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IN THIS ISSUE – “We had a blindfold on.”

         Gov. Newsom, telling the media why the State Budget deficit was a big surprise 

 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 JAN. 12, 2024

 

Despite Staggering Deficit, Governor Promises No Drastic Cuts in State Budget

San Jose Mercury News

Gov. Gavin Newsom said Wednesday the state’s budget deficit — projected just last month at a staggering $68 billion — has been revised to $37.9 billion, and will be solved without drastic cuts to core programs.

Newsom attributed the rosier deficit outlook in Wednesday’s proposed budget to his office using more optimistic revenue expectations than the legislative analysts who estimated last month’s higher figure.

With that shrunken shortfall, Newsom unveiled a proposed $291.5 billion budget for 2024-25, including a $208.7 billion general fund that covers operating expenses for most programs including education, health and human services, criminal justice and transportation. But the gap is still daunting.

“For decades and decades we’ve come to expect the volatility in our tax system,” Newsom said, where revenue “goes up during good times, goes down very badly in the bad times.

“This is a story of correction and normalcy, and one that we in some respects anticipated, and one we’re certainly prepared to work through.”

The governor said his proposed budget maintains promised multi-year funding commitments, including $15.3 billion to tackle homelessness, $8.7 billion for mental health, $109.1 billion for transitional kindergarten through community college and $1.1 billion for public safety.

The plan calls for “modest but not significant cuts to the vast majority of those programs,” Newsom said, without new taxes like a “wealth tax” on rich California residents that some lawmakers have proposed.

Among the moves the governor’s budget proposes to fill the $37.9 billion deficit:

  • $13.1 billion from reserve funds
  • $8.5 billion in reduced spending for things like climate and housing programs and school facilities, and freezing new contracts, cell phones, technology equipment and nonessential fleet purchases and travel.
  • $5.1 billion in funding delays, including $1 billion for transit and inter-city rail projects and $550 million in kindergarten facilities grants.
  • $2.1 billion in spending deferrals, including $499 million for the University of California and California State University systems.

Republican leaders who have criticized the state’s spending were skeptical.

“Welcome to year six of ‘Gavinomics’ where his budgets turn surpluses into deficits and his policies push Californians to flee,” said Senate Minority Leader Brian W. Jones, a San Diego Republican and vice chair of the Senate Budget and Fiscal Review Committee.

Democrats countered that their caution in socking away reserves has paid off.

“In anticipation of an inevitable downturn, we have diligently prepared for leaner times, accumulating record level budget reserves that will allow us to adopt a budget that protects the gains we’ve made over the last decade,” said Assemblyman Marc Berman, a Menlo Park Democrat.

California’s budget is subject to wild fluctuations in revenues because of the state’s heavy reliance on income taxes, particularly from the wealthy whose taxable earnings are largely driven by investment returns. Personal income tax provides about two-thirds of the state’s general fund revenues, with 1% of tax returns — 180,000 — accounting for half of income taxes paid.

A year ago, California saw an unprecedented $97.5 billion budget surplus flip into a $22.5 billion deficit, a figure that swelled to $31.5 billion by May when the governor released his revised proposal for the budget lawmakers had to approve in June.

But even that figure proved wildly off. Due to an unusual delay in tax filings — winter storm disaster declarations prompted the IRS last year to extend 2022 tax filing deadlines into November — state leaders didn’t get a clear picture of income tax revenue filings until December.

The non-partisan Legislative Analyst’s Office reported Dec. 1 that revenues were $58 billion below assumptions for the 2022‑23 through 2024‑25 budget years. A few days later, the LAO projected a $68 billion deficit for the 2024‑25 budget, with additional yearly shortfalls of around $30 billion through 2027-2028.

Legislative Analyst Gabriel Petek said Wednesday that about half the difference between the two deficit projections involves assumptions about minimum school funding requirements under 1988’s Proposition 98, and the other half is revenue projections. The governor’s office, he said, assumes legislative action on school funding and is more optimistic on revenues.

But Petek said there is no “correct” deficit estimate, and that “both are almost certain to be wrong to some extent.”

The governor will revise the budget in May after income taxes are filed and the legislature must approve it in June.

The state’s Republicans, whose votes the Democratic majority hasn’t needed to pass a budget, say Democrats are overspending, noting the state budget has more than doubled in a decade, from $152 billion to $311 billion last year, an increase from $108 billion to $226 billion in the general fund.

While homeless advocates were relieved Newsom declined to propose significant cuts to homelessness spending, service providers “still face an uncertain future when it comes to funding services and affordable housing development,” Bring CA Home, a coalition of advocates and providers, said in a statement.

The proposed budget keeps funding levels flat for transitional kindergarten through junior college education, the single largest state program, and above Prop 98 guaranteed levels, including the transitional kindergarten rollout, student mental health and special education.

Albert Gonzalez, president of the California School Boards Association, said that while they were “concerned to see a reduction in school facilities funding and a cost-of-living adjustment below 1 percent,” school boards “understand a $38 billion deficit demands tradeoffs.”

Environmentalists were disappointed that many of the cuts are coming from programs to address climate change, particularly after this past year, which is expected to rank as the hottest in recorded history.

Newsom committed in 2021 to a landmark $54 billion on climate programs over five years — including expanding electric car charging stations, boosting solar and wind power incentives, and thinning forests to reduce wildfire risk. His proposed Wednesday budget trimmed that to $48 billion over seven years, with the hopes that some funding will come from the federal government.

“We had hoped for a more courageous proposal,” said Mary Creasman, CEO of California Environmental Voters, a non-profit group in Sacramento. “Every penny we pinch now is going to have exponential costs for Californians in wildfires, floods and other disasters.”

https://www.mercurynews.com/2024/01/10/gov-newsoms-budget-plan-shrinks-deficit-to-37-9-billion-fills-without-major-cuts-tax-hikes/

Governor’s FY24-25 Budget Summary:

https://ebudget.ca.gov/budget/2024-25/#/BudgetSummary

 

Environmentalists Dismayed at Newsom Budget Cuts: “We Hoped for a More Courageous Proposal”

Sacramento Bee

As California faces a $38 billion deficit, Gov. Gavin Newsom proposed cuts to clean transportation and building decarbonization programs designed to help the state confront the worsening effects of climate change.

Newsom’s proposed budget released Wednesday would cut and delay a net $4.8 billion from efforts to combat climate change. Most notably, he plans to cut subsidies for electric vehicles and trucks, building decarbonization assistance and watershed resilience.

The move prompted dismay from environmental advocates, particularly as 2023 marked the hottest year on record and atmospheric carbon dioxide reached record levels. They say California cannot afford to cut back on plans to defend against climate extremes. “The governor and legislature’s commitments to fund the transition to zero emission transportation are essential for protecting our health from air pollution and climate change,” said Bill Magavern, policy director for the Coalition for Clean Air.

He said major cuts to the zero-emission transportation budget will “make it harder for lower income Californians to afford EVs and slow down the transition to zero-emission trucks, which will mean more lung-searing diesel pollution in our neighborhoods.”

To avoid deeper general fund cuts, Newsom is proposing more than $1 billion in backfill spending by shifting costs to a fund that receives revenue from the state’s cap-and-trade program. The program fluctuates in revenue but generally amounts to $4 billion a year for climate initiatives.

The governor committed $54 billion over five years during previous surplus budget years. After reducing that figure by a net $3.6 billion during last year’s deficit, his proposal for this year further lowers the total by $2.9 billion in reductions and $1.9 billion in spending delays.

During a press conference in Sacramento, the governor highlighted international climate diplomacy and commitments to water infrastructure streamlining, as well as dam removal on the Klamath River.

He also projected additional federal climate spending. “Spending on climate actually will grow,” Newsom said in response to questions about whether he overpromised. “I may have understated our capacity, because I never could have imagined what kind of support we would get from the federal government.”

In this year’s proposal, largest cuts included $283 million from the state’s equitable building decarbonization effort and $200 million from clean transportation and mobility programs.

That means less incentives for heat pumps, electric vehicles or carsharing in disadvantaged communities. The governor proposed reducing funding for watershed resilience programs within DWR and the Wildlife Conservation Board by $350 million over two years.

He is also seeking to trim and delay incentives for clean trucks that transport goods to and from ports by a total $136 million. Newsom also left out funding for the state’s biggest new climate law, SB 253, which requires big companies to disclose their greenhouse gas footprints.

He also did not include funding for SB 261, which requires them to report on climate-related financial risk.

Climate activists and some lawmakers said they were wary of the governor’s decisions to cut climate programs in a moment where extreme weather caused by climate change continues to increase in severity.

“We had hoped for a more courageous proposal in this moment that addresses things like ending corporate handouts and ending subsidies for oil companies,” said Melissa Romero, deputy legislative director with California Environmental Voters. and a climate bond to address these critical needs.

While Sen. Josh Becker, D-San Mateo, expressed concern about the governor’s proposed cuts and use of funds designated for other spending, he said he was grateful to see much of California’s climate investments remain in tact.

“We cut into some of it last year and a little more this year but by and large the governor is protecting the majority of that significant investment” he said. “I just want to be clear that our GGRF funds coming from cap-and-trade are not a piggy bank to be used for general budget items.”

Among the other proposed cuts to climate programs and projects in Newsom’s budget: $475 million to support clean energy and climate technology development $100.7 million for wildfire and home hardening programs $50 million for the Regional Climate Resilience Program at the Office of Planning and Research $40.1 million for the Extreme Heat and Community Resilience Program $15 million from the Low Carbon Economy grant program in the CA Workforce Development Board $7.3 million in ZEV manufacturing grants $6.75 million for Forecast Informed Reservoir Operations for snowpack runoff predictions

https://www.sacbee.com/news/politics-government/capitol-alert/article284045783.html#storylink=cpy

 

How Do You Cut a Colossal $68-Billion Budget Deficit Nearly in Half?

Easy. With a Pencil…

LA Times commentary from George Skelton

You simply erase the “68” and write in “38.”

I’m being only half facetious.

Budgeting in Sacramento is basically guesswork anyway. One number — one tax revenue calculation — is essentially as valid as another at this stage. It’s five months before a budget must be passed by the Legislature.

Gov. Gavin Newsom chose to take a relatively rosy view of the 2024 economy Wednesday in sending the Legislature a roughly $292-billion spending plan for the next fiscal year, which starts July 1.

Still, Newsom’s proposal is around $20 billion smaller than the current budget. Here’s guessing that gap will practically disappear after the governor and legislative leaders finish negotiating the final product. Liberal Democrats control California’s Capitol, after all.

Newsom’s cheery economic outlook contrasts with how the nonpartisan Legislative Analyst’s Office saw things last month. The office — the Legislature’s own highly respected number cruncher — issued a much more pessimistic forecast. It implied risk of a recession and calculated the budget deficit at $68 billion.

“We’re just a little more optimistic,” the governor said in unveiling his budget proposal to reporters. “We don‘t see a recession.”

As he customarily does, Newsom displayed a remarkable memory bank for numbers, articulately reciting data nonstop for nearly two hours.

California taxpayers and primary users of state services will benefit from Newsom’s confidence in a rebounding economy — at least for now. It means there won’t be a serious push to raise taxes. Nor will there be deep cuts in education and healthcare.

The spending cuts could become more severe later if Newsom’s revenue projections are off base.

But hardly any politician wants to raise taxes in an election year — or in any year for a governor who dreams of one day sitting in the Oval Office and seems to be limbering up for a 2028 presidential race.

The governor couldn’t have been more clear about the fact he has no interest in a broad-based tax increase.

“Why the hell do you keep writing about that?” he asked reporters, referring to speculation about tax hikes and particularly targeting Wall Street Journal editorial pages. “The state pays a price for the misrepresentation and lies.”

Asked later by a reporter whether he was committed to no major tax increase, the frustrated governor replied: “I’m just not going to say it again. I say it every year.”

So, how does Newsom propose to balance the books?

For starters, the governor whacks $30 billion off the Legislative Analyst’s Office’s deficit forecast. He assumes the economy will generate more tax revenue — $15 billion more — than does Legislative Analyst Gabriel Petek. And he figures that the amount of required state school aid is $10 billion less than what the office calculates.

After that, Newsom taps into $13 billion in reserves.

He makes $8.5 billion in spending cuts, most notably in climate reduction and housing programs.

There’s a narrowly focused tax paid by managed-care organizations that service Medi-Cal recipients. It would generate close to $4 billion.

He wants to delay spending on $5 billion worth of items, such as transit and intercity rail, higher provider rates for serving developmentally disabled people, preschool programs and clean energy investment.

General fund spending worth $3.4 billion would be shifted to other kitties, such as the cap-and-trade program that pays for climate programs.

There’s also $2 billion in accounting gimmicks. One example: Pay state employees on July 1 rather than June 30 so the spending can be counted in the next fiscal year.

How did the state stumble into this red ink hole, falling from a $100-billion budget surplus just 18 months ago?

One short-term reason is that the federal government extended the normal tax filing deadline last year from April until November to ease life for Californians harmed by record winter storms. That meant Newsom and legislators didn’t know how much tax revenue to expect before passing the current budget in June. So, they took the easy way out and overestimated tax collections.

“We had a blindfold on,” Newsom said. If they’d been able to see clearly, he asserted, spending would have been adjusted downward.

Maybe. But their natural tendency was to spend more, not less.

The bigger long-range problem is that Sacramento continually rides a roller-coaster tax system that reacts erratically to good and bad times. It’s either boom or bust for the state treasury. But the politicians don’t have the will or courage to fix it.

The top 1% of earners pay nearly 50% of the state income tax, which supplies two-thirds of Sacramento’s revenue. Their capital gains feed the vault in a robust economy but are reduced to a trickle when investment earnings are weak.

One long-sought reform that has never gained traction is to broaden the tax base: Reduce California’s highest-in-the-nation 13.3% income tax rate and extend the sales tax to services, such as legal and accounting.

Asked about that Wednesday, Newsom replied, “It’s the art of the possible.” And reform seems politically impossible.

Anyway, Newsom said, he prefers to keep California’s very progressive income tax system and simply save more money in good times to use in bad times. He wants to tweak the law to allow for higher savings.

This is Newsom’s opening salvo in budget negotiations with legislative leaders.

It’s a good bet that even the governor’s minimal cuts will be eased and spending increased. Liberal Democrats own the place.

https://www.latimes.com/california/story/2024-01-11/skelton-newsom-budget-deficit-rosy-economy

 

Tech Industry Drives California’s “Financial Roller Coaster”

CalMatters

If you’re a California resident, you use tax-funded roads, schools and other services, so you’re on the Silicon Valley financial roller coaster whether you know it or not.

The tech industry has contributed an increasing amount to the state budget, and even the way tech companies pay their employees has become a growing source of the state’s income tax revenue, a new analysis shows.

Many tech companies pay their employees base wages as well as stock options. Vested stock options —  options that have matured and are fully owned by employees, who can choose to sell them — are treated like ordinary income for tax purposes.

Companies must pay withholding taxes on part of that income to state and federal governments.

Last year, those taxes paid by the four largest tech companies in the state — Apple, Google, Meta and Nvidia — grew to at least $5 billion, making up more than 6% of all of the state’s income-tax withholding, the Legislative Analyst’s Office estimated.

That’s up from 4% to 5% pre-pandemic, has more than doubled since 2016 and quadrupled over the past decade. That increase has come as those companies have grown tremendously in market value — the four of them are now worth more than $7 trillion. Last year, the withholding taxes they paid helped offset the effects of fewer initial public offerings on the state’s revenue.

Chas Alamo, principal fiscal and policy analyst for the office, did the analysis. He said that if he had the resources to do a deeper dive and had tallied the stock-equity withholding from all large tech companies in the state instead of just the biggest four, it might make up as much as 10% of all income-tax withholding. That’s on top of what the tech industry contributes to the state’s personal income-tax revenue, which makes it even more dependent on tech’s ups and downs.

Historically, “withholding has been a stable barometer of how the state’s economy is doing,” Alamo said. “It hasn’t been subject to the volatility of the stock market. But that has changed over the last several years.”

All Californians have a stake in the health of the tech industry, because the state relies so heavily on personal income taxes for revenue. In light of a multibillion-dollar budget deficit and mixed signals around tech — which on the one hand continues to lay off employees but on the other hand is seeing an artificial-intelligence boom that has translated into gains on Wall Street — income-tax withholding from both tech employee wages as well as the withholding from their stock options matter more than ever.

Pinpointing exactly how much tech-industry employment contributes to the state’s coffers can be tricky because tech companies have many different types of employees, but consider this: Software developers in the state earned about $48.9 billion, based on average annual earnings of about $190,000, according to data from the Employment Development Department as of the first quarter of last year.

That total from just one segment of the industry was more than what the state received in total income-tax revenue from all sectors of the labor force through November: $47.2 billion, according to the State Controller’s tracker.

As for the rise in stock-equity withholding, it was the result of a great 2023 for the large tech companies whose financial filings Alamo analyzed, especially Meta and Nvidia. Shares in chip company Nvidia, whose graphics processing units dominate the artificial intelligence market, ended last year up about 239% from the previous year. Facebook parent company Meta’s investments in artificial intelligence helped propel its stock 198% higher year over year. Meanwhile, the stock of Apple and Google ended 2023 up 49% and 59% year over year, respectively.

If artificial intelligence continues to lead to stock-market gains for tech companies, the state will keep reaping the rewards.

Some experts and economists are plenty optimistic about artificial intelligence.

“AI is going to power the next wave of economic growth in the state and nation,” said Ahmad Thomas, chief executive of Silicon Valley Leadership Group, a tech policy advocacy group whose hundreds of member companies include some of the biggest names in tech and business. Thomas called the Bay Area the “epicenter” of artificial intelligence because most hot startups in the space are based in San Francisco or elsewhere in the Bay Area.

Stephen Levy, longtime economist and director of the Center for Continuing Study of the California Economy, an independent, private research organization, said that despite more than 260,000 layoffs in the tech industry worldwide last year, according to one count, the number of tech jobs is now higher than what it was before the coronavirus pandemic.

That’s echoed by the California Center for Jobs and the Economy, the information arm of the California Business Roundtable, an advocacy organization made up of top executives of the state’s major employers.

The center says there were about 1.4 million jobs it considers part of the tech industry as of November 2023, about 76,000 more than the total tech jobs in the state in February 2020.

Levy said there is a “rebalancing” that’s going on in tech after all the hiring companies did during the pandemic, but that electric vehicles, cleantech infrastructure and artificial intelligence are “three areas (where he expects) massive amounts of money over the next five years.”

The budget Gov. Gavin Newsom proposed on Wednesday mentioned expectations for continued slower and more moderate job growth, which his staff also attributed to “reverting to historical trends as the labor market is now in the post-pandemic recovery period.”

In the past couple of years, fewer initial public offerings for companies in California — 195 in 2021 vs. 30 in 2023, according to data from PitchBook, which keeps track of capital markets — have meant fewer newly minted multimillionaire tech employees and less state revenue from income-tax withholding and capital gains, which is the profit investors make when they sell stock.

PitchBook’s 2024 venture capital outlook, though, said that if inflation continues to ease and the Federal Reserve does not raise interest rates, IPOs could make a comeback.

Yet Alamo, of the Legislative Analyst’s Office, cautioned that just as companies’ stock-price surges can result in a bump in revenue from withholding, “the same could happen on the opposite side.”

That’s one reason the Center for Jobs and the Economy has warned against the state’s heavy dependence on one region, and has said the state needs to regulate — and spend — less.

The tech-heavy Bay Area contributes more than 40% of personal income-tax revenue to the state, according to U.S. Bureau of Economic Analysis figures cited by the group. And, as Newsom’s budget also pointed out this week, the top 1% earners in the state, most of whose income comes from stock-based compensation and capital gains, contributed half of all personal income taxes to the state in 2021.

“The problem is it really disguises the true economy of California,” said Brooke Armour, president of the California Center for Jobs and the Economy. “When you have one small part of the economy that carries the state, that papers over the affordability crisis.”

https://calmatters.org/economy/2024/01/ca-tech-tax-withholding/

 

Google Lays Off Hundreds; Continues Silicon Valley Cutbacks

NY Times

Google laid off hundreds of workers in several divisions Wednesday night, seeking to lower expenses as it focuses on artificial intelligence and joining a wave of other companies cutting tech jobs this year.

The Silicon Valley company laid off employees in its core engineering division, as well as those working on the Google Assistant, a voice-operated virtual assistant, and in the hardware division that makes the Pixel phone, Fitbit watches and Nest thermostat, three people with knowledge of the cuts said.

Several hundred employees from the company’s core engineering organization lost corporate access and received notices that their roles were eliminated, two of the people said.

Google said that most of the hardware cuts affected a team working on augmented reality, technology that combines the real world with a digital overlay.

“We’ve had to make some difficult decisions about ongoing employment of some Google employees and we regret to inform you that your position is being eliminated,” the company told some workers in the division, according to the text of an email reviewed by The New York Times.

Google confirmed the Assistant cuts, earlier reported by Semafor, and the hardware layoffs, earlier reported by the blog 9to5Google.

“We’re responsibly investing in our company’s biggest priorities and the significant opportunities ahead,” a Google spokesman said in a statement. After cuts throughout the second half of 2023, “some teams are continuing to make these kinds of organizational changes, which include some role eliminations globally.”

The cuts continue a trend of tech layoffs, after large companies such as Google, Meta and Amazon laid off thousands of workers last year. Ten days into this year, more companies have announced job cuts. Earlier Wednesday, Amazon shed hundreds of workers from its Twitch streaming service, Prime Video and MGM studios. Xerox said this month that it would cut 15 percent of its 23,000-person staff, and the video game software provider Unity Software said it would eliminate 1,800 roles, or 25 percent of its work force.

At Google, Sundar Pichai, the chief executive, has pushed the company since July 2022 to sharpen its focus and to reduce expenses as global economic conditions deteriorated. In January 2023, Google shed 6 percent of its work force, or 12,000 people, in the largest layoffs that the company has conducted. Since then, executives at the company have said they would try to significantly reduce costs, as it focuses on the growing field of generative artificial intelligence.

Google, which had 182,000 employees as of Sept. 30, said the layoffs on Wednesday were part of a set of reorganizations that were made in the normal course of business.

https://www.nytimes.com/2024/01/11/technology/google-layoffs.html