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IN THIS ISSUE – “I’m not going to comment on that yet. That’s what we’re trying to figure out now.”
Assembly Speaker Robert Rivas on deficit-plagued state finances
- California Financial Crisis Deepens
- State’s Cash Flow 20% Below Forecast; Unemployment Ticks Up
- Governor & Legislative Analyst Paint Different Pictures of Red Ink
- Meanwhile…Legislators Introduce 2,124 New Bills
- Delta Management is Hottest Water Issue – UC Berkeley Experts Opine
- Logistics / Warehouse Boom Slows in CA & Nation
- Historic Low Turnout for California March Primary?
Capital News & Notes (CN&N) curates 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 FEB. 23, 2024
California Financial Crisis Deepens
CalMatters
The biggest challenge facing lawmakers and Gov. Gavin Newsom is the state budget deficit — and it just got bigger.
The Legislative Analyst’s Office projected the shortfall as $15 billion higher, or $73 billion.
The analyst’s office had pegged the 2024-25 deficit at $58 billion in January, using Newsom’s revenue estimates when he presented his initial budget proposal.
Newsom’s Department of Finance reported Friday that preliminary General Fund cash receipts in January were $5 billion below (or nearly 20%) the governor’s budget forecast. (See next story.)
Unless state tax revenues pick up significantly, the bigger number will make it more difficult to balance the state budget just through dipping into reserves and targeted spending cuts.
But exactly how the state can dig its way out — at least in the Assembly — remains to be seen.
Speaker Robert Rivas told reporters today that the budget has been at the forefront of conversations among Assembly Democrats and that he is very concerned with the growing deficit.
He praised the governor’s commitment to preserving classroom funding, and said he didn’t see a way to avoid dipping into the state’s reserves, as the governor’s January budget plan proposed — though the speaker urged a prudent approach to using rainy day savings in case the budget picture worsens in future years.
“We are very concerned about short-term fixes for long-term problems,” said Rivas, who took over as speaker last summer, just days after the Legislature and Newsom reached a deal on the 2023-24 budget that covered a $30 billion deficit after two years of record surpluses.
“Clearly, we need to prioritize oversight and curb spending and our investments,” Rivas added.
In the coming weeks, Rivas’ plan calls for an oversight budget subcommittee he formed in December to review the state’s spending on housing, he said.
But, as legislative leaders and the governor have noted, the budget deficit won’t be addressed just through oversight and cuts. It’ll also mean tougher paths for bills lawmakers introduce this year — including the return of the single-payer healthcare effort by Democratic Assemblymember Ash Kalra.
“It’s a good idea, but it’s a tough, tough sell, especially in the budget climate that we are experiencing now,” he said.
And while the governor has shot down any attempt to raise taxes or create new ones to increase state revenues, Rivas did not take a position.
“We look at all of the strategies when it comes to ensuring that we have a balanced budget — there are many of those tools that are available,” he said. “Which ones are appropriate, I’m not going to comment on that yet. That’s what we’re trying to figure out now.”
But Rivas may have to make some decisions soon: A spokesperson for Newsom’s Department of Finance issued a statement later today calling on the Legislature to take early action on $8 billion in savings to address the looming deficit. Newsom will propose an updated budget in May before negotiations with legislative leaders and a final spending blueprint in June.
Today’s updated deficit projection also prompted concern and criticism of Democrats from the Republican caucus. Sen. Roger Niello, vice-chairperson of the Senate budget committee, echoed the sentiment on oversight, in a statement; “It’s time for a course correction and a renewed commitment to responsible budgeting that puts the needs of our residents first.”
State’s Cash Flow 20% Below Forecast; Unemployment Ticks Up
Dept. of Finance
Preliminary General Fund agency cash receipts were $5 billion, or 19.7 percent, below the 2024-25 Governor’s Budget forecast for January and were $5.9 billion, or 4.8 percent, below the fiscal year-to-date forecast of $121.5 billion.
The Governor’s Budget forecast was completed in late November; therefore the fiscal year-to-date differences in this report reflect variance since then. The primary driver of the cumulative shortfall was personal income tax estimated payments, which were $4.6 billion below forecast for the fiscal year-to-date, indicating weakness in receipts relating to tax year 2023.
Additionally, fiscal year-to-date corporate tax cash receipts were $980 million below forecast due to $552 million in higher corporate refunds and $223 million in lower estimated payments.
Personal income tax cash receipts were $4.7 billion, or 6.2 percent, below the fiscal year-to-date forecast of $76.2 billion. This was due to a $5-billion shortfall in January. Personal income tax estimated payments, which reflect the fourth quarter estimated payment for tax year 2023, were $4 billion below forecast in January, bringing the fiscal year-to-date shortfall to $4.6 billion.
Personal income tax withholding receipts were $1 billion below forecast in January and $494 million below forecast fiscal year-to-date due to overages in November and December.
Corporation tax cash receipts were $3 million below forecast in January and $980 million, or 4.6 percent, below the fiscal year-to-date forecast of $21.5 billion.
Sales and use tax cash receipts were $53 million below forecast in January and $199 million, or 1.1 percent, below the fiscal year-to-date forecast of $18.8 billion. Sales and use tax receipts reflect part of the final payment for calendar year fourth quarter taxable sales, which was due on January 31.
The California unemployment rate rose 0.2 percentage point to 5.1 percent in December 2023, the latest available data. California civilian unemployment increased by 29,200, civilian household employment decreased by 32,700, and 3,600 people dropped out of the labor force.
The state labor force participation rate decreased 0.2 percentage point from November to 62 percent. California added 23,400 nonfarm payroll jobs driven by private educational and health services (13,200), government (8,100), leisure and hospitality (7,100), manufacturing (2,600), other services (1,300), and construction (200). Five sectors lost jobs: professional and business services lost the most jobs (-3,800) followed by trade, transportation, and utilities (-2,100), information (-1,900), financial activities (-1,100), and mining and logging (-200).
Year-to-date through December 2023, California permitted 110,000 housing units, down 2 percent from November 2023 and down 2.9 percent from December 2022. December year-to-date permits consisted of 56,000 single-family units (up 0.4 percent from November, but down 6 percent year over year) and 54,000 multi-family units (down 4.4 percent from November, but up 0.6 percent year over year).
MORE:
https://dof.ca.gov/wp-content/uploads/sites/352/2024/02/Finance-Bulletin-February-2024.pdf
Governor & Legislative Analyst Paint Different Pictures of Red Ink
CalMatters commentary from Dan Walters
While Gov. Gavin Newsom gallivants around the country as a campaign surrogate for President Joe Biden – and to burnish his own national image – the state budget he proposed just six weeks ago is falling apart at the seams.
Last week, his Department of Finance indirectly acknowledged the budget’s problems, reporting that through January revenues were running $5.9 billion behind the new budget’s assumption for the current fiscal year.
The Legislative Analyst’s Office, which advises the Legislature, increased its estimate of the budget’s deficit, which Newsom had originally pegged at $38 billion, to an eye-popping $73 billion after toting up Newsom’s proposals and decreasing its revenue estimate.
If the downward revenue trend continues, the 2023-24 budget could wind up in a deep hole and there will be much less money available for the 2024-25 fiscal year that begins on July 1.
The shortfall was particularly acute in January, a key month on the fiscal calendar because quarterly payments for personal income taxes were due. The month’s income tax payments were $5 billion below the $20.4 billion the administration expected to collect.
When he unveiled his 2024-25 budget in January, Newsom proposed a series of fiscal maneuvers to close the gap, very few of which were actual spending reductions.
He tapped the state’s emergency reserve and dug deeply into the bag of tools that the state has historically used to paper over deficits, including spending deferrals, loans from special funds and accounting tricks, such as a maneuver involving school aid.
The Legislature’s budget analyst, Gabe Petek, had originally estimated the deficit at $68 billion, largely due to revenue projections about $15 billion lower than the governor’s over the three-year “budget window,” from 2022-23 through 2024-25.
The new revenue numbers and projections imply that Petek’s scenario is much closer to reality than Newsom’s. They also imply that, if Newsom is trying to skate through the final three years of his governorship without making some basic fiscal adjustments, he’ll leave a big mess for his successor.
The deficit, whatever its true dimensions, appears to be detached from California’s underlying economy, and is rather what fiscal mavens call a “structural deficit” – one in which baseline revenues and baseline spending are fundamentally imbalanced.
And in fact both Newsom’s budget and Petek’s analysis agree that the state faces deficits of roughly $30 billion a year at least for the remainder of his governorship.
