by Joan Meiners for ProPublica
NEW ORLEANS — In the aftermath of Hurricane Katrina in August 2005, while stranded New Orleanians flagged down helicopters from rooftops and hospitals desperately triaged patients, crude oil silently gushed from damaged drilling rigs and storage tanks.
Given the human misery set into motion by Katrina, the harm these spills caused to the environment drew little attention. But it was substantial.
Nine days after the storm, oil could still be seen leaking from toppled storage tanks, broken pipelines and sunken boats between New Orleans and the Mississippi River’s mouth.
And then Hurricane Rita hit. Oil let loose by Katrina was pushed farther inland by Rita three weeks later, and debris from the first storm caused damage to oil tankers rocked by the second.
All told, the federal agency overseeing oil and gas operations in the Gulf of Mexico reported that more than 400 pipelines and 100 drilling platforms were damaged.
The U.S. Coast Guard, the first responder for oil spills, received 540 separate reports of spills into Louisiana waters. Officials estimated that, taken together, those leaks released the same amount of oil that the highly publicized 1989 Exxon Valdez disaster spilled into Alaska’s Prince William Sound — about 10.8 million gallons.
The Oil Pollution Act, passed by Congress in response to the Valdez incident, requires that federal and state agencies work with the companies that spilled the oil to conduct a preliminary assessment of damage to natural resources. Once a comprehensive report is finalized on the value of the affected plants, soil, water and wildlife, those so-called responsible parties must pay for restoration efforts.
Fourteen years later, not one assessment of the damage to natural resources after the two 2005 hurricanes has been completed. None of the 140 parties thought to be responsible for the spills has been fined or cited for environmental violations. And no restoration plans have been developed for the impacted ecosystems, fish, birds or water quality, a review by The Times-Picayune and The Advocate and ProPublica has found.
The extent of the damage to the environment may never be known.
Even small spills have impacts, said Darryl Malek-Wiley, an organizer with the environmental conservation organization Sierra Club. Oil seeps into the marsh mud and affects the worms and snails. Birds that eat those animals are affected, as are the fish and the fishermen who bring them home. Then the marsh plants start to die, and saltwater intrudes to push them over. The coastline recedes. The next storm churns closer.
“I think it’s an outrage that they haven’t made any progress,” Malek-Wiley said. “Here we are 14 years later and they haven’t done anything. A year after Katrina, things had settled down significantly. I think the oil response team should have been moving forward with environmental damage claims.”
Over the same period, some of the very same companies responsible for spills have gotten reimbursements totaling $19 million from a federal trust fund that allows private parties to submit claims for expenses incurred cleaning up their spilled oil.
In order to get their money back, companies have to file papers saying how much oil they spilled, why it spilled and what they did to capture it. They often describe the spill as the result of an “unforeseeable act of God.”
By failing to hold anyone accountable for the spills, Louisiana is likely leaving on the table hundreds of millions of dollars in environmental remediation money. When BP spilled 134 million gallons of oil into the Gulf of Mexico in 2010, the company agreed to pay $8.8 billion to help restore the natural environment.
If the companies responsible for the Katrina and Rita spills paid up at the same rate, Louisiana would add more than $700 million to its restoration budget — money that Steve Cochran, associate vice president for coastal resilience at the Environmental Defense Fund, said is desperately needed.
“It’s pretty clear what the value of money is in a place like Louisiana, where we have these restoration needs,” Cochran said. “Every dollar that’s not collected [in fines] is a dollar that we can’t spend on this work.”
Indeed, most of the coastal restoration work going on in Louisiana is being funded with the BP settlement. When reached by phone, Cochran was just leaving a meeting with state natural resource managers about coastal resilience projects slated for next year, funded with about $750 million of money from the BP spill.
“It’s a lot of work that’s desperately needed but that is only possible because that [BP settlement] money became available,” Cochran said.
With no statute of limitations on assessing oil spills in Louisiana, officials at the Louisiana Oil Spill Coordinator’s Office, or LOSCO, say they are still working their way through a complex process of using computers to model the damage. But Stephanie Morris, a lawyer for the agency, says that even if they complete that work, it will be difficult to fine responsible parties or otherwise hold them accountable for damages caused 14 years ago.
“The [oil companies] always fight with us,” Morris said. “Their position with us is always: ‘Louisiana has a lot of spills. You have a degrading coast. Are you trying to say these injuries are from my little spill?’”
Charlie Henry, a member of the regional National Oceanic and Atmospheric Administration response team, oversees the damage assessment process for spills in Louisiana, Texas and Oklahoma and has worked with LOSCO on oil spill response for 30 years. If the 2005 spills had not been signed over to LOSCO, assessing them would likely have fallen to Henry’s group.
He says it’s common for five years to pass before a spill assessment and remediation plan is complete. He thinks that the fact that LOSCO is still working on the 2005 hurricane spills shows diligence, not fecklessness.
“Some states would have given up on [the hurricane spills] — just moved them to a cold-case file like a police department would when they can’t solve it,” Henry said.
