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IN THIS ISSUE – “Halfway through the current year, we have yet to see clear signs of such a rebound”
Legislative Analyst on the Governor’s economic recovery prediction
- State Budget “Difficult Decisions”: Legislative Analyst Sees “Spending Cuts and Revenue Increases”
- Legislature to Winnow $100+ Billion in Bonds
- Newsom Intercepts Youth Football Ban; Eyes His National Standing
- New Poll Finds Most Voters Have Mixed Feelings About Newsom
- State Senate Leader Expected to Run for Governor
- Judge Rules Against Delta Tunnel Funding Plan
- A California River Ran Dry…And Few Noticed
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. 19, 2024
State Budget “Difficult Decisions”: Legislative Analyst Sees “Spending Cuts and Revenue Increases”
CalMatters
Gov. Gavin Newsom’s recipe for digging the state out of a multi-billion dollar budget hole has “strengths and weaknesses” while his revenue projections are “plausible, but optimistic,” the nonpartisan analyst’s office representing the Legislature said today.
The size of the budget deficit is up for debate: Newsom put the number at $38 billion while the analyst’s office says Newsom’s own math suggests the hole is deeper — $58 billion — for the 2024-25 fiscal year, which starts July 1.
Worse, both the governor and Legislative Analyst’s Office predict large deficits of about $30 billion annually through 2027-28.
But while California has large reserves and a number of spending plans that don’t affect the state’s core social and public services, “future deficits are likely to require more difficult decisions, like ongoing spending cuts and revenue increases,” the analyst’s office said in its initial review of Newsom’s $291.5 billion spending plan.
Newsom so far has balked at raising taxes on the super wealthy, bristling at the suggestion during his budget press conference on Wednesday. His fellow Democrats in the Legislature are split.
One progressive lawmaker sought again to pass a wealth tax for Californians with net assets of at least $50 million, but a committee chairperson shelved that proposal.
In a statement responding to the analyst’s report, a Newsom spokesperson said that it “outlines one perspective on California’s budget shortfall and revenue projections.”
“The state can produce a prudent, balanced budget that preserves key investments for education, public safety, addressing homelessness, mental health care reform, climate action, and other priorities without a ‘wealth tax’ or any other broad-based revenue increases,” said Brandon Richards, the spokesperson.
Fueling the Legislative Analyst’s Office’s worry is disagreement with Newsom over just how much more tax revenue the state can collect. Last fiscal year state tax collections fell 20%. Newsom’s 2024-25 proposed budget projects an 8% increase in 2023-24, the current budget year.
“Halfway through the current year, we are yet to see clear signs of such a rebound,” the analyst’s office wrote. And while the stock market is experiencing a rebound — a vital source for state revenues — it can just as quickly reserve course.
The analyst’s office writes Newsom is right to pull $13 billion from the state’s reserves. Doing so leaves about $11 billion in California’s rainy day fund; leaving a sizable chunk of cash in reserves is “prudent given the continued budget problems likely for future years,” the office wrote.
For Newsom to legally raid the rainy day fund, he’d have to declare a “budget emergency” — a move the analyst’s office said would be justified.
However, Newsom’s plan to also pull $900 million from another reserve account may not be consistent with legislative intent, the office wrote.
This is a fund meant to support health insurance and cash aid programs for low-income residents. The office wrote that “economic conditions likely do not yet match what the Legislature envisioned when it created the reserve.”
The office recommends that Newsom and Legislature make more cuts to existing short-term programs that aren’t part of the state’s core, ongoing educational or social service commitments. Doing so may mean pulling less money from reserves to have more emergency cash on hand for future deficits.
The swirl of competing assessments and early prognostications is par for the course for a budget process that lasts at least through June and often spills into September.
The analyst’s office, the state’s main check on the governor’s state-spending math, plans several more detailed reviews of Newsom’s plan as legislative budget committees hold dozens of public hearings assessing the governor’s proposals.
Newsom will release a revision to his 2024-25 spending plan in May, after the state sees just how much it collected from taxpayers in April to better forecast its revenue picture. By early June, the lawmakers will propose their own budget for 2024-25, setting in motion a furious few weeks of negotiations between Newsom and the Legislature to finalize a budget plan by around June 27.
