For Clients & Friends of The Gualco Group, Inc.
IN THIS ISSUE – “Tightening Our Belt Across the Board”
- California’s Fiscal Fitness Budget Plan: Billions in Cuts & Hopes for Federal Aid
- Capitol $1.2-Billion Makeover…Should It Be Paused?
- Lost Jobs…Take Your Pick: “Jaw-Dropping” or “Skyrocketing”
- COVID Comeback – the Car
- Federal Judge Blocks US Plan to Increase Delta Water Pumping
- Shrinkage for Biggest Reservoir in 40 Years
FOR THE WEEK ENDING MAY 15, 2020
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.
READ ALL ABOUT IT!!
Gov. Gavin Newsom on Thursday proposed a slimmed-down $203 billion state budget that relies on help from Senate Republicans and President Donald Trump to avoid $14 billion in trigger cuts, with the state facing its first deficit in eight years after being blindsided by the coronavirus pandemic.
The trigger cuts go back to the last recessionary playbook, proposing significant reductions in everything from schools to health care and the safety net.
Newsom squarely pinned the future of those programs on Trump: “These are cuts than can be triggered and eliminated with stroke of a pen,” he said, referring to the president.
Trump and Senate Majority Leader Mitch McConnell have suggested that a federal aid package for states and cities may involve Democrats approving Covid-19 liability waivers for businesses, and McConnell previously said he would not support “blue state bailouts.” Federal aid for states has become a partisan matter, with Republicans in Congress increasingly blaming Democratic-led states for their budget woes, while governors insist their problems are pandemic-driven.
Newsom said he had confidence that House Speaker Nancy Pelosi would come through for her home state, saying “she delivers.” California leaders need to know before July 1 whether federal aid is coming to avert the trigger cuts, Finance Director Keely Martin Bosler said.
The Democratic governor has projected a $54.3 billion deficit over the next 14 months. To help bridge that gap, the governor’s budget would also cancel spending expansions he proposed in January, rely on $8.8 billion in rainy day reserves and draw upon $8.3 billion in already approved federal funds.
He would also turn to $10.4 billion in internal borrowing, transfers and deferrals, a method that his predecessor, Gov. Jerry Brown, eschewed and reversed over the course of several years.
“We’re tightening our belt across the board,” Newsom said, later calling California “the State of constant re-imagination.”
While Newsom’s budget does not contain broad-based tax increases, the governor proposed a tax hike that would largely affect businesses by temporarily suspending net operating losses and limiting tax credits to raise $4.4 billion in the next fiscal year.
Four months ago, Newsom proposed a $222 billion overall spending plan fueled by the prospect of record state revenues. The general fund budget he released Thursday would be the state’s smallest since 2017-18.
The governor’s budget would eliminate some programs that he proposed in January. Among the most notable: Newsom proposed saving nearly $700 million by delaying his Medi-Cal overhaul that would have had the program find housing for homeless people and offer meals for elderly residents. In another pullback, Newsom proposed withdrawing a Medi-Cal expansion to older undocumented immigrants, which would save $112 million.
“I am extremely disappointed that health for seniors in California will not be a priority in this newly revised budget,” said state Sen. María Elena Durazo (D-Los Angeles) in a statement. “By failing to expand Medi-Cal for seniors, we are jeopardizing not only their health, but the health of all. Especially during a pandemic, we should be expanding medical care to those most at risk, regardless of immigration status.”
Newsom said schools face a $15 billion loss, including $6.5 billion that could be preserved with federal aid. He plans to help schools cover their shortfall with $4.4 billion in already approved federal stimulus aid, as well as several other measures, such as allowing districts to borrow against future state revenues.
With historic unemployment and huge numbers of people who have lost their job benefits, California also expects to see its Medicaid caseload swell by 2 million people, to a maximum of 14.5 million residents in July — a staggering 37 percent of the state’s population. The governor has proposed diverting $1.2 billion in tobacco tax revenues to help pay for their health care if the federal government does not provide aid. That has angered the state’s doctors lobby, as physicians and other providers would lose supplemental rate hikes while having to serve more Medi-Cal patients under that proposal.
