 19.1% 25.0% % > 65 12.0% 10.3% 10.7% 9.9% 13.4% 9.9% Born Overseas 11.9% 26.5% 22.3% 30.5% 31.4% 36.5% % Without High School 16.4% 19.8% 10.6% 14.1% 11.6% 13.0% % Bachelor and Above 26.5% 29.1% 38.7% 39.3% 47.7% 44.1% % Poverty 12.7% 13.4% 8.5% 10.9% 7.7% 7.3% Homes Median household income $43,564 $50,220 $69,835 $61,731 $65,060 $76,544 Ownership Rate 66.8% 58.1% 70.2% 57.5% 49.9% 62.7% Occupations Management, professional 34.1% 35.2% 40.2% 44.2% 48.5% 50.6% Service occupations 16.1% 16.4% 16.6% 13.0% 13.8% 12.8% Sales and office 26.2% 25.9% 25.7% 25.1% 24.6% 21.3% Construction, extraction 9.5% 8.9% 9.2% 7.4% 5.3% 7.7% Production, transport 13.3% 12.1% 8.2% 10.2% 7.4% 7.4% Median earnings $26,236 $27,302 $36,806 $32,700 $37,947 $40,699

How does Sonoma stack up? Total population 454775 Average household size 2.61 Median age (years) 37.9 Average family size 3.15 HOUSING OCCUPANCY OCCUPATION Total housing units 189818 Management, professional 33.5% Homeowner vacancy rate (percent) 0.6 Service occupations 16.4% Rental vacancy rate (percent) 5.3 Sales and office occupations 28.0% Ownership Rate 64.2% Farming, fishing, and forestry 1.4% Construction, extraction 9.3% EDUCATIONAL ATTAINMENT Production, transportation 11.4% Percent high school graduate or higher 87.6 Percent bachelor's degree or higher 30.1 INCOME AND BENEFITS Employed 227350 Median household income 54614 Percent unemployed 5.4 Per capita income (dollars) 28685 Armed Forces 191 Employed civilian population 227350 PERCENT BELOW POVERTY 8.9

The importance of education Family Income Education and Income 90000 80000 70000 60000 50000 40000 30000 20000 11 12 13 14 15 Average Education Inequality Out of 110 B / D Rank San Jose 2.84 2 Oakland 2.49 11 Sacramento 1.74 15 San Francisco 3.46 17 Ventura 1.65 18 Santa Barbara 1.37 20 Orange County 1.60 22 Salinas 0.90 27 Vallejo 1.87 32 Stockton 0.73 40 Modesto 0.49 44 Riverside-SB 0.76 50 San Diego 1.53 51 Fresno 0.60 60 Bakersfield 0.52 89 Los Angeles 1.03 93

Where is growth in the Bay? 10 Year Changes: 93-03 Pop 2003 New MF Homes New SF Homes Adult Pop Ch Growth Sacramento 1,330,711 15,294 68,372 151,392 11.4% Contra Costa 1,001,136 9,796 39,482 108,647 10.9% Santa Clara 1,678,421 34,236 29,374 101,838 6.1% Alameda 1,461,030 17,276 28,176 98,119 6.7% San Joaquin 632,760 2,456 42,896 90,175 14.3% Sonoma 466,725 5,995 17,007 46,928 10.1% Solano 412,336 4,257 17,518 39,996 9.7% San Francisco 751,682 19,447 1,216 23,942 3.2% San Mateo 697,456 7,172 7,620 21,136 3.0% Santa Cruz 251,584 2,279 4,788 14,948 5.9% Napa 131,607 1,041 5,301 12,972 9.9% Marin 246,073 1,913 4,741 5,690 2.3%

