ECONOMIC OUTLOOK 2003 – The Waiting Game

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ECONOMIC OUTLOOK 2003

– The Waiting Game

Big disparity exists among L.A.’s classes as they face uncertain future

By LAURENCE DARMIENTO and JONATHAN DIAMOND

Staff Reporters

Sure, these are tough times a near stagnant economy, the lingering effects of the stock market slide and possible war with Iraq.

For all that, however, attitudes about the future often depend on where you happen to be in the present. Or to put it simply, how much money you have in the bank.

The Business Journal recently assembled three groups of people who look at their financial lives in very distinct ways. The middle class folks in Glendale have taken huge hits in the stock market and now worry about their retirement nest eggs. The Pacific Palisades residents generally remain wealthy and optimistic about their futures. And the working class poor gathered at a Rampart area union hall are mostly concerned about day-to-day survival.

Their lives are not at all intertwined a reflection of L.A.’s long-standing class divisions but that may be changing. A mammoth state budget deficit will likely be felt at all income levels. Crime is on the rise and that, too, knows no boundaries. Then there is the ongoing threat of future terrorist attacks, where no gate is high enough.

Uneasiness Plagues Middle Class Despite Rising Real Estate Assets

Glendale residents Joanne Hedge and Rob Sharkey were putting substantial sums into their retirement accounts at or near the top of the market.

The result? Real losses that make them feel like retirement is a distant dream.

“We saw wonderful paper gains where did it go?” said Sharkey, a television producer married for 31 years. “We would love to get out of the rat race. We have thought seriously about moving to Florida where I am from. (But) of course the money we were gong to retire on just seems to have seriously evaporated.”

At its core, Glendale always has been a middle-class haven, but these days a streak of anxiety appears to run deep amid its homeowners, despite the real estate wealth that has appreciated beneath their feet.

Paper stock market gains have evaporated, jeopardizing retirement plans. And with even the experts uncertain of the market’s direction, they have set aside hopes of any investment riches.

Meanwhile, with President Bush focused on a possible war with Iraq, there is unease about the government’s ability to turn around the economy any time soon.

“We here in Southern California are blessed with this amazing real estate, which is probably a better investment than the stock market anyway,” said Hedge, a single, commercial artists’ representative in her 50s. “(But) at my age we have postponed any thought of retirement. I don’t think I’ll ever retire really. We are just living in very different times.”

Hedge says her Step IRAs are “in the tank,” and she has been exploring alternative investments, although she does not sound optimistic.

Meanwhile, Sharkey begrudgingly puts money into his stock-based 401(k) at work. “The money comes out of your paycheck and goes in there but hasn’t gone anywhere,” he said.

Brian and Pam Ellis, a couple with two children, managed to pull out near the top, but only out of necessity. They needed to liquidate in order to keep their family afloat.

Brian has been unable to find producing work in Hollywood, and he now works as an advertising representative for a small Glendale agency while his wife, out of the workforce for 10 years, started a job in August as executive director of the Glendale Symphony Orchestra Association. It pays what she calls a “pittance,” about $650 a week. She also is an elected member of the board of the Glendale Unified School District.

“We went from making quite a bit of money to zero. We had to live on it,” said Pam.

While these Glendale homeowners appear to have long forgotten any dreams of making a killing in the market, they have a continued faith in its ability to build wealth over the long term.

“My father went through the ’60s and ’70s and he didn’t make any money, but then in the last 20 years his portfolio has quadrupled,” said Brian Ellis.

The group is in agreement that the economy has been in the doldrums, but their opinions on what is being done about it splits them along party lines.

Hedge and Sharkey, both registered Democrats, believe Bush has not given the economy the required attention, forestalling any hope of a recovery.

Pam Ellis, who along with her husband is a registered Republican, notes how the mall parking lots are not full, and that the stores are full of sales indications that retailers are hurting. But she also believes that turning it around may be beyond the capabilities of even the federal government.

Her husband, the most conservative of the group, thinks that Bush is doing what he must and that the economy eventually will recover.

“National security is the federal government’s primary purpose, and if he’s not concentrating on that I would be very afraid,” said Ellis. “On the economic side, you can set a tone but it’s much too complex for one guy to turn around. I think consumers are the ones controlling it, and if consumers are comfortable and confident that things are going OK and are spending, then the economy grows.”