Sen. Holly Mitchell (D-Los Angeles), chairwoman of the Senate Budget Committee, projected optimism about getting federal help. She said that spreading trigger cuts across an array of areas would mobilize interest groups to put pressure on Congress.
“The programs he’s attached to the trigger will hopefully create a wonderful advocacy opportunity,” she said.
But Assemblyman Phil Ting (D-San Francisco), chairman of the Assembly Budget Committee, said Thursday the state should consider another fallback plan to avoid trigger cuts if the federal government does not approve an aid package. That could include other forms of revenue, and he didn’t rule out broad-based taxes.
“I think you have to consider everything,” Ting said.
Republican lawmakers, who have chafed at the increasing length of Newsom’s stay-at-home restrictions, emphasized a need to reopen the economy to help replenish state coffers in addition to helping residents get on their feet. “The best way to fix this budget crisis is by helping people get back to work safely,” said Assembly Republican Leader Marie Waldron.
And perhaps previewing arguments from Republicans on Capitol Hill, Sen. John Moorlach (R-Costa Mesa), said Newsom should have included more permanent cuts and looked at ways to reduce pension obligations.
“It is missing real program and staffing cuts for contraction, except for ‘trigger cuts’ pending a hope of additional federal funding (to subsidize state misspending),” he said in a statement.
In the past year, Newsom, like Brown, focused on adding onetime expenditures rather than building too much into the state’s permanent spending base. Newsom took a more cautious posture as economists suggested the risk of a mild to moderate recession was growing as each year passed.
But no one predicted the economic collapse that Covid-19 has wrought. Newsom said Thursday the state’s main three tax revenue sources would drop by 22 percent.
Both Finance and the nonpartisan Legislative Analyst’s Office see the potential for about $40 billion in revenue decline over the next 14 months, though the LAO also suggests a “U-shaped” recovery remains possible, which would reduce those losses.
The state is in better shape now than when the Great Recession struck in late 2008. California learned from those years and benefited from a soaring Silicon Valley tech boom as the economy recovered. The state built a $16 billion rainy-day fund, a savings account it didn’t have when state leaders had to bridge roughly $60 billion in budget shortfalls in 2009.
The state also has plenty of cash to tap, with roughly $44 billion in borrowable reserves to pay bills. In the last recession, then-Controller John Chiang had to pay state vendors with IOUs, while California had to regularly obtain short-term loans to keep the state running.
Controller Betty Yee raised the prospect Wednesday that the state could again have to borrow cash at some point, but noted that she has never had to do so since taking office in 2015.
Before the recession, California lawmakers launched a $755 million makeover for the Capitol that would bring down the warren of offices attached to the historic building and replace it with a modern structure.
Add in a related construction project meant to give lawmakers temporary offices on O Street and the total endeavor was expected to cost about $1.2 billion, making it the biggest undertaking in a boom-times set of plans former Gov. Jerry Brown approved to replace long-neglected state government buildings around Sacramento.
Now, with the state facing a deficit estimated to run north of $50 billion, a group of historic preservationists mostly worried about the potential destruction of trees in Capitol Park is asking the state to halt the project. Its members argue the red ink brought by the economic standstill is an opportunity to rethink an expensive project.
“We are not a group looking to kill the project,” said Dick Cowan, one of the leaders of the group called Public Accountability for our Capitol. “We want it redesigned and we think we do need a pause. And that coincides nicely with a year where we’re going to scramble to pay for all of this.”
So far, lawmakers are not willing to consider the request, although it underscores the difficult decisions they’ll face in the coming months as they try to close the projected deficit.
Last year, the Legislature approved $3.5 billion for a year of spending on 200 capital projects, according to an October report from the Legislative Analyst’s Office. About $1.5 billion of that sum was expected to come out of the state general fund, which pays for education, prisons and social services, among other government programs.
Assemblyman Ken Cooley, D-Rancho Cordova, over years advanced the intricate plan to replace the 68-year-old structure known as the Capitol Annex.
The existing building has long been considered a health and safety hazard. A 2017 report painted a grim picture of a decrepit building lacking properly working toilets, insufficient exits and fire sprinklers.
Cooley insists the Capitol project is not one that will be delayed or suspended in the coronavirus-induced downturn.
“Maintenance of the current building’s antiquated and failing systems are costly, difficult to repair, and fail to provide the public with a safe and accessible venue to engage with their government,” Cooley said in an emailed statement. “The annex project has emerged from consideration of these perils by three administrations and, as it puts dollars into the regional economy, it will specifically address these vital health, life safety, accessibility and security deficiencies.”
In 2018, Cooley led the way when lawmakers agreed to pay to bulldoze the annex and rebuild the offices. Construction blueprints call for a parking garage, a modern visitors center and a 200,000 square-foot annex expansion.
The replacement project involves temporarily moving the Legislature into a new $423.6 million government building located at 1021 O Street by the end of 2021. That building is already well underway. Lawmakers are expected to work there until 2025, when the annex is scheduled to be finished.
Cooley said the Capitol project is safe in part because the Legislature has authority to pay for it by selling bonds and repay investors over time. He added the sputtering economy might even lower the projected cost of the building because materials will become less expensive.
Historically, said Legislative Analyst Office analyst Eunice Roh, more than 60 percent of government building projects are paid for using bonds.
Lawmakers negotiating the budget over the next month could choose to save money delaying certain projects, according to H.D. Palmer, spokesman for the Department of Finance.
The ones that were expected to get under way around Sacramento include a $915 million government campus on Richards Boulevard and a $131 million renovation of the Gregory Bateson Building at 1600 9th Street.
During the economic downturn, the Legislature and Gov. Gavin Newsom could also consider bonds to pay for projects, Roh said, to “delay costs yet continue to build/maintain critical infrastructure.”
Back at the Capitol Mall, the main opponents to the proposed legislative building are trying to buy time for trees.
Redwoods, a bunya pine and cedars stand on the site of a proposed parking garage, between the Capitol and N Street.
The Department of General Services’ environmental review says “as many existing trees as possible would be retained” during construction, but estimates 20 to 30 could be removed.
Advocates have guessed more than 100 trees are in peril.
Department of General Services spokeswoman Monica Hassan said the group’s fears are based on a misunderstanding of the plans.
“The concerns about the number of trees impacted appear to be based upon the unfortunate assumption that the entire area as shown in the (environmental impact report) will be the actual footprint used for the project,” Hassan said in an email. “Which is not correct.”
Eric Steinman, a Sacramento resident, said the parking garage clashes with California’s ambitious environmental agenda.
“California’s holding itself up as the leader in climate change and environmental protection, but when it comes to their own building, (lawmakers) will cut down 100-year-old trees with little regard for public use, public involvement and decision,” Steinman said.
Steinman said the plans for the garage are based on an assumption that legislators will still be driving cars to work in 50 to 100 years, which he said is “unrealistic.”
The Legislature’s Joint Committee on Rules has provided updates on the project during hearings in the last few years, with the latest on Sept. 6.
Cooley said the Joint Rules Committee is working with arborists and landscaping experts to “preserve as many trees as possible with the project footprint.”
“The committee has no intention of removing 100 trees within this footprint,” he said. “The JRC is undertaking painstaking efforts to carefully preserve as many trees as possible within the scope of the project.”
San Jose Mercury News
An unemployment rate that has “skyrocketed” could leave one-fourth of California’s workforce without jobs — akin to the rates during the Great Depression — Gov. Gavin Newsom warned Monday in a forbidding assessment about how the coronavirus has wrecked the state’s once booming economy.
“Unemployment numbers” in California “will be north of 20 percent,” Newsom said during a regular briefing to discuss the state’s war against the deadly bug. The state’s Employment Development Department is due to release the latest official unemployment rate for California on May 22.
California has received a jaw-dropping 4.5 million unemployment claims since mid-March when state and local government agencies began to impose business shutdowns and other mandates in a quest to combat the coronavirus, the governor said.
The 4.5 million in unemployment claims represent 23.3 percent of the current California workforce of 19.3 million. It’s likely that at least some of those who filed claims have since returned to work or found a new job.
“Unemployment has skyrocketed in this state,” Newsom said.
The governor also warned that 20 percent might not represent the worst of it for the unemployment rate.
“Getting closer to 22, 23, 24, 25 (percent),” the governor said, is “very likely.”
At the nadir of the Great Depression in 1933, the nation’s unemployment rate reached 24.9 percent.
Since March 12, the EDD has distributed $13.1 billion in payments to workers who have filed unemployment claims, the governor said. About $3.4 billion of that was paid out just last week, he said.
majority of California’s economy continues to function, despite being hobbled by the government mandates, the governor said.
“Over 70 percent of the economy in California is open,” Newsom said.
As claims pour in, workers in the Bay Area reported on Monday that they are still unable to connect with the EDD, which has been buried beneath the avalanche of unemployment filings and benefit requests.
“The EDD was completely unprepared for this,” said Thomas Glazis, a Milpitas resident who has been trying without success to reach the EDD’s main numbers.
James Li, a public relations account director, would rather spend an hour sitting in Beijing traffic than risk 30 minutes exposed to crowds on a train. “Traffic is as bad as it could be” but the subway is still too dicey, he said.
In Frankfurt, real estate assistant Anna Pawliczek is driving to work for the first time in her career. “I definitely have always preferred to chill out in the train, instead of being stuck at traffic lights,” she said. But days after Germany ended its lockdown, her company is asking returning employees to avoid public transportation at all costs.
Gasoline demand is rebounding, suggesting that the car — at least for now — is making a comeback. As lockdowns ease and parts of the world reopen for business, driving has emerged as the socially distant transportation mode of choice and is offering some near-term relief to an oil market fresh off its worst crash in history and reeling from an unprecedented collapse in energy demand.
“People are using more their cars because they are afraid to use public transportation,” Patrick Pouyanne, the chief executive of French oil giant Total SA, said.
It’s too soon to say whether this change is permanent. In some parts of Asia that reopened earlier than the rest of the world, people are venturing back onto trains. And it’s unclear whether global gasoline demand will ever fully recover.
But on the streets of Beijing, Shanghai and Guangzhou, morning traffic is now higher than 2019 averages while subway use is well below normal, according to data compiled by BloombergNEF. Volume on Beijing’s metro system is 53% below pre-virus levels. Subway usage in Shanghai and Guangzhou is down 29% and 39%, respectively.
“At least at the beginning of our way back to normality, we expect a decrease in the use of public transportation,” said Josu Jon Imaz, the head of Spanish oil company Repsol SA.
It’s a phenomenon that may begin to reverse the dramatic reductions in air pollution the world’s busiest cities have seen in recent months as travel and industrial operations ground to a halt.
In Berlin, among the first European cities to relax its lockdown, public transit use remains down 61% while the number of people driving has recovered to 28% below normal normal, according to data from Apple Inc., which tracks request for directions on its popular Maps app.
Apple Maps data for 27 world cities shows that driving directions are recovering more quickly than directions for mass transit. In Madrid, driving is 68% below normal levels, up from about 80% in April, while use of public transport remains down 87%, largely the same level as last month.
The same is occurring in Ottawa, the Canadian capital, where driving directions on the app have recovered to 40% of normal levels, up from 60% in April, while directions for mass transit remain flat from April at 80% below normal levels.
In the U.S., gasoline consumption is clawing back from record lows, rising by 400,000 barrels a day during the week ended May 1. Cities in Florida, one of the first American states to re-open, has seen fuel sales rebound to 30% below normal levels, from 50% weeks ago, according to the Florida Petroleum Marketers Association.
“I think maybe we will get a third of gasoline demand back relatively easy,” said Patrick DeHaan, an analyst at GasBuddy. The rest will come back much more slowly, he said, perhaps taking a year or more. Some demand may never return.
Gasoline’s recovery may extend into summer amid changes in the way people vacation. In the U.S., demand for long-haul recreational vehicles has picked up as people opt for road trips over air travel. Jon Gray, chief executive officer of RVshare, said bookings in some areas have more than doubled compared with last year. “We saw an almost overnight doubling of bookings” as lockdowns showed signs of ending, he said.
Fuel distributor Pilot Flying J Inc. also has noted the trend. “People are thinking about their travel plans for this summer and many are considering road trips due to people feeling more comfortable driving,” said Chief Experience Officer Whitney Haslam Johnson.
A similar pattern played out in China during the five-day Labor Day holiday in May. Over the first four days of the holiday, car trips in Beijing jumped 15%, while trips by plane and train in and out of the city fell 76% and 86%, respectively, according to government data.
In a sign of strengthening demand, gasoline’s discount to Brent crude has shrunk to just $1.86 a barrel in Asia from $11.46 about a month ago, according to data from PVM Oil Associates. While they have rebounded in May, Brent crude futures are still more than 50% lower this year.
What’s good for the oil market, though, usually isn’t good for the climate.
Amid the post-lockdown revival of the car, electric vehicles are likely to be left on the sidelines as a struggling economy and cheap gasoline stifles demand for cleaner-burning autos. Even under the most optimistic scenario, worldwide sales growth this year will barely exceed 2019, according to BloombergNEF. Depending on how the pandemic plays out, the outlook is even bleaker.
Widespread lockdowns that have shuttered factories and kept people at home stands to reduce global carbon emissions by 8% this year, the biggest reduction ever, according to the International Energy Agency. But even that won’t be enough to reverse warming temperatures, which have been rising steadily by an average of almost 2.5 parts per million a year since 2010.
Still, a look at cities that were early to re-open suggests that the spike in driving will be short-lived.
In Seoul, software developer Kim Jingi drove to work for a month and half after restrictions eased, in an effort to self-isolate. But for the last two weeks, Kim has returned to the subway.
“I thought it was safe enough,” Kim said. Also, “it was hard to find a parking spot.”
A federal court on temporarily blocked the Trump administration’s efforts to pump more water to the agricultural Central Valley, which critics said would threaten endangered species and salmon runs.
A judge issued a preliminary injunction in two lawsuits brought against the administration by California’s Natural Resources Agency and Environmental Protection Agency and by a half-dozen environmental groups.
The order bars the U.S. Bureau of Reclamation until May 31 from going ahead with expanding the amount of water it pumps from the San Joaquin Delta through the federal Central Valley Project.
The suits argued that the exports would cause irreparable harm to species protected by state and federal law.
President Donald Trump has denounced rules meant to ensure that enough fresh water stayed in rivers and the San Francisco Bay to sustain more than a dozen endangered fish and other native species, which are struggling as agriculture and development diverts more water and land from wildlife.
But especially in the wake of a long drought, farmers in the Central Valley — a Republican enclave in a Democrat-controlled state — are thirsty for more water. The valley is the heartland for the state’s $50 billion agricultural industry.
The administration says its proposed changes will allow for more flexibility in water deliveries. In California’s heavily engineered water system, giant state and federal water projects made up of hundreds of miles of pipes, canals, pumps and dams, carry runoff from rain and Sierra Nevada snow melt from north to south — and serve as the field of battle for lawsuits and regional political fights over competing demands for water.
“Today’s victory is critical, but the fight is not over,” state Attorney General Xavier Becerra said in a statement. “We have the facts, science, and the law behind us, and we look forward to making our case in court.”
San Jose Mercury
An ambitious plan to build the largest new reservoir in California in 40 years to supply water to homes and businesses from the Bay Area to Los Angeles, along with Central Valley farmers, is being scaled back considerably amid questions about its $5 billion price tag and how much water it can deliver.
Sites Reservoir is proposed for construction in remote ranch lands in Colusa County, about 70 miles north of Sacramento. The reservoir, originally designed to be four times as big as Hetch Hetchy Reservoir in Yosemite National Park and nearly as big as San Luis Reservoir between Gilroy and Los Banos, received more money than any other project two years ago from a water bond passed by state voters during California’s historic drought.
But supporters still haven’t found enough to pay all the construction costs.
So, late last month, the agency planning the reservoir, the Sites Project Authority, issued new plans. Although Sites is among the most high-profile water projects in the state, they have gone largely unnoticed due to the coronavirus pandemic.
Under the new approach, the price tag will be cut roughly 40% from $5.1 billion to $3 billion. The reservoir’s size will shrink from 1.8 million acre feet to 1.5 million acre feet. Plans to build an 18-mile pipeline east to the Sacramento River to fill the reservoir were dropped in favor of using existing canals. A hydro-power pumping station was cut. And significantly, the amount of water the reservoir is expected to deliver on average, known as the “annual yield,” was cut in half from 505,000 acre feet to 243,000 acre feet.
Backers say the reservoir, which would still be California’s seventh largest, nevertheless remains on track.
“This is a step in the right direction to making this project a reality for the state of California,” said Jerry R. Brown, executive director of the Sites Project Authority.
Brown, no relation to the former governor, was hired last month after previously working as general manager of the Contra Costa Water District, where he oversaw expansion of Los Vaqueros Reservoir.
Making the project more affordable, he said, will increase the likelihood that water agencies will contribute — from farmers in the Sacramento Valley and San Joaquin Valley to urban users like the Santa Clara Valley Water District in San Jose, the Zone 7 Water Agency in Livermore, and the Metropolitan Water District in Los Angeles, all of whom have expressed interest.
So far, 21 agencies have put up $27 million for planning and studies. Another $19 million is due by Oct. 1.
“We took to heart what people told us and said we need to take a step back and re-evaluate this,” he said. “We’ve developed a right-sized project that is affordable and buildable.”
But the changes highlight how difficult it is to construct huge new water projects in California, even as the state heads into a dry summer following a disappointing winter rainy season.
“All of us have done something like this in our lives,” said Jay Lund, director of the UC Davis Center for Watershed Sciences. “You go out on the market and see how big a house or car you can buy at first, but then when you sharpen your pencil and do the finances more seriously, you decide you can only afford something a little smaller.”
Environmentalists were more blunt.
“To me it just shows it’s a project that’s struggling to pay for itself,” said Ron Stork, a senior policy advocate for Friends of the River, a group that opposes the project.
The changes will delay the start of construction from 2022 to at least 2023, although planners say they still hope to finish by the original date of 2030.
“The probability of it happening at this price is much higher,” Lund said. “But the probability of any major new water project is always small in California.”
There are several reasons, he noted.
First, many of the best locations for dams are already taken. Second, environmental laws like the Clean Water Act and Endangered Species Act mean rivers can’t be dammed, wiping out fish and other wildlife, as they were generations ago.
Finally, it’s hard to fund them. Not only did California voters pass Proposition 13 in 1978, requiring a two-thirds majority to raise most taxes, but in 1986, former President Reagan changed federal law to require states to pay a greater share of the huge costs of building dams to curb federal spending.
The idea for Sites has been around since the 1950s. Politically, it has a big advantage: It would be an “off-stream” reservoir. Instead of damming a river, a remote valley 10 miles west of the sleepy farm town of Maxwell would be submerged, the water held in by two large dams and up to nine smaller “saddle dams” on ridges.
The reservoir would be filled by diverting water from the Sacramento River — California’s largest river — in wet years, and releasing it in dry years for farms and cities, along with fish and other species in the Sacramento-San Joaquin River Delta.
The project has multiple challenges, however.
The state Department of Fish and Wildlife, which must issue permits, said the original plan would take too much water out of the Sacramento River, harming salmon, steelhead and other species. That’s in part why planners reduced the annual yield in the revised plans.
Then there’s money. Sites’ planners, who are mostly political and farm leaders in the Sacramento Valley, asked the Brown administration for $1.6 billion from Proposition 1, a bond passed in 2014 by voters. They got half, $816 million. They also were awarded a $439 million loan from the U.S. Department of Agriculture. They also are seeking at least $1 billion in other federal loans, and $1.2 billion from water agencies that would buy the water.
But Sacramento Valley farmers already have groundwater and senior water rights. And because many grow low-value crops like rice, they can’t afford a project that is too expensive.
Silicon Valley and Los Angeles may be interested. But they have alternatives, like building local reservoirs, expanding recycled water and conservation, and cleaning contaminated groundwater, which may be cheaper.
“People are already saving water for rough periods,” Stork said. “That’s why this project is probably in trouble.”
To get the state bond money, the project must lock in 75% of its outside funding and finish its draft environmental studies by Jan. 1, 2022.
If built, Sites would be the largest new reservoir in California constructed since 1979, when the Army Corps of Engineers completed construction on the 625-foot high New Melones Dam on the Stanislaus River near Jamestown, in the Sierra Foothills of Calaveras County at a capacity of 2.4 million acre feet.
“It’s a steep hill to climb,” Lund said. “But it’s not as steep at $3 billion as it would be at $5 billion.”