Where is growth in the Bay? Economic Growth House Income 00 Annual Increase 90-00 Labor Force Partic. rate Increase 90-04 Sacramento $43,816 3.1% 660,000 49.6% 136,400 Contra Costa $63,675 3.5% 520,600 52.0% 84,200 Alameda $55,946 4.1% 751,200 51.4% 72,100 San Joaquin $41,282 3.0% 289,300 45.7% 61,700 Sonoma $53,076 3.9% 263,600 56.5% 56,800 Solano $54,099 3.3% 216,400 52.5% 51,100 Napa $51,738 3.5% 71,900 54.6% 15,330 Santa Clara $74,335 4.4% 866,800 51.6% 12,300 Santa Cruz $53,998 3.8% 140,300 55.8% 4,300 San Mateo $70,819 4.3% 370,800 53.2% -400 Marin $71,306 3.9% 130,800 53.2% -1,400 San Francisco $55,221 5.2% 403,100 53.6% -7,300

The Bay in the Long Run? Housing prices aren t the issue. Net Migration as % of Population. 1.4% 1.0% 0.6% 0.2% -0.2% -0.6% Migration and Price Appreciation: California -10.0% 0.0% 10.0% 20.0% Relative Change in Real Estate Prices* 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% -2.0% -2.5% -3.0% Migration and Unemployment: California US Unemploymemt - California Unemployment Net Migration (% of Population) 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

So will the lack of infrastructure investments slow population growth? 700,000 600,000 500,000 400,000 300,000 Change in California Population 1997 1999 2001 2003 2005 2007 2009 It s a quality of life, not quantity of life issue.

What kind of population growth? Real Median Income Orange Los Angeles Inland Empire 1990 $59,652 $44,408 $43,082 2002 $57,830 $43,682 $45,918 % Households < 50K / Year Income (real) Orange Los Angeles Inland Empire 1990 39.7% 53.7% 56.3% 2002 43.3% 55.3% 54.2%

California s Growing Educational Gap 37.0% 32.0% 27.0% 22.0% 17.0% 12.0% Percent population 25+ without a high school diploma 1979 1981 Balance of US California 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 31.0% 29.0% 27.0% 25.0% 23.0% 21.0% 19.0% 17.0% 15.0% Percent population 25+ with Bacherlor Degree or more 1979 1981 1983 1985 California 1987 Balance US 1989 1991 1993 1995 1997 1999 2001 2003 This is the result of international immigration into the state, which is predominantly in the Southern region.

The education budget rose from 1995 to 2000 California Education in Comparison: 2002 Data California Rank Spending Per Student $7,055 28 Spending Per Teacher $54,348 1 Student Teacher Ratio 14.10 48 Non-Instructor / Instructor Ratio.53 6 Public spending oneducation as % of Personal Income 3.8% 37 The largest crisis in infrastructure? Human capital investments in the next generation. Budget reform and structural reforms are both clearly needed. Remember: these are the kids who are going to be supporting YOU in 20 or 30 years.

Any budget relief in the future? General Fund Forecast (In Billions) $110 105 100 Expenditures 95 Revenues 90 85 80 75 Operating Deficits 70 65 60 01-02 03-04 05-06 07-08

But California is a high tax state, right? California State and Local Taxes and Fees relative to US FY 01-02 California % Inc USA % Inc Personal Income $1,145.3 15.6% $8,801.5 15.0% General revenue own sources $178.4 % Rev $1,324.2 % Rev Taxes $120.4 67.5% $905.0 68.3% Property $30.2 17.0% $279.1 21.1% Sales and gross receipts $41.6 23.3% $324.0 24.5% Individual income $33.0 18.5% $202.9 15.3% Corporate income $5.3 3.0% $28.2 2.1% Charges and miscellaneous $57.9 32.5% $419.2 31.7% Value Equity Taxes Rate 1 $600,000 15% $9,000 10.0% 2 $600,000 100% $1,500 0.3%

Summary for the Bay region Short run weak / long run strong The fundamentals for strong long run growth in place: education, industry, income, jobs Population growth continues to expand inland Challenges from the area largely external Tax system that needs overhaul as does state budget Business climate issues to remain a drag Southern Cal demographic issues

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