Since the 2005 spills, little action has been taken to help prevent something similar from recurring. Neither Patrick Courreges, communications director at the Louisiana Department of Natural Resources, nor Greg Langley, the press secretary of the Louisiana Department of Environmental Quality, were aware of any new regulations since Katrina to protect against storm-related oil spills or the associated damage to the environment.
“The thing about Katrina was, it came to shore as a Cat 3 but really it still had a Cat 5 storm surge with it,” Langley said. “When you get that much water rushing in on you at that velocity, it’s going to knock things down. That’s like, an act of God.”
At the federal level, the catastrophic 2010 Deepwater Horizon spill prompted some reforms. The Obama administration decided that it was problematic to have the same agency oversee oilfield leasing and offshore safety, and those functions were split between new divisions within the Interior Department.
The administration also imposed a series of more stringent well safety regulations. However, many of them have been rolled back by the Trump administration.
While hurricanes gain speed due to the effects of climate change, the push for oil leasing in the Gulf of Mexico shows no sign of slowing down. In 2014, the Obama administration opened up 40 million new acres in the Gulf for oil and gas development. Four years later, the Trump administration announced plans to open up most of the rest, in what would be the largest expansion of offshore oil and gas drilling in U.S. history. Many of these 76 million acres are to be offered at reduced royalty rates to encourage additional near-shore drilling in Louisiana waters.
Meanwhile, scientists expect that future storms will exacerbate oil damage to the environment.
“In the Gulf, storms are predicted to be less frequent but more intense when they do come,” said Sunshine Van Bael, an ecologist at Tulane University who evaluated damage to marsh ecosystems from the BP oil spill. “One thing that storms do is, if oil has been buried underneath the marsh because it wasn’t rehabilitated, a storm could come along and whip that back up to the surface. So, the aftereffects of the oil spills might be greater [with climate change] since the storms are predicted to be more intense.”
The Regulatory Pipeline: The Way It’s Supposed to Work
In 1967, a 37 million gallon spill of crude oil from the tanker Torrey Canyon caused massive environmental damage off the coast of England, prompting the U.S. to develop a national strategy the following year to guard against a similar outcome. The Oil Pollution Act, passed in 1990, established the framework for state and federal oil spill response that is still used today.
When oil spills into water, it sets into motion a complex series of events. The spiller, or someone who notices oil in water, calls the U.S. Coast Guard, which gives the spill an identification number and logs it into the National Response Center database. In Louisiana, the state police are also notified. They assign each spill a different number and relay information to LOSCO. Depending on the size of the spill and the resources affected, as many as 12 other state and federal agencies are notified.
To create clearer jurisdiction, the Louisiana Legislature in 1991 created LOSCO to manage the process. Its deputy director, Karolien Debusschere, said, “I’ve been doing this a long, long time, and I feel it’s a pretty well-functioning system.”
Along with having to pay for cleanup and mitigation, the company that caused the spill could be subject to fines from the U.S. Environmental Protection Agency or the state DEQ. It might also face civil lawsuits from private parties and from LOSCO on behalf of state residents.
That’s how Louisiana’s system works. In theory, at least.
A Leaky Process
The reality is quite different and much more opaque.
An analysis of Coast Guard National Response Center data by ProPublica and The Times-Picayune and The Advocate shows that Louisiana out-spills every other state. In some years, it has as much as 10 times the number of crude oil spills into water reported as in other oil-producing states like Texas, California, Oklahoma and Alaska. This amounts to around 1,000 spills into Louisiana waters every year, though most are small. Nearly a quarter of these spills are due to an ongoing leak by Taylor Energy, reported every weekday, but even without these, the state still far outspills every other.
Since its creation in 1991, LOSCO has settled assessments for 24 spills. No method exists for the public to track individual spills through the assessment process, how many spills are being addressed, or at what stage they leak out of the system.
Unless citizens monitor the National Response Center database, or the Coast Guard announces the spill in a press release, the public only learns that a spill has occurred when a notice of intent to restore the habitats is released. That, in turn, only happens after a spill has made it through the damage assessment pipeline. If the spills never gets assessed, a public notice is never filed.
No such notices have been filed for the 2005 spills. A list of 407 spills from Katrina and Rita, down from the original count of 540 for unexplained reasons, sits cued up in a spreadsheet on Debusschere’s computer — unevaluated, unresolved and unremediated.
All these years later, the only way Debusschere figures she can still evaluate the impacts is to work with scientists to build a computer model to simulate damages. She says she has no idea when that effort might be complete.
LOSCO did complete preliminary assessments for at least some of the 2005 spills, as well as some modeling of the damage. But none of it has been released to the public and Morris declined to share it with a reporter, saying it was a work in progress.
There is limited baseline data on the natural, pre-spill state of the environment along Louisiana’s coastline, making it hard to accurately estimate the ecological damage.
And it’s even harder now. The oil that fouled Louisiana’s waters in the summer of 2005 has long since dispersed or settled into the marsh mud. The plants, pelicans, fish and otters that might have been affected are gone.
