For Clients & Friends of The Gualco Group, Inc.
IN THIS ISSUE – “I See Some Nuance”
MANAGING THE PUBLIC’S MONEY
- Newsom’s Heavy Lift – Tax Reform
- Public Housing Rehab Costs More Than New Homes…?
- Business Advocates for Cap-and-Trade Spending Review
- PG&E Bankruptcy: Wake-Up Call for Managing Climate Change Risks
UNIQUELY GOLDEN STATE
Capital News & Notes (CN&N) harvests California legislative and regulatory insights from dozens of media and official sources for the past week, tailored to your business and advocacy interests. Please feel free to forward.
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FOR THE WEEK ENDING JAN. 25, 2019
Gov. Gavin Newsom has the next four years to make his mark as California’s most powerful politician but significantly less time — more like 15 months — to broker a deal that would stave off a galactic clash of political heavyweights while also making public policy history.
The deal he has in mind would result in a sweeping overhaul of the state’s tax system. The incentive, he told reporters earlier this month, is a looming ballot measure that would raise commercial property taxes by a total of up to $11 billion a year. The so-called ”split roll” measure removes most businesses from protections created by Proposition 13, the landmark law that limits when property values are assessed and how much tax can be imposed.
“My desire is to use this as an exercise in bringing the parties together to see if we can compromise on a more comprehensive tax package,” Newsom said of the ballot measure.
It’s a bold idea, though not a new one. For decades, policy analysts have lamented the labyrinth of state tax rules as confusing and unfair. A manufacturer can be taxed when buying equipment and then again on the products made by that equipment. One homeowner pays sales tax when buying a pine tree for her yard but a neighbor buying an orange tree isn’t. Why? Trees that produce food for human consumption aren’t taxed.
Critics say California’s tax system is still based on an era in which goods, not services, dominated the economy. That provided incentive for the last big reform effort, a 2009 bipartisan commission that crafted detailed recommendations for a framework relying less on income taxes generated by Wall Street investments from the most wealthy. Its key recommendation was a “business net receipts tax,” a broad tax on economic activities at a relatively low rate.
But Democrats balked, believing it would shift more of the tax burden from the rich to the poor. The panel’s lengthy report was dead on arrival in the state Capitol, promptly put on a shelf where all but a few of its recommendations have gathered dust ever since.
The message ever since has been that broad tax reform simply isn’t doable. That was certainly the viewpoint of former Gov. Jerry Brown who, Newsom said this month, “had no interest in this, even at the peak of his power, influence and insight.”
The new governor also rejected the idea that California’s tax structure had to be one or the other — progressive in taxing those who can afford it but also volatile, or stable but regressive in who pays.
“I don’t see it that way,” Newsom said. “I see some nuance.”
Depending on which powerful groups open their war chests, the “split roll” ballot measure could easily attract $100 million or more in campaign spending. The ripple effects could last years. That Newsom can even try to broker a deal is thanks to a 2014 law that allows backers of an initiative to cancel their efforts after turning in signatures, used successfully to avoid ballot box battles over California’s minimum wage and privacy laws.
Newsom denied that his past support for rethinking commercial property tax rules would keep him from being an honest broker.
“My job, if we’re going to get the parties together, is not to predetermine the outcome,” he said.
To call that ambitious is an understatement. The two sides in the fight over taxation are suspicious of each other’s motives, and Newsom has already outlined a very expansive agenda without such an unprecedented effort. If he’s serious about being a peacemaker in the tax wars, he’ll need to begin his efforts sooner rather than later.
Commentary from CalMatters
Cascade Village sounds like a mountain hamlet, but it’s the name of a somewhat shabby block of 74 low-rent apartments in the southern edge of Sacramento.
A few days ago, Sacramento city officials announced that they will float a $25 million bond and loan the proceeds to the 55-year-old complex’s owner, Bayside Communities of Walnut Creek, to finance a $28 million rehabilitation project.
“It’s very important we preserve our affordable housing stock, or we could lose it,” Christine Weichert, the assistant director of Sacramento’s Housing and Redevelopment Agency, told the Sacramento Bee.
Residents of Cascade Village, whose rent payments are subsidized by the federal government, will be moved into temporary quarters while their apartments, about 750 square feet each, are spiffed up with remodeled kitchens and bathrooms and new appliances, plus handicapped access.
That’s good news for them, certainly, but it raises a serious issue: Why is it costing so bloody much?