The state’s economy may not be booming, but it is generally positive, with low unemployment. Nevertheless, Newsom wants to tap the “rainy day” reserves that are meant to offset a serious economic downturn.
Using reserves now and employing other short-term actions would merely postpone the day of reckoning and worsen its impact.
That danger is illustrated by the aforementioned school aid maneuver, which would, Petek’s office says, “allow schools to keep $8 billion in cash disbursement above the minimum requirement without recognizing the budgetary impact of those payments.”
“This proposed maneuver is bad fiscal policy,” the analysis continues, saying it “creates a binding obligation that will worsen out‑year deficits and require more difficult decisions in the future.”
If revenues continue to fall behind the Newsom budget’s relatively rosy projections, avoiding hard decisions to cut spending and/or raise taxes would require even more elaborate budgetary tricks like the school finance sleight-of-hand that would make future budgets even more imbalanced.
Petek wants his bosses in the Legislature to get real with true cuts in spending, particularly money for items that had been budgeted but not yet spent. But doing so means they would have to reduce spending that their allies, such as public employee unions and advocates for educational, health care or social services, want to preserve, or raise taxes that are already among the nation’s highest.
That’s why they will be tempted to adopt a bag of tricks, regardless of future impact.
Meanwhile…Legislators Introduce 2,124 New Bills
CalMatters
With the dust settled after Friday’s bill introduction deadline, the California Legislature’s count for new bills this year is 2,124.
That includes 1,505 in the Assembly and 619 in the Senate. The total is close to the recent average, though many measures never reach the governor’s desk. That’s because some aren’t really proposed to get there in the first place and others are introduced without tracking whether similar existing laws are working.
Last year, legislators introduced more than 2,600 bills (the most in a decade) and passed 1,046. Gov. Gavin Newsom signed 890 and vetoed 156. But with 2024 being an election year, lawmakers seeking reelection may hope to notch a few legislative wins, inked with the governor’s signature, under their belt.
A few interesting bills that made the last-minute deadline:
MORE:
https://calmatters.org/newsletter/california-bills-2024/
Delta Flow Management is Hottest Water Issue – UC Berkeley Experts Opine
LA Times Boiling Point e-newsletter
Some of the thorniest debates over water in California revolve around the Sacramento-San Joaquin River Delta, where pumps send water flowing to farms and cities, and where populations of native fish have been declining.
State water regulators are considering alternatives for new water quality standards that will determine how much water may be taken out, and how much should be allowed to flow through the delta.
And one alternative has been especially controversial: a proposal to rely on negotiated “voluntary agreements” in which water agencies pledge to forgo certain amounts of water while also funding projects to improve wetland habitats.
Gov. Gavin Newsom and his administration have touted this voluntary path as a solution to break away from the traditional conflict-ridden regulatory approach, but some leading water experts have raised a number of concerns. They say that to be effective and improve the delta’s deteriorating ecological health, the proposed agreements need to come with a list of ingredients.
And they warn that without the right measures in place, California faces serious pitfalls, including risks that the delta’s fish populations and ecosystem could continue to decline.
To learn more about these issues, I spoke with Felicia Marcus and Michael Kiparsky, two experts who wrote a report outlining what they say should be “guiding principles for effective voluntary agreements.” The report was released last month by the UC Berkeley School of Law’s Center for Law, Energy & the Environment.
Summarizing their conclusions, Marcus, Kiparsky and their colleagues wrote that leading with voluntary agreements “as a solution for balancing human and environmental needs for water — rather than first, or simultaneously, pursuing a regulatory pathway to achieve key biological goals — is a perilous strategy that risks continued environmental degradation.”
Although voluntary agreements can be beneficial, the researchers said, “they cannot fully substitute for regulatory requirements” that ensure sufficient water for the environment.
The California State Water Resources Control Board is in charge of setting water quality standards and flow requirements for the delta and San Francisco Bay.
Marcus, a former chair of the board who is now a visiting fellow at Stanford University, said managing water in the delta “requires a complex balancing act” of agricultural and urban uses, fisheries and ecosystems.
“It means making some hard calls that make people unhappy and have an impact on historic human uses,” Marcus said. “We traditionally have shortchanged the fish and wildlife flows needed to sustain the ecosystem. We have cut it too close and taken more water out of the system that any ecosystem can bear.”
Marcus was the state water board’s chair until 2019, when Newsom declined to reappoint her after a controversial board decision to increase flow requirements in part of the delta, and instead appointed E. Joaquin Esquivel as chair.
Populations of salmon, delta smelt and other species have been declining in recent years.
Last year, populations of fall-run Chinook salmon were so low that regulators shut down the fishing season along the coast. Environmental advocates have called for more stringent flow requirements to help struggling fish populations recover.
The update of the Bay-Delta Water Quality Control Plan has been years in the making. The last substantial changes in water quality and flow requirements were adopted in 1995 for much of the watershed.
“The only way to make progress is to make regulatory calls based on the science that add water back in a way that mimics nature, while leaving open the door for creative ways to implement habitat projects on the ground that can help fish faster than flow alone,” Marcus said.
Marcus said if voluntary agreements go forward without adequate standards in place, “the ecosystem will continue to collapse and more species will go extinct.” She said it would also open up the potential for litigation or intervention by the federal Environmental Protection Agency “because of how long it is taking the state to update its now obviously inadequate water quality control plan.”
Marcus said it’s good the state water board is now moving ahead with the process of updating the water regulations.
“Update the regulations with enough water … while keeping an open eye towards how to implement it in a creative way,” Marcus said. “There is a path here. But right now the delay is just deadly to the ecosystem, and we’re going to end up losing it, which is bad for everybody.”
Kiparsky, who leads the Wheeler Water Institute at the UC Berkeley School of Law, said a serious risk if the status quo continues is that the ecosystem probably will keep suffering devastating blows.
“The status quo means dead fish,” Kiparsky said. “The protections are inadequate now.”
He said state officials urgently should pursue “both the creative solution but also the regulatory foundation.” That foundation, he said, lies in updating the regulations in a way that sets clear flow rules based on the latest science.
Kiparsky said he and his colleagues think there is no problem with the approach of voluntary agreements “as long as the regulations are updated.”
If negotiated agreements “can provide more effective ecological outcomes with less water, that would be a great thing,” Kiparsky said. “But it won’t happen without an updated regulatory baseline.”
In their policy paper, Kiparsky, Marcus and their colleagues recommended five principles to “guide the appropriate use” of voluntary agreements.
They said the state should “establish a strong regulatory foundation” for voluntary agreements, which cannot replace regulatory standards. They said such agreements “must achieve comparable environmental outcomes” to what would be expected under regulatory requirements.
They also said such agreements need to “articulate clear, specific biological goals and measures of success,” that actions taken under them must be supported by the latest science, and that the agreements “must include robust and transparent accountability mechanisms.”
The state water board said in an email that the agency’s staff has not yet prepared a response to the recommendations, and that it will release responses to these and other public comments on its draft report.
The board said the next major step in the process of considering updates to the bay-delta plan “will be the public release of draft possible changes.” The draft amendments, the agency said, will be “part of a full public process, which will include an opportunity for written comments and a public workshop,” and then final proposed amendments will go before the board for a decision.
Logistics / Warehouse Boom Slows in CA & Nation
Wall Street Journal excerpt
Warehouse developers are increasingly contending with a headache that is all too familiar to residential builders: not-in-my-backyard community opposition to their projects.
More local governments are restricting or even banning new logistics hubs that have mushroomed throughout the country to meet the needs of online retailers.
After years of national employment growth, many elected officials aren’t as enthusiastic as they used to be for the jobs these facilities created. Instead, they are much more attuned to resident complaints over increased traffic, noise, pollution and demands on local infrastructure from the large trucks rumbling through their towns to get to and from these warehouses.
“Nimbyism is much more of an issue,” said Seth Martindale, senior managing director in CBRE’s consulting practice that helps companies with industrial site selection. “People want next-day delivery but they don’t want to see a distribution center next to them.”
Industrial property has been a top performer in the commercial real-estate business for most of the past several years. Retailers have been eager to grow their e-commerce operations and provide more shoppers with next-day or same-day delivery by adding distribution centers and other warehouses.
But lately demand for new space has subsided as consumers began returning to stores. Construction starts have dropped sharply as higher interest rates increased costs and leasing has slowed in some markets, in part because a building boom during the pandemic produced a space glut.
Growing community opposition is the latest hitch. It has resulted in longer delays and higher costs in places such as New Jersey and the Inland Empire in southern California.
“It’s taking multiple years to get your project from the dirt being ready to having all the final approvals,” said Vince Tibone, managing director at analytics firm Green Street.
Local resistance is also quashing hopes that industrial conversion projects will help find uses for aging corporate campuses and empty suburban office parks.
The U.S. suburban office vacancy rate has jumped to 11.1% from 8.7% in the first quarter of 2020, while available sublease space more than doubled to 74.4 million square feet from 33.9 million, according to CoStar Group.
“Ten years ago people would laugh at you if you said you were going to convert an office building to industrial,” Tibone said, because office properties were more valuable. Today such deals “pencil economically” but that is only if the local municipality grants the necessary permits, he said.
Community opposition reflects the boom in e-commerce during the pandemic. In 2021 and 2022, annual demand for industrial space soared to 500 million square feet compared with about 300 million square feet in the years leading up to the pandemic, according to Green Street. Developers delivered over 500 million square feet in 2023, Green Street said.
Market participants say expansion will continue as long as consumer appetite for shopping online remains strong. E-commerce requires three times the amount of logistics space than bricks and mortar retail, according to Green Street.
Online sales are expected to keep growing an average 6.5% annually the next five years, the firm said.
Community opposition started on the West Coast but is now spreading. “The higher the income level, generally the more opposition, the more nimbyism and the more resources they have to slow down or prevent industrial development,” Tibone said.
Some governments are blocking distribution centers partly because they are running out of land for commercial purposes. They want to attract high-salaried office jobs to the sites, rather than logistics developments that pay lower wages and make smaller contributions to tax revenues.
Historic Low Turnout for California March Primary?
Capitol Weekly analysis by data scientist Paul Mitchell
There’s only two weeks before the completion of the 2024 March Primary and early numbers are suggesting an historically low turnout.
Last year we looked at turnout patterns in presidential primary elections, and the lesson was that they can be very erratic – chiefly driven by the competitiveness of the partisan presidential primaries. That analysis found that a competitive presidential primary can drive turnout for both parties, increasing participation for infrequent voters. But when there isn’t a competitive presidential primary these numbers drop – and turnout drops more precipitously for Democrats.
The prospect we were facing just at the end of 2023 was a very asymmetric election where Democratic turnout in the primary would suffer, given no real contest to the Biden re-nomination, and Republican turnout could spike with a competitive Nikki Haley or Ron DeSantis challenge to Donald Trump.
Comparing to past elections can be a bit tricky as the state’s registration has ballooned over the past several election cycles and this is the first primary in which all voters received ballots in the mail.
Looking as far back as 2016 we can see what happens when there are competitive primaries for both Republicans and Democrats – at this point in the election cycle already 10% of all vote-by-mail ballots had been returned. However, there were only 10 million voters who received ballots in the mail, and they were traditionally more motivated voters.
2020 Primary was not competitive on the Republican side, but there was a competitive Democratic primary. Turnout at this point in the election was at 5.5%, and even though there were only 16 million ballots mailed, there had already been 85,000 more ballots returned.
Looking at the 2022 Primary is at least a similar number of mailed ballots, at 21 million, but it was a gubernatorial primary – the lowest turnout type of statewide election. Yet, again, at this point turnout was higher by more than 50,000 votes.
The demographics of the electorate thus far could also be telling us something about eventual turnout. Democrats are currently at 49% of ballots returned, just two-points higher than their base registration, but Republicans are at 32%, 6-points over their base registration. Predictably, independents are the ones who really are sitting on the couch – while they are 29% of voters, they are only 19% of ballots that have been returned to Counties.
The electorate is also incredibly old, with seniors being only 25% of the electorate, but 57% of returns. Voters 18-34, also 25% of the electorate, are only 8% of returns. White voters are also outperforming – while they are 55% of registrants, they are 70% of returns, and while Latinos are at a record high 28% of voters, they are at just 15% of ballots returned.
The impacts of these turnout numbers on campaigns can be massive. Lower turnout is correlated with more volatile election outcomes. Will this have an impact on a big race like the US Senate contest? Maybe. A higher Republican turnout would point to a race in which Steve Garvey makes it to the General election, closing out the election for two of the three main Democratic challengers.
A low turnout election, especially with relatively higher Republican participation, could also cause many legislative and congressional races in heavily Democratic districts to be decided in the primary when a Republican makes the runoff.