“You know, the natural environment is always changing,” Henry explained. “There’s some studies on turtles and marine mammals you can draw from, for example, but none of them are comprehensive. And none of them are current, because maybe they were all done five, 10 years ago.”
That’s not how it’s done in Alaska. According to Henry, after the Valdez spill, the state of Alaska started requiring oil companies to document the condition of the environment at the desired site before issuing a drilling permit, ensuring that if a spill does occur, the damage can be measured.
The outdated data available for Louisiana, on the other hand, has been collected at the state’s expense, most of it only after the latest massive disaster.
Knocked Off Track
Debusschere said that LOSCO was making progress before the Deepwater Horizon offshore rig gushed 134 million gallons of crude into the Gulf. She blames the BP spill for knocking the agency off track in processing the Katrina-era spills.
“It kind of sucked up the room,” Morris, the LOSCO attorney, said. “It’s the same folks on both sides, you know, all got engaged to work on Deepwater Horizon.”
Still, critics wonder why LOSCO hadn’t completed any of the 2005 work before the BP spill.
“There should have been some kind of action in the late 2006, 2007 period,” said Malek-Wiley of the Sierra Club. “A year after Katrina, things had settled down significantly. I think the oil response team should have been moving forward with environmental damage claims.”
During that 4 1/2-year lull between Gulf oil catastrophes, LOSCO did finish damage assessments for five small oil spills that occurred before Katrina. Two of them dated to the late 1990s. For one of these, remediation efforts are ongoing.
The BP disaster may have actually helped streamline the processing of both past and future spills at LOSCO by coalescing a network of experts who now have extensive experience evaluating oil damage to Gulf habitats, Morris said.
It also made a powerful argument for more resources. At the time Katrina hit, LOSCO only had five employees working response and damage assessment and an annual operating budget of just over $5 million. Today, LOSCO has 19 people handling those duties, and its budget has had a modest increase, to $7.5 million.
Resorting to Civil Litigation
Where LOSCO’s small team has failed to fully assess the harm caused by a single spill from Katrina or Rita, some damages from a 2005 spill have been resolved through civil litigation.
In 2009, a class-action lawsuit against Murphy Oil Corp. ended in a settlement requiring the company to pay $330 million to 6,200 claimants, including owners of about 1,800 homes in St. Bernard Parish. The damage occurred when one of Murphy’s storage tanks floated off its foundation during Katrina and dumped over a million gallons of crude oil into a square-mile segment of Meraux and Chalmette.
Paul Thibodeaux, the lawyer who represented Murphy Oil, called the incident “the largest environmental disaster [of Katrina] that affected people directly.”
Thibodeaux thinks that similar lawsuits against companies that spilled oil farther out along the coastline were never pursued because there weren’t enough plaintiffs in these rural areas to land a lucrative settlement.
But even in the areas affected by the Murphy Oil spill, many owners of damaged properties could not be located. In a flooded post-Katrina neighborhood, few left forwarding addresses.
In 2007, the EPA fined the same Murphy Oil facility $395,313 in civil penalties plus $1.5 million in cleanup costs after a large benzene leak. That case was settled in April 2019. But there has been no official accountability for the 1 million-plus gallon oil spill that occurred in 2005.
Debusschere says Murphy Oil’s million-gallon spill will be included in LOSCO’s modeling of Katrina and Rita damages.
Murphy Oil officials did not return several voicemail messages seeking comment.
Malek-Wiley notes that there are simple methods to secure an oil tank in place when a hurricane is on the way.
“If you know a hurricane is coming, you fill your tanks with additional water to make them heavier so they won’t shift. Murphy didn’t do that, and their tanks shifted, allowing the oil to come out,” Malek-Wiley said.
Murphy wasn’t the only company to make such a mistake.
The largest single spill of the 2005 hurricanes occurred when tanks owned by Bass Enterprises succumbed to strong winds and tides, spilling 3.8 million gallons of crude oil into Cox Bay, on the Mississippi’s east bank between Port Sulphur and Empire in Plaquemines Parish. It was four times larger than the Murphy spill.
The EPA’s database on environmental violation enforcement, ECHO, does not report any action against Bass Enterprises since the company paid a $1,760 fine for an unrelated violation in 2003. Bass Enterprises declined to comment.
Despite the hurricane danger, Louisiana doesn’t specifically mandate that oil companies weigh or bolt down their tanks. According to Dwight Bradshaw, a senior environmental scientist at the DEQ, you just can’t protect against some storm-related spills.
“Down at the Bass Cox Bay spill, you had 18 to 20 feet of water,” Bradshaw said. “It’s the laws of physics. Oil is lighter than water, so those tanks are gonna be lifted off their foundations. It’s an act of God. So, they’re not responsible.”
Under state and federal laws, oil companies are supposed to have risk management plans in place for so-called act of God events like hurricanes. But it’s not clear how many do have such plans. Bradshaw said that the DEQ makes site visits and can ask to see the written plans anytime, but that the companies are not required to file anything.