Sharkey doesn’t buy it. He says the government must to do more or the economy will languish for the foreseeable future.

“I remember how FDR somehow reinvigorated a nation in a time of depression when nobody had any money,” he said. “Uncle Sam didn’t have any money,” he said. “We didn’t have any money. It’s a lack of interest. It’s a lack of focus.”

Closer to home, the group is less optimistic, even about their seemingly secure real estate wealth. All are sitting on homes that have appreciated during the last five years, but they also worry they may be sitting on a bubble.

Hedge and the Ellises have taken advantage of the low interest rates to refinance their mortgages. But now the couple is looking at 28 years before their mortgage will be paid off.

The Ellises have more immediate concerns. Their 18-year-old son is heading to college next year and with the state budget facing a $35 billion deficit, Pam suspects that cuts to California’s state universities may force him to go to a private school.

“The U.C. budgets will get cut so severely they are going to raise tuition and have fewer classes. It may not be cost effective, not if it takes five or six years (to get through.),” she said.

As a school board member, Pam Ellis worries about changes going on in Glendale, as more poor immigrants move into the community. About half the children in the district now qualify for free or reduced fee lunches. “Children come to school hungry. We feed them lunch. We feed them breakfast. I don’t know what they do for dinner,” she said.

Her husband agrees that growth has lowered the quality of life in the region, but adds that it’s still a great place to live, which is why people come here in the first place. And who could stop them anyway?

Sharkey isn’t buying it. He says all the growth is getting to him, and worries about gang violence increasing in Glendale.

“We have become inevitably more urbanized as a neighbor of L.A. and all the problems of L.A. inevitably creep across our border,” he said. “People react to these problems by voting with their feet. We will leave.”

Largely Immune to Downturn, Business as Usual for Wealthy

The first wave of El Nino rains left Pacific Palisades scrubbed and shiny, a cool winter breeze coming in off the ocean. Life is good.

In this pocket of 21,000 residents, where the median income is $120,000 per year (three times the national median) and home sales have been averaging nearly $1 million, it would be hard to tell there had been a recession at all.

“I continue to enjoy my toys,” said Michael Edlen, “and if something new comes on the market I’ll buy it. I’m not decreasing the expenditures on disposables if anything, it’s increasing gradually.”

In the search for positive economic signs, there is perhaps no better place to look than those who are best positioned to spur activity by spending and hiring. And among a group of Palisades residents, there is plenty of optimism.

“I manage my business aggressively but carefully,” said Edlen, a residential real estate agent who lives and works in the Palisades and whose average listings are now priced at $2 million. “I over-invest, I hire more staff than is theoretically necessary for the level of business and I pay for more advertising and more Internet exposure. It has been a successful strategy for four years in a row. I don’t see any reason to change it.”

Norman Kulla, a financial advisor with offices in the Palisades and Calabasas, has taken the slowdown as an opportunity to stock up on talent. “Our firm has added people,” he said.

Mike Deasy, a partner in a Beverly Hills real estate brokerage specializing in expensive, architecturally significant homes listed for as much as $7.5 million, is making the investment in infrastructure.

“We’ve actually laid out more money,” he said. “We’re expanding the firm and putting out more capital for various technological improvements. Whatever the psychology of the marketplace, it’s not affecting us negatively.”

What he does see as a negative is a growing state budget deficit and federal interference in personal freedoms.

A registered independent who said he votes Libertarian when there’s a candidate on the ballot, Deasy does “not have a lot respect for the (Gray Davis) administration and how it has handled any number of fiscal and energy issues.”

And he’d like to see more attention paid by city government to the infrastructure in and around the Santa Monica Canyon neighborhood in which he lives. That could be accomplished, he said, with greater community involvement in budgeting matters.

The greatest threat, however, involves terrorism and more significantly, how it has eroded life in this country.

“I have neighbors that have been arrested and detained by the Immigration and Naturalization Service,” he said. “That, to me, is the more immediate threat than the terrorist threat. The individual rights of the few are the individual rights of us all.