That $28 million works out to $378,000 per unit, which happens to be somewhat higher than the median price of a single-family home in the Sacramento area that would be much larger than a Cascade Village unit, plus have a garage and a yard.
Other comparisons only deepen the mystery. A quick check of real estate listings reveals many refurbished, ready-to-occupy single-family homes in Cascade Village’s Avondale neighborhood, each well over 1,000 square feet, for about $250,000.
To put that in another context, Sacramento’s $25 million bond would fully purchase homes for 100 families – a third more than the 74 families now living in Cascade Village.
Or one could compare the price of rehabbing Cascade to other apartment complexes now for sale in Sacramento. Many are under $200,000 a unit and very nice ones in very nice neighborhoods can be had for about $250,000 a unit.
Still another comparison: The $378,000 per unit price tag for rehabbing Cascade Village is more than the state’s estimate of the average cost of building “affordable” housing from scratch.
This is not a new issue. Yours truly raised the same point several decades ago when the same agency spent more than $80,000 per room to convert two dilapidated downtown hotels into a “single room occupancy” complex for low-income adults. At the time, that was more than the average price of multi-room apartments for sale in Sacramento.
City officials figuratively shrugged their shoulders when queried about the high cost of the Shasta/Argus hotel project on 10th Street a couple of blocks from the Capitol, saying that it was just what it cost to comply with all of the red tape.
It would have made more sense for Sacramento’s housing agency to buy existing apartment houses then and it would make more sense for Sacramento to do the same now, or even buy single-family homes for rental to Cascade Village tenants.
But Sacramento is not an isolated case. Throughout the state, in the name of building housing for low-income families, officials are spending huge amounts of money that’s not buying very much.
California has a deep housing crisis that would take many billions of dollars to resolve. But that task is made immeasurably more difficult when money is winding up somewhere other than in actually producing needed housing and maintaining the existing housing stock.
Gov. Gavin Newsom says he’s serious about confronting the housing dilemma. He should start by finding out why it’s costing us so much to buy so little.
Commentary from California Chamber of Commerce
California produces just 1 percent of atmospheric carbon emissions, yet global leaders and activists care about California regulations. Why is this?
It’s the same reason that California politicos insist on our unique climate regulations. Governors and legislators–here and globally–count on California’s leadership to translate into solutions applicable around the world. If it can work in California, then maybe it can transform global climate policy.
Govs. Jerry Brown and Arnold Schwarzenegger staked their climate policies on the belief that a cost-effective and gradual approach will not upset consumers, destabilize markets or shock voters, but will reduce greenhouse gases released to the atmosphere consistent with projected recommendations for global carbon emission reductions.
This has been the guiding principle of California’s go-it-alone approach. Otherwise, we are simply volunteering our economy and lifestyles for underperformance and discomfort.
The Legislature memorialized this approach in 2017 when it adopted the cap-and-trade system as the state’s central approach to greenhouse gas regulation, rejecting specific command-and-control mandates.
The Legislature directed the California Air Resources Board to “avoid adverse impacts on households, businesses and the state’s economy” and consider the “potential for environmental and economic leakage.”
Right policy, but the Legislature will spend the taxes generated by cap-and-trade on programs that may or may not affect taxpayers’ daily lives.
Rather than allowing regulators to hide the true costs from the public by rolling cap-and-trade taxes into fuel and utility bills, the Legislature should review the goals and impacts of cap-and-trade, and how the increased revenue from motorists and ratepayers will be spent.
For example, the Legislature insisted that cap-and-trade include a price ceiling to prevent shocks to consumers and the loss of economic activity from California to other states.
Setting the price ceiling is tricky because it requires balancing the state’s interests in containing costs for businesses and households with the certainty of reaching targeted greenhouse gas emission levels.
Nonetheless, the Air Resources Board has adopted an aggressive regulation, baking in higher consumer and industry costs in the hope of squeezing out more emission reductions. This approach not only flouts the express will of the Legislature, but undermines the moral authority for engaging in state-level greenhouse gas regulation.
Instead of benchmarking a price ceiling and letting it rise with inflation, the California Air Resources Board has proposed compounding each annual increase by another 5 percent. The effect would be that by 2030, the price ceiling would increase by an additional 60 percent.
The difference in 2018 dollars is a 2030 price ceiling of about $100 per ton of greenhouse emissions, compared to $60 without this adder.
A $40 difference is the equivalent of a 36-cent increase in a gallon of gasoline and double-digit increases in natural gas and electricity rates.