Environmental activists worry that the failure to hold anyone accountable for the 2005 spills sends the wrong message.
“To the extent that fines are supposed to be disincentives for behavior, it’s a failure of the system,” Cochran of the Environmental Defense Fund said. “If I get a speeding ticket but I don’t have to pay it, I probably won’t slow down.”
“Acts of God”
While natural resource damage assessments stagnate and civil cases fail to find plaintiffs, some claims from oil companies have moved more quickly.
To date, more than $19 million has been paid out from the federal Oil Spill Liability Trust Fund to reimburse at least two oil companies for costs they incurred cleaning up oil they spilled during Katrina and Rita. According to U.S. Coast Guard documents, those expenses include $38,000 for an oil recovery barge that succumbed to hurricane turbulence and $16.5 million in oil recovery costs that resulted when debris from a hurricane-damaged drilling platform punctured an oil transport tank.
Decades ago, Mark Schleifstein and his colleagues exposed environmental threats coming out of industrial plants all along the Louisiana section of the Mississippi River. A lot of those plants never went away, and even more are moving in.
Since 2000, at least 28 hurricanes or tropical storms have made landfall in Louisiana — an average of more than one per year. But still they are treated by the state as unforeseeable events.
Adam Babich, former director of the Tulane Environmental Law Clinic, said Louisiana has had a more liberal application of the act of God defense than other states or federal courts. He explained that while the act of God defense does not usually release oil companies from liability, it can weaken arguments to hold them accountable.
“We don’t normally penalize [companies] for act of God events,” Greg Langley of the DEQ said. “We just get right to remediation.”
Joan Meiners is an investigative reporter and Ph.D. ecologist, focused on demystifying environmental issues of broad public concern. Mark Schleifstein contributed to this report.
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LA’s Original Farmers Market – Business Booming During Pandemic
LOS ANGELES (KABC) — The coronavirus pandemic has forced many Southern California businesses to shut down, but for many local grocery stores and farmers markets, business is booming.
Food deliveries are soaring as shopper demand goes through the roof. Vendors at the original Farmers Market say they’re coping by doing their best to keep shelves full.
“People are ordering three times as much, as soon as it hits the floor people grab it,” said delivery driver Jerry Portillo.
Eggs are in big demand and fresh produce is a welcome sight. LA County, city issue new ‘Safer at Home’ restrictions on businesses, activities “I live it, I just went vegan so this is good,” shopper Skip Mukes said.”It’s my secret, this is a […]
Trump Hotels Still Open Amid Coronavirus Despite President’s Remarks
(TMZ) — President Trump said it’d be a good idea for hotels to start closing their doors — including his own — but the fact is … Trump Hotels in America are by and large open for business.
45 was asked about how the shutdowns and closures sweeping the nation’s businesses might be affecting his own — the guy lends his name to several different hotels and restaurants globally — and he said he was getting hurt like everyone else.
It almost seemed like he wasn’t sure — but took some big guesses, eventually deferring to his sons, who are in charge of the Trump empire while DT’s in office.
Still, Trump took a hard stance, telling the press he actually thought it would be a good idea if his hotels closed to deter people from congregating and cut down on the virus potentially spreading. TMZ called around … and it doesn’t sound like that memo’s gotten to his own staff quite yet. Fact is … some U.S.-based Trump Hotels are still taking bookings.
Of the stateside Trump Hotels where folks can rent a room for a night — according to the front desk clerks:
— Trump International Hotel Chicago … Open for business
— Trump International Hotel Waikiki — Open for business
— Trump Int’l D.C. — Open
— Trump Int’l Hotel and Tower Vancouver — Open
— Trump National Doral Miami — Open
Trump hotels in Nevada and New York — Closed
As for international properties, the hotel in Turnberry, Scotland is open. The hotel in Ireland is not.
Of the places that are still open, most of them are stepping up cleaning and have closed the restaurants, gyms and other amenities. In some cases, in-room dining seems to be the only option.
With Coronavirus, CA’s Economy is in Uncharted Territory
by Ben Christopher for CalMatters
COVID-19 is almost certain to cause the first pandemic-induced recession of the postwar era. For millions of Californians and their families, that may mean less work, lower income and more financial stress.
Social distancing may be good for public health these days, but it isn’t good for the California economy. As the coronavirus pandemic forces millions of residents to cancel dates and travel plans, retreat from social life to shelter in place , key cogs of the state’s economic engine are grinding to a halt.
That’s an unprecedented shock for a modern economy, experts say — one that will test the resilience of California’s decade-long boom and the adequacy of its $18 billion cash reserve.
What we know so far: The coronavirus is almost certainly causing the first pandemic-induced recession of the postwar era. For millions of Californians and their families, that may mean less work, lower income and more financial stress, particularly for those least able to weather the shock: Californians living at or below the poverty line, those without savings or outside financial support and people living on the street.
What we still don’t know: how bad this will get. Never before in the state has so much business activity come to such an immediate and widespread stop at once, the experts say. Policymakers, businesses and regular Califorians are just beginning to grapple with what this all might look like.
“It’s so much larger than anything we’ve encountered before,” said Jesse Rothstein, professor of public policy at UC Berkeley. “I think this is going to be larger than the Great Recession. I hope it doesn’t last as long, but the magnitude of the shock is bigger.”
The state’s enormous, diversified economy — fifth largest in the world — isn’t reliant on any one industry. But sunny California’s tourism, hospitality and retailsectors — together providing about one in five jobs, according to state statistics — are proportionately larger here. So are transportation, warehousing and other trade-related industries. All are taking the most immediate financial hit.
And while the tech sector that has driven so much of the state’s economic growth may very well be better equipped to handle — even prosper from — the new housebound economic order, such a dramatic slowdown is likely to leave few sectors unscathed.
“A month ago California was in a situation where we still had one of the strongest economies we’ve ever had,” said Rob Lapsley, president of the California Business Roundtable, which represents major employers in the state. “Now, the underlying analysis on all of this is uncertainty. Nobody knows. We’re in uncharted territory.”
Will the coronavirus crisis cause a recession?
Earlier this week, President Trump said the U.S. economy may be headed for a recession. Some experts say we’re already there.
According to a team of economic forecasters at the UCLA Anderson School of Management, the countrylikely entered recession this month. California, said Jerry Nickelsburg, who directs the forecast, probably will get hit harder than the nation as a whole.
“Over the last week … transportation in the U.S. has plummeted,” he said. “People are not going on vacation. Transatlantic flights have been canceled, which means less travel but also takes a lot of (air) cargo out of the system.”
The forecasters project the state unemployment rate to go from just under 4% in January to 6.3% by the end of the year.
Hitting bars, restaurants, gyms and hotels especially hard, the economic constriction, like the contagion that precipitated it, is likely to spread quickly as newly unemployed workers stop spending, shuttered businesses cut off their orders and lenders and landlords stop receiving their monthly checks.
“You add it all up and who is holding up the economy? Health care,” said Nickelsburg. “That’s not enough.”
Who gets hit the hardest?
During a public health emergency, when millions of people are being told to steer clear of restaurants, bars, hotels and airplanes, it doesn’t take a lot of imagination to surmise which industries will suffer the most.
Liz McAlpine was a bartender in Oakland before the restaurant where she works went take-out only, cut her schedule to four hours a week and put her on boxing and bagging duty for deliveries. She makes about $14 an hour and can no longer count on the tips that one made up a considerable portion of her earnings. She had side jobs that have fallen through. She said she has $17,000 in student loans to repay. Her three housemates are now out of jobs, too.
“I THINK THIS IS GOING TO BE LARGER THAN THE GREAT RECESSION. I HOPE IT DOESN’T LAST AS LONG, BUT THE MAGNITUDE OF THE SHOCK IS BIGGER.”—Jesse Rothstein, UC Berkeley professor of public policy
“None of us have a Plan B or C or D,” she said. We have no idea what we’re going to do. I have a tent.”
The pandemic has hammered both the state’s neighborhood bars and bistros and its biggest tourism draws. This month, Disney shuttered the gates of the Magic Kingdom, and the Coachella music festival was postponed from April to October. The opening of a 466-room Marriott in Anaheim was canceled and has yet to be rescheduled while, nationwide, roughly 8 in 10 hotel rooms sit empty.
Retail, hospitality, food and travel are not just major employers in the state. They also hire a disproportionate number of California’s low-wage workers.
The top job categories for the state’s working poor, according to an analysis by the Public Policy Institute of California, include janitorial services, food preparation andjobs in the arts and entertainment industry. Another PPIC analysis estimates that 22% of food and accommodation workers in California are at or below the poverty line already.
“Poverty in California is really about working poverty,” said Sarah Bohn, one of the authors of both analyses. “The social safety net plays an important role, but for the vast majority of low-income families, it’s really about their earnings.”
Many of these workers are “already vulnerable (to) becoming homeless or suffering other sorts of housing instability,” said Chris Hoene, executive director of the California Budget and Policy Center, a think tank that focuses on low-income Californians. “What will change in their hours or work schedule mean for them?”
And when the public health emergency does end, many laid-off workers may not be able to count on getting their old jobs back, said UCLA’s Nickelsburg. One possible side effect of this downturn is that it will accelerate trends that were already developing before the pandemic.
”Brick-and-mortar retail was already contracting,” he said. “To the extent that (the epidemic) forces more contraction for brick-and-mortar, you might not expect all those businesses to come back.”
Meanwhile, Amazon announced that it would be hiring 100,000 workers to handle the flood of online delivery requests. A company spokesperson said 12,000 of those hires are expected to be in California.
Rachel Michelin, president of the California Retailers Association, which represents the state’s largest retailers, said consumers shifting to online sales may “might make a dent” in the financial landslide now burying the association’s members — but only a small one.
Even if the shelter-in-place order is lifted, she said, “you have people who aren’t working, consumers who are now wondering, ‘Am I going to have a job?’” she said. “I think people are going to think twice about buying things they don’t necessarily need until we get past this.”
A prolonged economic freeze would be particularly hard for smaller businesses that don’t have the cash reserves to cover overhead like payroll, rent, mortgages and taxes until things improve.
“How do you give restaurants, in this case, the ability to hibernate?” said Jot Condie, president of the California Restaurant Association. How do they “ramp down operations so that when the all-clear is given, they can hit the switch and their workers can start working again and get back into the game, and restaurants can be open for business?”
With slim margins and high overhead costs, Condie said, many restaurants won’t survive much longer than a month without outside help.
“HOW DO YOU GIVE RESTAURANTS, IN THIS CASE, THE ABILITY TO HIBERNATE? [HOW DO THEY] RAMP DOWN OPERATIONS SO THAT WHEN THE ALL-CLEAR IS GIVEN, THEY CAN HIT THE SWITCH AND THEIR WORKERS CAN START WORKING AGAIN?”—Jot Condie, California Restaurant Association
Ann Callahan owns and operates a bed-and-breakfast in San Diego’s Hillcrest neighborhood, a cozy getaway spot that has become a kind of pandemic boarding house.
Although all of her typical conventioneer clients have cancelled, she still has four rooms booked. Three are occupied by out-of-towners who want to spend the crisis close to loved ones in the area, and a couple from London whose cross-county American holiday was abruptly cancelled.
Callahan said she’s set up new protocols, making sure chairs are at least six feet apart and directing all guests to use hand sanitizer before using appliances. She said she’s lucky to have enough money saved up to weather a prolonged crisis. But no one knows how prolonged this one will be.
“It’s not like 9/11. When it hit us, everything closed. But then we knew the worst of it was over going forward,” she said. “We don’t know when we’ve hit the peak of the pandemic.”
The state is prepared to extend hundreds of millions of dollars in loans to small businesses through its infrastructure bank, the treasurer’s office and the office of the Small Business Advocate. The federal Small Business Administration also announced that it would make loans for post-disaster rebuilding available to small companies weathering the shutdowns.
“The biggest thing we’ve been hearing from employers is (they’re) concerned about capital: How do they make payroll? How do they ensure that business can stay open if they’re seeing a massive decrease in demand for their goods and services?” said Mark Herbert, director of Small Business Majority, a group that lobbies on behalf of small businesses in Sacramento.
And in a sign that the slowdown is sending business both small and large reeling, shipments in and out of California’s major ports have started to slow. That’s likely to affect the state’s trade, transportation, warehousing and manufacturing sectors.
In Los Angeles, cargo volumes last month were 23% lower than February 2019, and 41 vessels have already canceled their scheduled trans-Pacific voyages to and from the port through April. That’s up from a typical 17 cancellations over the same period.
In the Long Beach and Oakland, the state’s two next largest ports, volume is also down, with cancellations up.
That’s not an unprecedented dip, said Mike Zampa, spokesperson for the Port of Oakland. There is always a slump in Pacific Rim trade in February, as factories across Asia shutter for the Lunar New Year.
“Once the factories come back online, the order of imports tends to come back up,” he said. “But there’s no question at all that the spread of the virus has affected imports throughout the U.S.”
Are there any economic winners in this pandemic?
As consumers stock up, stay home and try to take the edge off, supermarkets sales, online retailing and demand for cannabis and booze have been skyrocketing.
All that online shopping ought to be good news for the Inland Empire’s burgeoning warehousing and logistics industry, said Rob Lapsley of the Business Roundtable. Amazon operates more than a dozen fulfillment centers in the region.
Warehousing and logistics have been “the backbone of that region’s growing economy since the recession, a completely enhanced logistics economy down there that’s been replacing a lot of our manufacturing jobs,” he said.
But online shopping isn’t likely to make up for losses elsewhere. And the surge in spending on non-perishable groceries, toiletries and marijuana now may simply lead to less spending in the future. (Those who loaded their trunks with toilet paper this week may not need a re-up on new rolls anytime soon).
Thebiggest employer in the California private sector is certain to see a huge surge in spending throughout the pandemic: the health care industry. Hospitals, clinics and labs across the country are now scrambling to ramp up capacity to test, treat and contain those who are infected. Policymakers in Washington and Sacramento are scrambling too, which will likely mean billions more in government spending.
That could benefit workers in certain niche industries, like the country’s medical-device manufacturers, which are rushing to meet demand as hospitals and clinics run out of equipment. Roughly 17% of those workers are employed in California.
But the surge in demand for medical services could bring its own disruptions.
“If there are a lot of cases in the ICU, hospitals are going to have to try to collect from either insurers or patients, and the question is whether anyone will have enough cash flow to service that while the hospitals are overflowing,” said Mathy, from American University. “This would be a very bad time for hospitals to start going bankrupt.”
And the various jobs that fall into the “health care and social assistance” category created by federal economic analysts is broad. Most health care work is not related to the coronavirus.