Legislative Republicans have criticized Newsom’s plan as based on gimmicks and accounting tricks. Sen. Roger Niello, vice chairperson of the Senate budget committee, posted on social media that he puts “much more faith in this analysis than the Governor’s proposal.”
Leaders of the Democratic supermajority, who can pass a budget without any Republican votes, have been generally supportive of the Democratic governor’s proposals, however.
Even though Newsom said his plan solves a $38 billion budget shortfall for the coming year, the analyst’s office said the governor’s proposal actually covers closer to $58 billion, underscoring the difficulty in arriving at a precise estimate of how deeply buried the state is fiscally.
A major difference between Newsom’s numbers and those of the analyst’s office? The governor’s proposal didn’t count $15 billion in funding reductions to K-12 education and community colleges as actual reductions in his $38 billion tally, the analyst’s office wrote.
Factor in some other changes in spending in Newsom’s proposal that should have been considered part of the deficit picture, and the analyst’s office says Newsom’s team is dealing with a $58 billion budget problem. This revises the analyst’s office’s December estimate of California’s fiscal woes, when it said the state had to shore up a $68 billion budget hole.
What does this mean for students, teachers and parents? That’s hard to assess. State budgets reflect a three-year window. The analyst’s office said most of the education-related reductions in Newsom’s plan from this week apply to the 2022-23 year — $8 billion.
But the analyst’s office said Newsom’s team “has not explained how its proposal could achieve $8 billion in savings, given the administration also indicates the proposal would not impact school and community college budgets,” it wrote. “The Legislature will need significantly more information before it can assess the proposal — including its potential effects on the state budget after 2024‑25.”
Legislature to Winnow $100+ Billion in Bonds
Yahoo News
California may be on the verge of a potential borrowing boom as Democratic state lawmakers draft more than $100 billion of bond proposals to fill funding gaps for several key legislative priorities.
The proposals include $15 billion of debt to make the state more resilient to climate change, $14 billion to modernize schools and $10 billion for affordable housing. Governor Gavin Newsom last year approved a $6.38 billion bond measure for voters to consider on the March ballot which would fund roughly 10,000 new mental health and substance abuse treatment slots.
Although California doesn’t cap how much money the state can borrow, Newsom’s administration has estimated the state can, at most, take on another $26 billion of bonds without pushing the ratio of annual debt costs compared to general fund revenue high enough to cause credit concerns.
California’s debt-service ratio is already expected to rise to 3.2% by fiscal year 2026-2027 from about 2.8% now, according to estimates from the state’s finance department.
“Our expectation is not that they would issue so much debt that it changes their credit rating,” said Karen Krop, senior director of US public finance at Fitch Ratings.
California is rated Aa2 by Moodys Investors Service, AA- by S&P Ratings and AA by Fitch.
The state had about $78.5 billion of general obligation and lease revenue bond debt outstanding as of June 30 with another $31.6 billion approved but not yet sold, according state figures.
Though the bond measures currently under consideration by the legislature total more than $100 billion, some of the proposals overlap and are likely to be combined while others won’t make it on the ballot at all.
In fact, despite lawmakers in the last legislative session introducing bills totaling more than $114 billion of borrowing, only one was approved and that was the mental health measure.
“We’re not going to put $100 billion worth of bonds on the ballot,” said California Senator Ben Allen, a Democrat who who co-sponsored a climate resiliency bond measure currently making its way through the legislature. “We’re not gonna see three different climate bonds on the ballot.”
An index of California bonds showed yields trading below those of top-rated debt after Newsom earlier this month projected a $37.9 billion deficit in his budget proposal, a gap that is significantly smaller than had been estimated by the state’s fiscal analyst. The yield on California general-obligation bond debt due in 10 years stands at 2.3%, compared to 0.7% in 2021, according to Bloomberg BVAL.
When bonds are approved all the debt isn’t sold at once. The state treasurer borrows in piecemeal over a number of years as the funds are needed. During the last five fiscal years, the state has sold an average of $7.3 billion of general obligation bonds annually, according Treasurer Fiona Ma’s office.
Whenever the tax-exempt debt is sold, it’s expected to be greeted with strong demand by wealthy investors looking to shield some of their income from the state’s high taxes, according to Dora Lee, director of research at Belle Haven Investments.
