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IN THIS ISSUE – “You really have to start early. I’m committed to this. I’m ready to run it.”
Lt. Gov. Eleni Kounalakis opens 2026 campaign for CA governor
- Governor, Senate Dems Start FY23-24 Budget Talks – Disagree Over Business Tax Hike
- Bipartisan Assembly Group Asks Newsom for $200 Million in Flood Aid
- Legislative Battle Over Water Rights Begins to Boil
- Gov. Kounalakis Launches Bid to Become 1st Woman CA Governor
- Air Board OKs Nation’s First Railroad Engine Emissions Limit
- War on Fentanyl Escalate in SF – Newsom Sends National Guard
- SF Leads US Cities in Business Real Estate Bust
Capital News & Notes (CN&N) harvests California policy, legislative and regulatory insights from dozens of media and official sources for the past week. Please feel free to forward this unique client service.
FOR THE WEEK ENDING APRIL 28, 2023
Governor, Senate Dems Start FY23-24 Budget Talks – Disagree Over Business Tax Hike
CalMatters & Sacramento Bee
Tax increases are sensitive business in politics. So it didn’t take long — all of two hours — for Gov. Gavin Newsom to swiftly and decisively reject the latest idea from Democratic lawmakers to balance California’s budget by pumping businesses for more cash.
Ahead of Newsom’s revised budget proposal that he will unveil in mid-May, Democrats in the state Senate put forward their own plan Wednesday setting out their priorities for the upcoming negotiations. It included a bold provision that immediately ruffled some feathers: Suspending a major business tax credit and hiking the tax rate on the highest corporate earners to raise billions of dollars.
Under the proposal, California would pause the net operating loss deduction, which allows businesses to carry forward their losses to future tax years, whenever there is a “budget emergency,” raising about $5 billion annually — though only temporarily, because companies could claim those credits again once the emergency ended.
The Senate Democrats’ plan would also increase the tax rate by more than 2 percentage points on taxable corporate income above $1.5 million, bringing in an additional $6 billion or more per year from the 2,500 largest companies operating in California.
This would be partially offset by lowering the tax rates by more than 2 percentage points on those first $1.5 million in profits, benefitting smaller businesses.
Sen. Nancy Skinner, the Berkeley Democrat who leads the Senate budget committee, said this approach would avert many potential cuts that Newsom laid out in his January budget and even enable some critical new spending, despite a deficit the governor has projected to be $22.5 billion in 2023-24.
Skinner: “The types of investments we made are things that have been needed in California for a very long time.”
Corporations that got a huge federal tax cut under then-President Donald Trump would “begin to pay their fair share,” Skinner said, allowing California to increase school funding, tax credits for low-income residents, payments to child care providers and programs to combat homelessness.
Newsom, who frequently declines to comment on legislative proposals, almost immediately swatted down the idea as bad for California’s business climate and its budget stability. In a statement, spokesperson Anthony York said the governor could not support the tax increases or “massive ongoing spending.”
York: “It would be irresponsible to jeopardize the progress we’ve all made together over the last decade to protect the most vulnerable while putting our state on sound fiscal footing.”
Even with the governor’s support, raising taxes is a heavy lift, requiring a two-thirds vote of both houses of the Legislature. A spokesperson for Assembly Speaker Anthony Rendon, a Lakewood Democrat, did not respond to questions about whether his caucus is open to the Senate Democrats’ budget proposal.
Discussions over a state spending plan will begin in earnest next month, and legislators must pass a balanced budget by June 15 or forgo their paychecks.
The California Chamber of Commerce wasn’t a fan of the proposed tax increase, with CalChamber President Jennifer Barrera saying in a statement that it is unnecessary because the state has built up its “rainy day” fund.
“Increasing taxes,” she said, “will send the wrong signals to job creators and investors in the state’s economy. Now is not the time to test California’s ability to withstand the impact of an economic downturn or a recession by placing our economic success at risk.”
Others, including Chris Hoene, executive director of the California Budget & Policy Center, praised the proposal.
“The Senate’s plan for a graduated corporate tax will help ensure that large profitable corporations fairly contribute to California’s tax revenues and support the services we all benefit from.,” Hoene said. “This is exactly the kind of policy solution California needs to better support communities across the state.”
SENATE BUDGET PLAN:
Bipartisan Assembly Group Asks Newsom for $200 Million in Flood Aid
Sacramento Bee
Lawmakers want Gov. Gavin Newsom to devote an additional $200 million to flooding in the San Joaquin Valley as their districts recover from flood damage and face down the new threat of rapidly melting snow in the southern Sierra Nevada.
A group of 12 bipartisan members of the state assembly requested the funding for disaster relief in a letter, citing the need for greater emergency response to flooding and more investment in protection efforts long term.
“We’re looking into the future and seeing that we have a massive amount of water coming into our communities with this snowpack. We have to be ready and time is of the essence,” said Kern County Assemblyman Vince Fong, who spearheaded the ask.
In his January budget proposal, Newsom cut $40 million for floodplain restoration projects in the San Joaquin Valley, which allow for rivers to flood in strategic places during storms or snowmelt, reducing the risks downstream and benefiting ecosystems.
In the letter, lawmakers including chairs of the emergency management committee said the governor’s recent executive order is not adequate to support response efforts and prevent future disasters.
More emergency funding this summer, they said, would compensate for historic lack of infrastructure upgrades.
A blueprint finalized last year to fortify the Central Valley against flooding by the Flood Protection Board estimated a mega-flood in the region could result in $1 trillion dollars in damage and called for $3 billion over the next five years in infrastructure upgrades. A couple hundred million, advocates have long argued, is a worthwhile investment.
After a century of attempts to tame California rivers with a complex system of concrete dams, canals and levees that transformed the Central Valley into fertile farmland, state officials have begun to appreciate the value of dedicating large swaths of land to floodplains.
Newsom’s initial budget proposed some $200 million on flood protections to reduce urban risk, strengthen levees in the Sacramento-San Joaquin River Delta, and reduce long-term risks in the Central Valley. But lawmakers say that doesn’t go far enough on disaster response.
Record snowfall in the Sierra Nevada this winter combined with an early season heat wave this week is raising alarm in the Yosemite Valley and Tulare Lake Basin, where a resurgence of the historic lake bed has already affected communities.
The governor visited the Tulare Lake Basin Tuesday and met with leaders of Corcoran and Allensworth where floodwaters are creeping into communities. In this week of high temperatures, snowmelt threatens to breach the levee protecting Corcoran and impact a nearby prison.
At least 60,000 acres of farmland in Kings County and Tulare County are now under roughly 3 feet of water following a series of atmospheric river storms this winter, according to the Kings County Sheriff’s Department.
Newsom, who called the visit a “surreal experience,” is expected to release his updated budget proposal May 12 as he faces an estimated $22.5 billion budget deficit. The governor’s office did not respond to request for comment before publication of this story.
https://www.sacbee.com/news/politics-government/capitol-alert/article274701031.html#storylink=cpy
Legislative Battle Over Water Rights Begins to Boil
CalMatters commentary from Dan Walters
After its first committee hearing, Assembly Bill 1337 was amended last week, which could be the opening salvo of a monumental political and legal war over who controls access to water in California – an issue that stretches back to the state’s founding in 1850.
If enacted as now proposed, AB 1337 would overturn a key state appellate court decision and give the state Water Resources Control Board the legal authority to curtail diversions from rivers – even by those who now hold the most senior water rights, those gained prior to the state asserting authority over water in 1914.
The legislation, carried by Assemblywoman Buffy Wicks, a Democrat who represents East Bay suburbs, would bolster a years-long drive by environmental groups to enhance natural river flows by reducing agricultural diversions during periodic droughts.
The stage was set eight years ago when, during one such drought, then-Gov. Jerry Brown declared an emergency and the water board attempted to impose restrictions on pre-1914 rights holders, contending that there simply was not enough water to meet their demands.
A curtailment order and a more than $1 million fine served on the Byron-Bethany Irrigation District, which serves customers in three counties on the southern edge of the Sacramento-San Joaquin Delta, symbolized the conflict.
“We are a test case,” Byron-Bethany’s manager, Rick Gilmore, said at the time. “I think this has become a larger issue. I think the water board wants to use this as a precedent so they can start to gain more control over senior water right users.”
An immediate confrontation was averted when the board modified its orders but litigation continued over the underlying issue of whether the board could curtail diversions by senior water rights holders via emergency order.
Byron-Bethany and other rights holders won at the trial level but the state appealed, only to lose again last September in the 6th District Court of Appeal in a decision known as the California Water Curtailment Cases, which is specifically referenced in the revised AB 1337.
“It is the intent of the Legislature that this bill clarify that the State Water Resources Control Board has the necessary authority to curtail pre-1914 water rights and address the gap in the state board’s authority revealed by the court in the series of cases known as the California Water Curtailment Cases,” the measure declares.
In the aftermath of the 2015 clash over curtailment orders, Brown and later his successor, Gavin Newsom, sought to avoid direct confrontation by forging “voluntary agreements” under which farmers would give up some water to increase river flows for fish and other species.
The process was spurred by the board’s 2018 release of draft water quality regulations that would require roughly 40% of natural river flows to reach the Delta, thus sharply reducing agricultural diversions.
A few months later, in his first State of the State address, Newsom declared, “Our first task is to cross the finish line on real agreements to save the Sacramento-San Joaquin Bay Delta. We must get this done – for the resilience of our mighty rivers, the stability of our agriculture sector, and the millions who depend on this water every day.”
The voluntary agreement process has achieved only minimal success, and environmental groups, which opposed it, continue to press the water board to finalize and enforce its long-pending water quality rules.
Given the immense stakes, AB 1337 and several other measures to enhance the water board’s authority will be the subjects of intense legislative skirmishing. Pardon the pun, but 2023 could be a watershed year not only for its immense amounts of rainfall and snow, but for the 173-year war over control of California’s finite water supply.
Lt. Gov. Kounalakis Launches Bid to Become 1st Woman CA Governor
Politico
California Lt. Gov. Eleni Kounalakis launched her campaign to become the first woman governor of the nation’s most populous state, pushing out ahead of what’s expected to be a sprawling field in 2026.
Kounalakis will open a campaign committee for governor and immediately start raising money and building her nascent public profile for the distant election.
Kounalakis said she wanted to tackle a long list of problems plaguing the state, from homelessness, income inequality and the soaring cost of living to the housing crisis, issues around mental health and rising deaths linked to fentanyl.
“The challenges that California has require leaders who are decisive, who have experience and who have a track record of getting things done,” Kounalakis said.
Her formal entry jumpstarts the race and puts pressure on other would-be contenders to announce gubernatorial bids of their own, perhaps sooner than they otherwise planned. California statewide campaigns are among the most expensive in the country, with TV ads in major markets costing millions each week and politicians taking years and even decades to establish their brands. Republicans don’t pose a serious threat in top-of-the-ticket races, so the scramble for early money and endorsements will take place primarily among Democrats.
Despite its reputation as a progressive policy laboratory, California has been led only by men. Sen. Dianne Feinstein and former state Treasurer Kathleen Brown, the daughter of one California governor and sister of another, lost governor’s races to a male rival. More recently, Jerry Brown defeated Republican Meg Whitman, the billionaire former eBay chief executive, in 2010.
Kounalakis has been acting governor more than a dozen times. When Gov. Gavin Newsom was away on holiday last spring, she became the first woman in the state’s 171-year history to sign a bill into law. Last fall, she was a prominent voice for Proposition 1, the voter-approved measure that guaranteed access to abortions after the U.S. Supreme Court overturned federal protections. Yet Kounalakis remains far from a household name across the state. She compared the race to a marathon, adding, “You really have to start early. I’m committed to this. I’m ready to run it.”
The timing of her launch is reminiscent of Newsom’s first successful run for governor. In February 2015, Newsom opened a committee to begin raising money for his marathon 2018 governor’s race just a few months after Jerry Brown was sworn in for his final term. Like Newsom did before her, Kounalakis expects to lean into her two terms as the understudy as well as the financial and ballot title advantages that can come with the role. Two of the state’s last four governors immediately preceded their time in the office as lieutenant governors.
Kounalakis has about $4.4 million in her campaign committee, which she will ultimately shift into the governor’s race. She informed Newsom of her plans to run for the office.
In her current role, Kounalakis, 57, presented herself as a seasoned operator focused on the cost of higher education and efforts to combat climate change. She pushed back on tuition and fee hikes at universities and state institutions and fought to add more slots for resident students as a member on governing boards of the UC and CSU systems. As the state’s representative for international affairs and trade, she represented California abroad at the United Nations Climate Summit. Kounalakis also talked up her experience opposing the Trump administration to halt offshore drilling and developing policies to help deliver three major offshore wind projects.
But the lieutenant governor’s office — largely regarded as a stepping-stone post for which candidates in California campaign independent of the governor — offers little in the way of built-in responsibilities. Kounalakis has made no secret of her ambitions and about wanting a bigger role. And she’s spoken openly about the need for a state of nearly 40 million people and the world’s fifth largest economy to have a woman governor.
Kounalakis referenced her immigrant family’s roots and connected her work for their housing development company with the need to build more dwellings in the state. She also touched on the historic implications of her run.
“We’re in a time where women’s rights are being attacked in ways that were inconceivable before Donald Trump won,” she said. “I am the first woman elected lieutenant governor of California, and God willing, I will be the first woman elected governor.”
EMILY’s List President Laphonza Butler, a strategist and former labor leader with deep roots in California, expects Kounalakis to be the first of several women to join the race.
MORE:
Air Board OKs Nation’s First Railroad Engine Emissions Limit
Associated Press
California approved Thursday a first-in-the-nation, ambitious rule limiting rail pollution to aggressively cut greenhouse gas emissions in the state’s latest move to establish itself as a global leader in the fight against climate change.
The rule will ban locomotive engines more than 23 years old by 2030 and increase the use of zero-emissions technology to transport freight from ports and throughout railyards. It would also ban locomotives in the state from idling longer than 30 minutes if they are equipped with an automatic shutoff.
“It is time to kickstart the next step of transformation, with trains,” said Davina Hurt, a California Air Resources Board member.
The standards would also reduce chemicals that contribute to smog. They could improve air quality near railyards and ports.
But some say it’s too soon for the locomotive standards. Wayne Winegarden, a Pacific Research Institute senior fellow, said the rule would be expensive for rail companies, and increased costs will mean higher prices for many goods that move by rail.
The Association of American Railroads said in a statement “there is no clear path to zero emissions locomotives.”
“Mandating that result ignores the complexity and interconnected nature of railroad operations and the reality of where zero emission locomotive technology and the supporting infrastructure stand,” the group wrote.
Freight railways are an efficient means to transport the roughly 1.6 billion tons of goods nationwide across nearly 140,000 miles (225,308 kilometers), much cleaner than if those goods were trucked, it said.
The transportation sector contributed the largest share of greenhouse gas emissions nationwide in 2020, according to the Environmental Protection Agency. But rail only accounts for about 2% of those emissions.
MORE:
War on Fentanyl Escalate in SF – Newsom Sends National Guard
Sacramento Bee
Gov. Newsom’s office announced that he will partner with the City of San Francisco, California Highway Patrol, the California National Guard, the San Francisco Police Department, and the San Francisco District Attorney’s office in an effort to combat the city’s fentanyl crisis.
“We’re taking action,” Newsom said. “Through this new collaborative partnership, we are providing more law enforcement resources and personnel to crack down on crime linked to the fentanyl crisis, holding the poison peddlers accountable, and increasing law enforcement presence to improve public safety and public confidence in San Francisco.”
Newsom’s office emphasized that the partnership is not about criminalizing drug users and those suffering from addiction; the targets are suppliers and traffickers. San Francisco Mayor London Breed thanked Newsom for the “critical support.”
https://www.sacbee.com/news/politics-government/capitol-alert/article274594236.html#storylink=cpy
SF Leads US Cities in Business Real Estate Bust
Wall Street Journal excerpt
Before the pandemic, San Francisco’s California Street was home to some of the world’s most valuable commercial real estate. The corridor runs through the heart of the city’s financial district and is lined with offices for banks and other companies that help fuel the global tech economy.
One building, a 22-story glass and stone tower at 350 California Street, was worth around $300 million in 2019, according to office broker estimates.
That building now is for sale, with bids due soon. They are expected to come in at about $60 million, commercial real-estate brokers say. That’s an 80% decline in value in just four years.
This is how dire things have become in San Francisco, an extreme form of a challenge nationwide. Nearly every large U.S. city is struggling, to some degree, with reduced office-worker turnout since the pandemic spurred remote work. No market was hit harder than San Francisco, for reasons including its high costs, reliance on a tech industry quick to embrace hybrid work, and quality-of-life issues such as crime and homelessness.
Many of the city’s most prominent corporate tenants, from Salesforce Inc. to Facebook parent Meta Platforms Inc., are flooding the office market with space for sublet rather than waiting for their leases to expire. The lack of office workers is rippling throughout the financial district, leading restaurants, retailers and other small businesses to lay off employees or close.
Nearly 30% of San Francisco’s office space is vacant, which is more than seven times the rate before the pandemic hit, and the biggest increase of any major U.S. city, according to commercial real estate services firm CBRE Group Inc.
Today it is hard to know just what office buildings in San Francisco’s financial district are worth, because transactions have practically dried up. A sale of 350 California promises to establish new pricing.
“We’re all really on the edge of our seats to see the first office trade in San Francisco,” said J.D. Lumpkin, executive managing director at real estate services firm Cushman & Wakefield.
Average asking office rent was $75.25 a square foot in the first quarter of this year, compared with $88.40 the first quarter of 2020, according to CBRE. Meanwhile, tenants are getting sublease space for as low as $25 a square foot. That is just enough to pay the electricity, heat and other costs to operate a building, said Elizabeth Hart, president of North American leasing for commercial property services firm Newmark Group Inc.
For the building at 350 California Street, some brokers say even an 80% markdown from the 2019 value might not attract an abundance of bids. Few conventional lenders will provide debt financing for a near-empty tower nowadays, brokers and landlords say, which means the winning bid will likely have to be all-cash. They say it’s even possible no deal will be done.
Matthew Anderson, managing director at Trepp, the data firm, said that selling the office building at a deeply discounted price would be a sad moment for the office market sector.
“I want to cry,” he said. “I’m getting emotional just thinking about that.”