Kate Schmidt, a retired Olympian javelin thrower, now runs her own rehabilitation service, helping her well-heeled clients at their homes. It’s a business that takes her from house to house, touching her clients, their belongings, their pets.
“I do all of the things we aren’t supposed to do now,” she said. And many of her clients are of an age that puts them at higher risk of lethal infection.
If she were responsible for transmitting the virus to any of them, she said, “I would never be able to forgive myself, so I pulled the plug.”
She’s put her business on hold. Unlike many personal-care workers, she has enough money saved to make it through a few months without income. But she’s still trying to find a way to keep her business operating.
“I’m trying to figure out Zoom, to see who amongst my clients will take me on their phone in their house,” she said.
A spokesperson for Zoom, the San Jose-based teleconferencing company, declined to share new usage numbers. But if any sector is equipped to deal with, and benefit from, California’s new work-from-home regimen, it would be the tech sector.
The demand for remote-working options to keep housebound people productive could become a silver lining in what is otherwise a very dark economic cloud for the state. That’s to say nothing of the demand for productivity-diminishing entertainment options available at such online sites as Netflix, based in San Jose, and Burbank-based Disney, which recently debuted its wildly popular Disney+ streaming service. Neither company responded to requests for new subscription data.
But not all of Silicon Valley can serve consumers stuck in their living rooms, said Carl Guardino, CEO of the Silicon Valley Leadership Group. Apple is in the manufacturing and retail business. Square, the San Francisco company that helps businesses process credit-card purchases on smartphones and tablets, depends on the health of small businesses. AirBnB is in the hospitality industry.
And electric-car maker Tesla “is obviously an innovation-economy company,” said Guardino. The firm, which employs roughly 10,000 people in the Bay Area, is suspending production at its Fremont factory as of March 23.
Investors on the whole don’t seem to think that tech is all that much more insulated than the rest of the economy. Since the beginning of the year, the S&P 500 Index, which tracks the performance of stocks belonging to the country’s largest companies, has fallen by 26%. The NASDAQ Index, which includes tech giants like Apple, has plummeted by 21%.
What about the state budget?
Call it Jerry Brown’s “I told you so” moment.
In the years after the Great Recession, Brown pushed the state to build a stockpile of cash that fiscal analysts say should weather a mild recession without necessitating serious cuts in funding for public schools, colleges or social-welfare programs.
According to the Department of Finance, the state has roughly $21 billion in reserves, most of that in an $18-billion rainy day fund. And in case that starts to run low, the state controller reported having nearly $42.8 billion available as cash that could be shifted among various state agencies to keep things running.
With any recession, the state budget takes a hit from both ends. As economic activity slows, the flood of revenue destined for state coffers dries up. In the short term, as panicked investors cash out of the stock market, there may actually be an increase in capital-gains tax revenue, which is paid when stocks, bonds and other assets are sold.
But in the longer term, “basically every source of state tax revenue that you can imagine is going to be down,” said Jeffrey Clemens, an economist at UC San Diego. That includes sales taxes, which depend on transactions in the now-paralyzed retail sector, and the state’s progressive income tax, which is particularly prone to whipsawing with each boom and bust.
We may not know the extent of the damage for a while.
Normally, budget bean counters rely on the bulk of filings during tax season to flesh out the state’s spending plan for the coming year. But the state and federal governments are extending tax deadlines, which will give budget officials an incomplete picture.
On the other side of the equation, there’s now increased pressure on state spending. That would be true even during a typical downturn, as more Californians turn to state programs like unemployment insurance, CalFresh food stamp benefits and CalWORKS, the welfare program.
Add to that the unique costs of addressing a public health crisis.
State legislators passed a bill allowing Gov. Newsom to spend up to $1 billion “for any purpose,” with much of it likely to go toward expanding the capacities of hospitals to treat the severely ill and of public health authorities to set up testing and quarantine sites. In the months ahead, uninsured Californians may turn to Covered California, the state’s subsidized health insurance market, for coverage. And if infections ramp up as expected, low-income Californians are likely to increase their use of Medi-Cal, California’s Medicaid program.
State lawmakers will need to pass a budget by mid-June. Because California’s Constitution limits how much the state can borrow and for what purpose, the only way to patch a fiscal hole without cutting services or jacking up tax rates in the middle of a recession is to draw down the rainy day fund or turn to the feds for help.
It’s not yet clear what kind of help Washington might offer. The Trump administration has proposed sending many American households some $500 billion over the next two months, with the bulk going to low earners. They’re also proposing another $300 billion in loans for small businesses.
Unlike past recessions, when stimulus packages of tax cuts and new spending have been enacted to entice people to go spend money at restaurants, bars and shops, new public spending is likely to have a very different impact this time, said UC San Diego’s Clemens.
This time around, most of the financial support is likely to be directed at “making sure that people don’t default on mortgages or miss rent payments just because they were an hourly worker who had their hours massively cut back,” he said.
Allowing the private sector to wait out the crisis in suspended animation could soften, or least delay, stress on the state budget.
Beyond that, there’s the fiscal reserve.
“If there is any silver lining, it is found in the condition of California’s budget, which entered 2020 on strong footing,” Gabriel Petek, the state’s nonpartisan legislative analyst, wrote this week. Earlier this year, his office estimated that California’s nest egg is big enough to weather a recession “typical of the post‑World War II era,” with no need to find money elsewhere.
NORMALLY, BUDGET BEAN COUNTERS RELY ON FILINGS DURING TAX SEASON TO BUILD NEXT YEAR’S SPENDING PLAN. BUT THE STATE AND FEDERAL GOVERNMENTS ARE EXTENDING TAX DEADLINES, GIVING OFFICIALS AN INCOMPLETE PICTURE.
But nothing about the current situation is typical.
“While it’s a substantial amount of discretionary reserves, we are anticipating that we need to do everything that we can to meet this moment and not go small,” Newsom said at a recent press conference.
And once that moment passes, the state’s longer-term fiscal future may look a little more grim.
With the collapse in stock prices, the state’s public-employee pension systems — mainly California Public Employees’ Retirement System and the California State Teachers’ Retirement System — are taking a beating. The balance belonging to the public employee system dropped by $69 billion — or 17% —since last month, according to the Sacramento Bee.
At last count, the combined retirement liability for state workers and teachers topped $250 billion. And because the funds depend largely on investment earnings to keep up with pension checks, Wall Street’s rout will lead to bigger unfunded liabilities at CalPERS and CalSTRS.
“I don’t even want to think about the impact on the pension funds,” said Brad Williams, a veteran budget analyst and partner at Capitol Matrix Consulting. “We know that pensions were underfunded going into this, and…once you get behind, it’s hard to claw back, so we really need a bounce back in markets to avoid pretty dire circumstances.”
Just how bad will this downturn be?
The size of the economic hit will depend on the severity and duration of the public health emergency. On that question, uncertainty abounds. But most experts are projecting a range of outcomes that span from “very bad” to “very, very bad.”
The UCLA forecast projectsa recession that will last through the fall. That assumes the worst of the pandemic will be over by summer.
“That’s based on very little data, but it looks like, in places like China and South Korea, that the number of new cases…is declining now,” said Nickelsburg. “So that’s what we’re basing it on.”
The best-case scenario, said Chris Thornberg, founding partner of the consulting firm Beacon Economics, is that social distancing measures will have their desired effect and slow the spread of the virus. In that relatively rosy picture, there is a sharp, but short-term, decline in retail and restaurant spending. But soon the public health emergency abates and economic activity revs back up within a few months. It’s what some analysts call a “V-Shaped” recession — down and then up again.
“If we have sufficient panic now” — meaning a coordinated pause of daily financial life — “it will be nothing more than a blip,” he said. “For once in my life, I’m espousing panic.”
But there are less rosy scenarios. If hundreds of thousands of people are sickened, if prolonged periods of isolation are mandated, if individuals and companies are pushed into bankruptcy in the meantime — or all of the above — “then swaths of people get laid off and that’s when it feeds back on itself.”
UCLA FORECASTS A RECESSION THAT WILL LAST THROUGH THE FALL. THAT ASSUMES THE WORST OF THE PANDEMIC WILL BE OVER BY SUMMER.
It’s not clear that a modern economy has ever experienced a disruption quite like this one.
In virtually every downturn in American history — from the Great Depression through the Great Recession — contractions have started in large, but not particularly labor-intensive, industries like manufacturing and construction. In general, said Gabe Mathy, an economist and economic historian at American University in Washington, D.C., spending on day-to-day things like restaurants, bars, gyms and shopping trips continues apace, offering some stabilizing ballast to the economy at large. Even in bad times, people still need to get their hair cut.
“During the Great Recession, spending on services was higher at the (lowest point), in 2009, than it was after the recovery,” he said. “Obviously this recession is going to look very different than the Great Recession.”
Mathy calls what we’re seeing now is a services recession — “the first one we’ve seen in world history” — and it’s hitting the economy in a sector that employs 86% of all American workers. The California labor force is particularly concentrated in the service sector.
“I don’t want to be too catastrophic, but the job losses we’re likely to see might be kind of eye-popping,” he said.
In a national poll sponsored by NPR and PBS and conducted in mid-March, 18% of respondents said they or someone in their household had either been let go or had their work hours cut.
In the second week of March, there were 58,208 applications for state unemployment insurance, an indicator of how many Californians have lost their jobs since the beginning of the public health crisis. In a live-streamed address this weekend, the governor said that the total clocked in at 135,000 on a single day last week.
The typical daily figure in the previous months was less than 6,000.
Ben Christopher covers California politics and elections, Judy Lin, Jackie Botts and Anne Wernikoff contributed reporting to this article.
This article is produced as part of WeHo Daily’s partnership with CalMatters, a nonpartisan, nonprofit journalism venture committed to explaining how California’s state Capitol works and why it matters.
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