“Even though the debt-service ratio is expected to increase, it remains manageable especially when you take into consideration the state’s decision to use prior surpluses to pay down pensions and address other long term obligations,” Lee said.
Newsom Intercepts Youth Football Ban; Eyes His National Standing
Politico’s California Playbook e-newsletter
A hotly contested bill meant to protect California kids from long-term brain injuries got a big downvote this week from Gov. Gavin Newsom.
The governor in a statement to Politico vowed to veto a bill banning tackle football for players under the age of 12. The legislation, authored by Sacramento Democrat Kevin McCarty, hadn’t even gone up for a floor vote yet, but was already the subject of fierce debate in the Capitol.
Newsom, in his statement, said he is deeply concerned about the health and safety of young athletes, but that “an outright ban is not the answer.”
“My administration will work with the Legislature and the bill’s author to strengthen safety in youth football — while ensuring parents have the freedom to decide which sports are most appropriate for their children,” the statement said.
Newsom’s decision to weigh in on the football legislation speaks to its potential as a culture war issue, our colleagues Eric He, Rachel Bluthand Christopher Cadelago write.
Critics, including Democrats in the state, had moved to characterize the proposal as unnecessary government overreach and another example of politicians thinking they know better than parents.
Newsom has been sensitive to headline-grabbing proposals that he believes cast the state as out-of-touch and put Democrats in a tough position heading into the election year.
His vow to veto McCarty’s bill was the second time in a week the governor has shut down a measure in its infancy. Newsom also poured cold water on Assemblymember Alex Lee’s wealth tax last week, hoping to fend off unsavory headlines about California liberalism run amuck ahead of an unexpected hearing on the bill.
State Sen. Angelique Ashby — who is backing McCarty’s opponent in the Sacramento mayoral election — posted on X that the bill was “overly presumptive” and “ignores safety protocols already in place.”
The wealth tax, while always a longshot, stalled in its first committee hearing following the governor’s comments. The question now is whether the football bill will move forward in spite of Newsom’s veto threat, or shrivel under the heat of his scrutiny.
New Poll Finds Most Voters Have Mixed Feelings About Newsom
Sacramento Bee & Institute of Governmental Studies @ UC Berkeley
Most Californians see the state headed in the wrong direction, and voters have mixed feelings about Gov. Gavin Newsom’s leadership, a new poll released Thursday shows. The Berkeley Institute of Governmental Studies poll conducted earlier this month found 47% of registered California voters disapprove of the governor’s leadership, while 46% approve.
That’s up slightly from late October, when 44% of voters approved of Newsom’s performance and 49% disapproved. April 2021 was the last time more than half of voters approved of the governor’s leadership.
At that time, 52% of surveyed voters favored his performance, while 43% disapproved. He saw his highest approval ratings in September 2020, during the height of the COVID-19 pandemic. Sixty-four percent of surveyed voters supported Newsom’s leadership then, while 36% disapproved of his performance.
Newsom has been trying to establish himself as a prominent national Democratic voice, possibly with the hope of being a presidential candidate in the future. But that sort of stature first comes with strong support in his home state.
A Newsom spokesman had not provided a comment about the poll by publication time. The governor appears to be wounded politically by voter anxiety over the state of the state.
The poll found one-third of those surveyed saw California moving in the right direction, while 57% saw it moving in the wrong direction.
Berkeley IGS noted the state approval ratings are still higher than they were when California last experienced financial difficulties in 2008-2011, when 69% to 80% of voters believed conditions were on the wrong track.
But they’re down from 11 months ago, when 36% of voters saw the state moving in the right direction. Forty-six percent of voters were positive about the state’s trajectory in May 2021.
Newsom faces a budget crisis, and the poll indicates 50% of voters surveyed believe California’s spending shortfall is a “extremely serious,” while 37% see it as “somewhat serious.”
The organization surveyed nearly 8,200 registered voters from Jan. 4-8, before the governor released his budget on Jan. 10. The poll has a 1.5% margin of error.
About 51% of surveyed voters said they want state leaders respond to the budget gap with spending cuts, and 35% would like to see them dip into California’s rainy-day fund. Only 13% are in favor of tax increases.
https://www.sacbee.com/news/politics-government/capitol-alert/article284398415.html#storylink=cpy
Poll:
https://escholarship.org/uc/item/46g7q3hk
State Senate Leader Expected to Run for Governor
Sacramento Bee
State Senate President Pro Tem Toni Atkins, D-San Diego, is expected to announce today that she will run for California governor in the 2026 election.
Atkins on Thursday filed paperwork stating her intent to join the race, and her campaign released plans for a “major announcement” in San Diego on Friday.
Atkins will join Lt. Gov. Eleni Kounalakis and State Superintendent of Instruction Tony Thurmond in the campaign to replace Gov. Gavin Newsom, who is serving his second and final term. Attorney General Rob Bonta has also said he’s considering a gubernatorial bid.
Atkins was elected to the state Senate in 2016, and has served as Senate Pro Tem since 2018. She is the first openly gay person to serve as the head of the Senate, and the first woman.
Before that, she was a member of the state Assembly and the first openly gay Assembly Speaker when she held the position from 2014-2016. She served on the San Diego City Council from 2000 to 2008, after moving to San Diego in the 1980s. She is originally from southwestern Virginia.
If elected, Atkins would be California’s first LGBTQ governor — but she’s already made history for that role, even if only on a technicality. In 2014, as Speaker of the Assembly, Atkins served as acting governor for 10 hours when then-Gov. Jerry Brown and then-Lt. Gov Newsom were both out of the state, as well as then-Senate Pro Tempore and current Sacramento Mayor Darrell Steinberg.
This made her the first LGBTQ person in the governor’s seat. She made history again last summer when she signed three bills into law as acting governor — the first openly LGBTQ person to do so — while Newsom and Kounalakis were both outside state lines.
Judge Rules Against Delta Tunnel Funding Plan
Associated Press
A California judge says a nearly 65-year-old law does not give the state permission to borrow the billions of dollars it would need to build a large water project, a decision that could threaten a key source of funding for a controversial plan backed by Gov. Gavin Newsom to build a massive underground tunnel that would reroute a big part of the state’s supply.
The Department of Water Resources approved a resolution in 2020 to borrow money for an unspecified “Delta Program.” The agency said it could borrow this money without asking for permission from the state Legislature because a law, last amended in 1959, says it can make changes to a portion of the State Water Project — a complex system of dams and canals that supplies water to about 27 million people.
But environmental groups and several Central Valley counties say that resolution was too broad. They say what the agency wants to build is a tunnel that would be outside the scope of the law. DWR’s latest proposal is to construct a tunnel about 45 miles (72 kilometers) long and 36 feet (10.9 meters) wide, able to carry 161 million gallons of water per minute out of the Central Valley and to the densely populated southern portion of the state.
On Tuesday, after years of lengthy court proceedings, Sacramento Superior Court Judge Kenneth C. Mennemeier agreed with the counties. He said the state’s definition of the project “leaves the door open” for the state to build whatever it wants, which he said is not allowed under the law.
“Although the Legislature plainly delegated broad authority to DWR, it did not delegate infinite authority,” Mennemeier wrote.
Mennemeier emphasized that his ruling was “quite narrow,” only applying to the Newsom administration’s unspecified “Delta Program” as defined in the DWR resolution.
Thomas Keeling, an attorney who represents six counties and various public water agencies, said it’s clear to him that the purpose of the bond resolutions approved by the Newsom administration in 2020 was to provide financing for the Delta tunnel project. He agreed the ruling is narrow because it doesn’t prevent the administration from finding other ways to pay for the project.
“That said, it would be a mistake to downplay the significance of this decision or to understate the obstacles that lie ahead for DWR in any subsequent effort to finance this taxpayer boondoggle,” he said.
Environmental groups and counties that oppose the project cheered the ruling as a blow to the tunnel’s financing. The project’s price tag was once put at $16 billion, but that was an old estimate for a previous plan. The state has not released updated estimates.
The DWR downplayed the significance of the ruling, although it said it disagreed with the decision and is considering an appeal. Margaret Mohr, deputy director of communications for the department, said the judge essentially rejected the broadness of the definition of the “Delta Program” and did not make a ruling specific to the tunnel.
“The judge has not said that DWR doesn’t have the authority to build the project or borrow money to pay for it,” Mohr said. Mohr added that “the Delta Conveyance Project is a critical part of California’s strategy to ensure a reliable water supply for millions of Californians — modernizing our water infrastructure to protect against the impacts of earthquakes, climate change, and more.”
The tunnel has been proposed — and disputed — for many years, earning widespread opposition from Central Valley communities that say it would harm their economies and the Sacramento-San Joaquin River Delta’s fragile ecosystem. The Newsom administration says the tunnel is a necessary upgrade of aging infrastructure that would help the state capture more water during intense rainstorms.
It’s not clear what other options the Department of Water Resources could pursue to pay for the project. Asking for approval from voters or the state Legislature would be difficult.
Just last year, lawmakers insisted on exempting the tunnel project from a law Newsom signed aimed at speeding up how long it takes to build large infrastructure projects.
Newsom, however, has been steadfast in his support for the project. Last month, his administration completed a key environmental review — the final step of a lengthy state regulatory process. But the project still must complete a federal environmental review and obtain various state and federal permits — a process that is expected to last until 2026.
A California River Ran Dry…And Few Noticed
NY Times
During California’s most recent drought, officials went to great lengths to safeguard water supplies, issuing emergency regulations to curb use by thousands of farms, utilities and irrigation districts.
It still wasn’t enough to prevent growers in the state’s agricultural heartland from draining dry several miles of a major river for almost four months in 2022, in a previously unreported episode that raises questions about California’s ability to monitor and manage its water amid worsening droughts.
It’s not uncommon, during dry spells, for farmers and other water users in California to draw streams down to a trickle in places. But the severity and duration of the 2022 decline of the river in this case, the Merced, where one stream gauge showed zero water moving past it nearly every day from June to early October, stood out even to experts.
“I was very surprised to see a river of this size without water,” said Jon Ambrose, a biologist with the National Oceanic and Atmospheric Administration’s fisheries service who visited the Merced’s parched riverbed that August. “This just isn’t something we see. This isn’t something that should be seen as normal.”
The Merced River originates in Yosemite National Park. It rushes through glacier-carved canyons and winds for about 60 miles through the Central Valley before pouring into the San Joaquin River, which nourishes the valley’s southern half.
California’s main water regulator, the State Water Resources Control Board, learned of the lower Merced’s bone-dry conditions in late October 2022, only after they had started to ease, Erik Ekdahl, the board’s deputy director in charge of water rights, said in an interview this week.
In investigating the matter, the board has so far found that the river most likely went dry as a result of people taking water legally, Mr. Ekdahl said. In other words, local farmers do not appear to have violated the board’s drought controls that year by slurping up every last drop.
“That is where the layperson would immediately go, ‘Well, how is this allowed to happen?’” Mr. Ekdahl said. The reason, he said, is that in droughts, California’s water system is geared more toward protecting water users’ rights than helping the environment. In general, “you can take the water that you’re authorized to take under your permit or license until you’re expressly told not to.”
California became an agricultural powerhouse by taming its rivers and parceling out their flows. But as the warming climate intensifies the state’s cycles of flood and drought, its system for apportioning water is under strain.
The state grants a high degree of privilege to senior users, or those who have been taking and using the rivers’ flows for a long time. This has helped encourage large investments in irrigation.
Now, though, virtually every drop has been claimed for one purpose or another, and officials are finding it increasingly challenging to manage supplies and protect the environment without harming the interests of long-established growers and other users.
California was in its third-straight year of drought in the summer of 2022 when staff members with NOAA Fisheries and the state’s Department of Fish and Wildlife found miles of the lower Merced severely dry.
The upstream part of the river was still flowing robustly, stream gauges showed. But by the time it neared the confluence with the San Joaquin, it had become a series of intermittent pools, imperiling threatened fish species including steelhead and Chinook salmon.
According to state data, the water users on the lower Merced include dairies, almond growers and vineyards that are part of E. & J. Gallo Winery, which calls itself the world’s largest family-owned wine and spirits company. A Gallo spokeswoman declined to comment.
California’s drought controls in 2022 cut supplies to many water users in the San Joaquin watershed, but not all of them. Many of the most senior users, or those claiming to have been using water for the longest time, weren’t cut off.
Even if the state water board had learned of the Merced’s withered conditions earlier that summer, it might still have taken months to enact new regulations to protect the river, Mr. Ekdahl, the board official, said. Imposing new rules to stop it from going dry in the future would also be a long and involved process, he said.