These increases are on top of the costs already assumed under an unadorned cap-and-trade regime, which already anticipates, by 2030, adding more than 50 cents a gallon to gasoline, and hiking utility bills by more than 25 percent.
These will create unavoidable costs to all Californians, especially residents who must commute long distances for work or school, and Californians who live in the interior of the state where temperatures are more extreme. As usual, low-income Californians will pay a larger portion of their income for higher energy prices.
Economic researchers have found that higher compliance costs for industry are directly proportional to higher emission allowance prices. This means that the incentive to move economic activity (and emissions) outside of California will increase along with allowance prices. Limiting allowance prices will limit the flight of jobs and excess emissions.
Cap-and-trade is clearly the superior policy choice to control carbon emissions, costing a third to a half as much as command-and-control policies. But how state officials implement this new pricing regime matters.
It isn’t leadership if nobody follows.
Air regulators and their masters in the legislative and executive branches cannot inspire international replication of these ideas unless they design regulations to contain costs, enhance competition, and minimize pain to ordinary Californians.
Allan Zaremberg is president and chief executive officer of the California Chamber of Commerce, firstname.lastname@example.org. He wrote this commentary for CALmatters.
PG&E Bankruptcy: Wake-Up Call for Managing Climate Change Risks
Wall Street Journal excerpt, Jan. 20
The probable PG&E bankruptcy could be a wake-up call for corporations, forcing them to expand how they think about climate-related risks, management consultants and other experts said.
California’s largest utility was overwhelmed by rapid climatic changes as a prolonged drought dried out much of the state and decimated forests, dramatically increasing the risk of fire. On Monday, PG&E said it planned to file for Chapter 11 protection by month’s end, citing an estimated $30 billion in liabilities and 750 lawsuits from wildfires potentially caused by its power lines.
The company’s fall has been fast and steep. In October, its market value was $25 billion. This week, it was removed from the S&P 500 as its value tumbled below $4 billion and its shares fell to their lowest level since at least 1972.
Previously, companies mainly worried over risks from new governmental regulations related to climate change, said Christophe Brognaux, a managing director at Boston Consulting Group. The PG&E case makes clear that companies also have to worry about sudden, and potentially unexpected, impacts to their core assets and liabilities, he added.
“Physical risks have only recently manifested themselves. This is a fairly new development,” said Bruce Usher, a professor at Columbia University’s business school who teaches a course on climate and finance. “If you are not already considering extreme weather and other climatic events as one of many risk factors affecting business today, you are not doing your job.”
J. Bennett Johnston, a former Democratic U.S. senator from Louisiana who has served on ChevronCorp.’s board of directors, said the potential for climate change to damage company assets and cause a mushrooming of liabilities is an emerging enterprise risk.
“The business community, by and large, has gotten the message,” he said. “You have to be pretty stupid not to see we’re in the midst of a climate crisis and it’s getting worse.”
Climate wasn’t the only factor that is pushing PG&E to a likely bankruptcy. State regulations also played a role. PG&E is required to provide electrical service to the thousands of people moving annually in the state’s forested areas. Moreover, an unusual California state law, known as “inverse condemnation,” made PG&E liable if its equipment started a fire, regardless of whether it was negligent.
PG&E capital spending plans are overseen by state regulators, who pressed the company to spend more on tree trimming but not, until a few months ago, on other fire-prevention measures such as early-warning weather stations and insulated wires.
PG&E’s former chief executive, Geisha Williams, told an investor conference in January 2018 that policies such as inverse condemnation could undermine the financial health of utilities and make them unable to carry out aggressive efforts to combat carbon emissions. “This policy isn’t affordable, and it isn’t sustainable. Ultimately, it carries grave implications for the industry’s financial health and our ability to attract the investment the state needs to fulfill its climate goals,” she said.
PG&E announced on Jan. 13 that Ms. Williams was stepping down as CEO as the political and financial fallout from the wildfires continued to grow.
In less than a decade, PG&E, which serves 16 million customers, saw the risk of catastrophic wildfires multiply greatly in its vast service area, which stretches from the Oregon border south to Bakersfield. Weather patterns that had been typical for Southern California—such as the hot, dry Santa Ana winds that sweep across the region in autumn, stoking fires—were now appearing hundreds of miles to the north.
“The Santa Ana fire condition is now a Northern California fire reality,” said Ken Pimlott, who retired last month as director of the California Department of Forestry and Fire Protection, or Cal Fire. “In a perfect world, we would like to see all [of PG&E’s] equipment upgraded, all of the vegetation removed from their lines. But I don’t know anybody overnight who is going to catch up.”