“What are we protecting?” he said. “The right to life, liberty and the pursuit of happiness. Liberty is a part of that triad, and it seems to me (the detentions) don’t accomplish a hell of a lot.”

The specter of terrorism has crimped some things for Kulla. Though he has traveled extensively throughout the Middle East in the last three years, this year’s holiday trip will be to Florida (which he pointed out was very dangerous for German tourists a few years ago).

“Terrorism is something we have to address by looking at the obvious stuff,” he said. But, he added, “most people in world are good people. You can’t plan around that kind of stuff, can’t be afraid of your own shadow.”

For Edlen, the tensions of the outside world whether international or regional tend to be farther away. “The reason I selected this community as place to live more than 25 years ago is that it has a very family-oriented, very high quality yet low key scale style of living,” he said.

A Republican since the Nixon administration, he retired nearly 25 years ago after his family business, the manufacturing and wholesale arm of Phillips Draperies, was sold to a larger firm. After spending seven years starting a family and working as a consultant, he got back into the workforce selling real estate.

In that regard, he sees few challenges to his way of life.

“The demographics are such that it will almost assure in perpetuity the high quality of life here, because there is no land available for a large increase in population,” he said. “The constraints of geography and topography and the cost of entry to the community is fairy significant.”

As for personal spending habits, it’s business as usual for all three men.

“I will spend this year. I will invest and feel there is good value in products,” said Kulla, whose clients must entrust him with at least $500,000 to open an account. “This economy has been very good for the consumer. It has presented a very attractive opportunity for spending money, getting a good value. If I’ve got the money to spend, I’ll continue my normal patterns. There’s no belt tightening.”

Despite broad economic softness and a 25 percent decline in the Dow Jones Industrial Average since the end of 1999, those at the upper end talk as if there’s hardly been a downturn at all.

“I’m certainly not decreasing the expenditures on disposables,” said Edlen. “I plan to continue to buy computer equipment every three four years. We eat out as much as we ever did, I’m buying a new car I do that every three or four years.”

Added Deasy: “I collect art and architecture and I haven’t stopped. Those tend to be high priced items, but if something unique comes along that’s irreplaceable I haven’t changed my parameters in that regard.”

Where are they putting their money?

Kulla: “The particular style we use is highly diversified. We don’t tend to make sector bets. We are increasing our equity allocation in small, medium and large cap. We’ll probably reduce our fixed-income allocation a bit, real estate we’ll keep pretty consistent.”

Edlen: “I allocate more to the business. My better return is in my own business. Aside from that, I am maintaining a diversified portfolio, very balanced, with a lot go into different funds to diversify even further. For the next year I wouldn’t do anything differently.”

Deasy: “As one of the three owners of a company, the largest investment is in expanding the company.”

And they all plan on giving. Edlen said his charitable giving, both personally and through the office, had increased. “I’ve found more organizations both with greater needs and that do greater good than I was aware of and feel impelled to be supportive in greater ways.”

For Deasy, the loss of large corporate citizens has served as something of a clarion call on his contributions.

“My giving is probably the same as last year,” he said, though it has been altered “by a number of articles and pundits indicating L.A. is a very abstemious and cheap source of benefaction.

“I’m embarrassed to read that,” he said. “A lot of cultural, educational and social institutions have been left high and dry and I think it’s sad.”

Kulla’s giving, he said, “is about the same. I wouldn’t say there’s been much change.”

The optimism exuded by the three extends to their views of all levels of the economy.

“Were at 6 percent unemployment which used to be considered full employment, ” said Kulla. “The numbers I see on income indicate that for those who are working there are going to be salary increases pushed through. What we’re all nervous about is really the uncertainty of the larger political context will there be a war and when will businesses start investing again and showing the kind of confidence we need to really grow the economy.

“We’re waiting for that, and there is some indication it’s beginning,” he said. “I don’t expect anything to go exploding again, but I do expect there to be a rebound. The bubble was an overinvestment in assets that didn’t give a very good return, principally telecommunications. But people have been rewarded for investing in real estate.”

Life Grows Increasingly Difficult for Low-Wage Earners

Aurelia Williams considers herself an optimistic person with a deep faith in God, but it can be tough these days for her to keep up a smile.

The Temple City woman lost her only daughter earlier this year after a 29-year struggle with cerebral palsy, forcing the single mother, who had received benefits as her daughter’s primary caretaker, to strike out anew.

Williams began taking care of another disabled person and landed a part-time sales job at a Pasadena shoe store. She earns $1,200 a month and struggles to make ends meet. But what really angers her is the feeling that politicians don’t have any sense of how she and others like her struggle.

“They don’t even care, and they don’t even care to know,” said Williams. “They scratch each other’s back in government, and I don’t think they have a sense of how to get the economy back together.”

Williams is one of four low-wage workers interviewed at a Service Employees International Union hall in the Rampart area. The group also included Paul Morgan, another home care worker who once held a high paying aerospace job before being laid off; Gloria Reyes, a Guatemalan immigrant who works as a janitor in a Westside high rise; and Carlos Radillo, a security guard and union activist.

During a recession, the rich may see their portfolio’s pinched and the middle class may fight to hold on to their gains. But the working poor often just struggle to make ends meet even more so than usual.

Reyes, a single mother, works two janitorial jobs to support her 12-year-old son, as well as her mother and three older children still in Guatemala.

She lives in a Pico Union apartment and commutes by bus in the evening to a 24-story Westwood high rise, where she works until the early morning. She also cleans three apartments on the side. Her primary job pays just $8.40 an hour.

“I have always had to supplement my income with cleaning apartments,” said Reyes, a Spanish speaker whose remarks were interpreted. “I have to send money back to provide for my mom and children over there.”

And the recession hasn’t made life any easier.

Last year, Reyes got a $125 Christmas bonus at her high rise job that paid for a gift for her son. The rest she sent to her mother and other children for clothing and other necessities. No bonus came this year, but that’s the least of it.

She’s heard that three janitors will be laid off after the first of the year, leaving the remaining workers to split the additional work. She says it’s more than they can handle. And lately, as she walks home in the early morning hours after her long bus ride, she’s noticed more gang activity.

“I am not carrying money, but at the same time they may get mad at you anyway and do something to you,” Reyes said.

Morgan has it easier, but he’s seen better days.

Ten years ago the 54-year-old African American had a $23-an-hour job in Hawthorne at the former Northrop Aircraft Co. as a parts expediter. But in 1993 his wife died, and a year later he was laid off after a series of work-related injuries. Now his two teen-age daughters live with their maternal grandmother and he lives on a $6.75 hourly wage as a home care worker, taking care of a disabled relative.

He gets by thanks to the retirement fund he built up at Northrop though taking money out early in emergencies costs him a 20 percent penalty. He lives at his girlfriend’s home, saving money on rent.

“I’ve seen better times for the economy. Some times I don’t have money to see my kids,” said Morgan, whose injuries left him with six screws in his neck.

His 16-year-old and 13-year-old daughters got $200 cash gifts from him last Christmas but with the economy the way it is, this year they got half that.

But if times are tough now, these workers expect they could get worse.

Radillo, 35, has worked as a security guard for years and recently became a union activist trying organize fellow workers at a downtown hotel. In response, he says he was moved to another location and only works weekends 16 hours a week at $8 an hour.

Even working three days a week as an organizer for the SEIU, he is strapped for money and isn’t sure how he’ll be able to pay off $2,500 in credit card debt.

Williams also has big credit card debt to pay off nearly $9,000 worth and has no idea when she will be able to knock it down, even though she pays 18 percent interest.

But more than anything, she would like to pursue her dream of opening a home to care for disabled persons. However, before she can qualify for government grants that would get her up and running, she must buy a house. She sees the care home as one of the only ways to have a decent retirement, but she lacks money for a down payment. So last year, she went to Merrill Lynch to see if she could make some quick gains in the stock market, but learned that means taking high risks and shelved the plans.

Reyes retirement idea is much simpler. She said she very well likely will return to Guatemala in her retirement, while Morgan figures he will be able to live with relatives in Ohio if his situation gets bad enough.

In the meantime, he’s shelved any plans he once had for buying his own home. He says the president has a vendetta against Iraq and is too interested in waging a war, rather than helping poor folks like him.

“If I bought one or even put a down payment on one, I would have to hit the lottery to finish paying for it,” he says.

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