PG&E has long accepted the science of climate change. It is one of several California utilities that, with prodding from state politicians, has been rapidly shifting to a cleaner energy future. It had $34.5 billion in long-term renewable energy contracts, according to a federal filing.
“Here was PG&E, the most ‘woke’ of utilities in terms of climate change,” said John Geesman, a former executive director and then member of the California Energy Commission. “Shouldn’t they have been adapting to climate change more rapidly than others?”
Other California utilities, such as Sempra Energy’s San Diego Gas & Electric, began investing years ago in technology to shut off certain power lines during high fire-risk periods as well as changing the layout of their wires to lower the chance of inadvertently sparking fires during wind storms.
Extreme weather has led to a few bankruptcies in the past. In 2005, Entergy Inc. placed its New Orleans unit into bankruptcy after a liquidity crisis caused by the flooding that followed Hurricane Katrina. That was a much smaller utility and the flooding was a largely man-made problem of neglected levees and other infrastructure designed to protect the city.
Other companies have been severely impacted by climate regulations. The market value of German utilities E.ON SE and RWEAG plummeted in the early part of this decade as heavy government subsidies for renewable energy undermined their business models. More recently, General Electric Co. miscalculated how a global renewable energy push would reduce demand for giant natural-gas turbines, one of the many woes that have battered the conglomerate.
The global business community is recognizing the risks it faces from climate change. This week, a World Economic Forum survey of global business and thought leaders found extreme weather and other climate-related issues as top risks both by likelihood and impact.
Companies and their risk officers should be more aware that climate change could lead to unexpected and rapid changes, said Paula DiPerna, a senior advisor to CDP, an international nonprofit organization that presses companies to disclose their environmental impact.
“There is a general sense among policy makers, the general public and corporations that climate change is going to happen slowly,” she said. “On the contrary, climate change is an extremely unpredictable series of events. And in the face of that, companies should be very prepared.”
California Republicans suffered yet another loss Thursday when one of their Assembly members defected to the Democrats.
Democrats celebrated with a victorious news conference Thursday morning, grinning and cheering as Assemblyman Brian Maienschein of San Diego announced his decision.
“As the Republican Party has drifted further right, I and my votes have shifted to the left,” he said. “I can either keep fighting to change the Republican party, or I can fight for my constituents.”
His party switch gives Democrats 61 of 80 seats in the Legislature’s lower chamber.
Maienschein said he disagreed with the GOP’s direction under President Donald Trump, but the lawmaker said the Republican president wasn’t the only reason he decided to leave the party.
“I don’t even know where to begin,” he said when asked about Trump. “His conduct has been very offensive really since the beginning … his conduct was reprehensible, immature, counterproductive to what I believed was best for the country.”
Being the single father of two girls has shaped his values, he said, citing his support for gun control, organized labor and abortion rights.
Assembly Republican leader Marie Waldron called Maienschein a “turncoat” in response.
“While Brian is enjoying the perks of his new status as a member of the Democrat majority in the Legislature, we Republicans will continue to stand for the people of California,” she said in a statement.
California Republicans suffered significant losses in the Legislature and in Congress in the 2018 midterms. They lose seven seats in the U.S. House of Representatives, and Democrats gained supermajority status in both houses of the Legislature. Maienschein leaving reduces their power even more.
“On behalf of the 61 members of the Democratic caucus, it is my honor to welcome Brian Maienschein to the Democratic party,” Assembly Speaker Anthony Rendon, D-Lakewood, said at the news conference, while his colleagues behind him chuckled.
Maienschein’s move comes a week after Senate Republicans signaled a shift to the right by selecting Sen. Shannon Grove, an outspoken conservative from Bakersfield, as their new leader. Grove earned a reputation as a staunch conservative when she served in the Assembly, at one point drawing criticism for remarks linking drought to abortion legislation.
You probably haven’t heard of Alfred Eichler. But the architect, who was raised in San Francisco early last century, helped create many of the buildings that have shaped everyday life for Californians.
During his time at the California Department of Public Works, which stretched from 1925 to the 1960s, he designed schools, hospitals and parks. Some of his most famous projects include San Quentin and Folsom state prisons, as well as the Tower Bridge in Sacramento.
The secretary of state’s office recently posted a new digital exhibit of his images — paintings, sketches and watercolors that collectively give you a sense of California in another era.
The structures, some of which might look prosaic if you drove past today, are cast in a new light.
You can browse the exhibit: