Capital News & Notes
For Clients & Friends of The Gualco Group, Inc.
IN THIS ISSUE – “Let’s Not Blow It Now,” J. Brown
- Gov. Brown’s Last State Budget Holds the (Bottom) Line
- Governor’s May Revise Budget Summary
- Legislative Analyst’s Analysis
- Brown Rejects $1-Billion Healthcare Increase…
- …And Legislators Propose $1 Billion for Low-Income & Homeless Housing
- Top 3 US Wind Energy Counties Are In California
- Millennials Change Climate Change Thinking
- Alaska’s Plan Breaks the Ice for Conservatives
- CA Birth Rate at Record Low
- US Businesses Set Capital Expenditure Record
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 MAY 18, 2018
READ ALL ABOUT IT!!
Gov. Brown’s Last State Budget Holds the (Bottom) Line
Commentary from the LA Times
Gov. Jerry Brown is massaging the final state budget of his long career, and his No. 1 priority is simple: Don’t leave his successor the same mess he did the last time.
When Brown shut the door on the governor’s office in 1983 after occupying it for eight years, he bequeathed George Deukmejian a $1.5-billion deficit headache.
Goodwin J. “Goodie” Knight did it to Pat Brown, who then enacted a big tax increase. Brown’s father, Pat Brown, did pretty much the same to Ronald Reagan in 1967. Pat Brown had changed the state’s accounting system to show more revenue than there actually was, a gimmick to avoid raising taxes as he ran for a third term.
Reagan did not do it to Jerry Brown. But Deukmejian did to Pete Wilson, who set a new record for hiking taxes.
Gray Davis left Arnold Schwarzenegger a huge deficit. And the film star flubbed up by borrowing money to fill the gap. That just dug a deeper hole. The Great Recession hit and Schwarzenegger left Jerry Brown $26 billion in the red.
By contrast, Brown on Friday reported an $8.9-billion surplus in a revised $199-billion budget proposal for the fiscal year starting July 1. Legally, legislators must pass a budget by June 15 or forfeit their paychecks for every day they’re tardy.
Brown knows from experience that dumping a deficit on a successor is not a legacy enhancer. The new governor then has a handy punching bag to blame for any tax hikes or program whacks.
“I don’t want to get caught in the jaws of the persistent fiscal instability of the state of California,” Brown once told reporters. “One thing we know is when governors leave town with big deficits, they’re more scorned than praised.”
Brown deserves credit for being tight with a buck. Yes, there is one glaring exception: the troubled $77-billion bullet train project. But, generally, the centrist governor has kept a lid on fellow Democrats’ spending.
The current surplus, however, can largely be attributed to Brown’s hefty income tax increase on the wealthy that voters approved in 2012. The tax hike was supposed to have been temporary, but the teachers union in 2016 persuaded voters to extend it until 2030.
It’s projected to bring in $8.3 billion during the next fiscal year. And that accounts for nearly all the surplus. It raises a question about whether the tax extension was really needed.
The “soak the rich” tax exacerbates a problem Brown continually harps about like a sidewalk preacher warning the end is near: tax revenue volatility. Because California leans too heavily on rich people’s income taxes — especially their capital gains — the state’s revenue stream varies wildly between floods in good times and trickles in bad.
“We’re nearing the longest economic recovery in modern history, and as Isaac Newton observed: What goes up must come down,” Brown said in his budget statement. “This is a time to save for our future, not to make pricey promises we can’t keep…. Let’s not blow it now.”
It also would be a good time to modernize the decades-old, outdated tax code. Asked about that, Brown replied there first needs to be political will, “which I don’t think exists today.”
That political will could start with gubernatorial leadership. But Brown is about to leave office, and most legislators are running for reelection. So tax reform is left for the next governor.
State Treasurer John Chiang, a Democratic gubernatorial candidate who’s trailing badly in polls, issued a statement declaring he’s all-in on overhauling taxes.
“Tame the current feast or famine revenue volatility that makes it nearly impossible to build and plan for the long term,” he asserted.
But he didn’t offer details.
Brown’s revised budget anticipates taking in $8 billion more in taxes than he had projected when proposing his original spending plan in January. But “revenue projected is not revenue in the bank,” he reminded.
Of the $8.9-billion surplus, the governor prudently proposed to stash $5.8 billion in reserves. He’d spend $1.1 billion on deferred maintenance. The rest would go to one-time projects addressing such things as infrastructure, homelessness and mental health.
He’ll need to resist liberal Democrats determined to spend more on “safety net” programs for the poor. Assembly leaders, for example, are seeking $1 billion to expand healthcare access.
“I’ll certainly look at any measure,” Brown told reporters. “But we’re already overextended…. I’ll be very cautious…. All the people who want things won’t be getting what they’d like to have.”
Neither will the next governor be getting a barrel of red ink. That will be a refreshing change.
Governor’s May Revise Budget
Legislative Analyst’s Analysis
Brown Rejects $1-Billion Healthcare Budget Increase…
Gov. Jerry Brown opted not to include major long-term investments in public health insurance programs in his budget revision on Friday, citing a preference for one-time spending measures.
“I’m going to be reluctant to embark upon programs that will continue and will grow into the future,” he said. “They all have some merit to them, but we’re already over-extended.”
The governor said he will “certainly look at any measure” that expands health care access.
The announcement comes after an ambitious request from an Assembly health committee last week: $1 billion from the general fund surplus to make a number of investments.
Their proposal is part of a package of new bills and includes expanding Medi-Cal to adults up to age 25, increasing subsidies and tax credits for Covered California consumers, streamlining the Medi-Cal enrollment process for low-income women and children, and increasing the number of doctors in rural areas.
“We continue to be disappointed by the lack of investment our Governor has made in improving health care in this state,” said Democratic Assemblymember Jim Wood in a statement. “The Assembly, on the other hand, has made health care a priority and we will continue to fight for our $1 billion funding package as budget discussions continue in the coming weeks.”
Wood led a special group of Assembly members that met regularly over the last few months to discuss ways to reach universal coverage, or health care for all Californians. It was the continuation of earlier discussions about single-payer health care, which Assembly Speaker Anthony Rendon shelved due to a lack of a concrete funding source.
A small group of Assembly members met several times this year to discuss ways to reach universal coverage, or health care for all Californians. It was the continuation of earlier discussions about single-payer health care, which Assembly Speaker Anthony Rendon shelved due to a lack of a concrete funding source.
The number of Californians on Medi-Cal grew rapidly during the Obamacare expansion and the Covered California marketplace gained 1.4 million enrollees. But there are still about 2.8 million Californians without health insurance, and advocates say it’s time to close the gap.
“Especially when our federal government continues to undermine our health system … California can and should make a meaningful down payment to the goal of universal coverage,” said Anthony Wright, director of consumer group Health Access, in a statement.
Health care costs rose for some marketplace customers when the federal government cut cost-sharing reductions for premiums in October.
Brown’s budget does include $55.3 million to “support new growth in Medi-Cal” in 2018-2019. It maintains a previously announced $163 million investment in physician payments and $70 million allocation for dental payments.
But much larger swathes of funding announced in the May revise are going toward mental health care for homeless individuals, assistance for housing-insecure people in the CalWORKS program and medical services in the state justice system.
…And Legislators Propose $1 Billion for Low-Income & Homeless Housing
A group of California’s Democratic state senators wants to nearly triple Gov. Jerry Brown’s proposed spending for low-income and homeless housing.
The plan would put $1 billion of the state’s projected $8.8-billion tax windfall toward financing low-income housing projects, supporting local efforts to provide rental assistance and shelters for homeless residents, and funding other programs. By comparison, Brown proposed $359 million for homelessness programs in his revised budget unveiled last week.
“We cannot hold our heads up high as we walk down the streets in our communities and in effect step over folks that are sleeping in doorways or that are living in tent encampments,” said Sen. Nancy Skinner (D-Berkeley), one of the plan’s authors. “We can do better. We will do better.”
The senators’ $1-billion budget request is part of a larger plan that would allocate $5 billion toward similar programs over the next four years. The money would help build or preserve an estimated 8,500 homes for low-income residents annually.
Still, even if the new measure is successful and combined with $6 billion in additional housing funding that voters could approve in November, the efforts would result in far less housing than what’s needed to assist the poorest Californians. Currently, 1.7 million California households pay more than half of their incomes on rent.
The senators’ plan comes at the start of budget negotiations. Assembly Democrats are expected to release their own affordable housing proposal as well in coming days. Brown and the Legislature face a June 15 deadline to pass next year’s budget.
Top 3 Wind Energy Counties Are In California
Remember when oil was king in Kern County? Maybe it still is, but Kern is the king of wind power.
According to the U.S. Geological Survey, Kern has more wind turbines — 4,581 — than any other county in the nation.
Riverside County ranked second with 2,373 turbines, while Alameda County ranked third with 1,430 turbines. Nolan County in Texas ranked fourth with 1,374 turbines.
The USGS has created a database that mapped all 57,636 of the nation’s wind machines, Energy Digital reported. Not only does Kern have more turbines, the USGS says it has the highest turbine density in the world.
That’s a lot of juice.
According to the survey, Kern has a total wind power capacity of 4 gigawatts, and more turbines than the entire northeast region of the United States.
To put this in perspective, there are a billion watts in one gigawatt. That’s a lot of light bulbs. Now multiply by four.
That’s enough to power between 1.2 million and 2.9 million homes, depending on the vagaries of seasonal demand. Obviously, most of that power is being exported outside of Kern.
The USGS generated the database in partnership with the Department of Energy, Lawrence Berkeley National Laboratory and the American Wind Energy Association.
Millennials Change Climate Change Thinking
The newest version of the Pew Research Center’s annual environmental poll covers a lot of familiar ground.
It finds that most Americans believe the government should be doing more to protect air and water quality, and the climate. But when it comes to deciding how to accomplish those goals, Democrats and Republicans are divided—except on the topic of building more wind and solar energy, which just about everyone loves.
But in addition to confirming that these long-held positions haven’t changed, the poll offers two new noteworthy insights.
First, it asks Americans how they feel about solar geo-engineering, which entails spraying a chemical into the high atmosphere that will reflect some of the sun’s heat back into space. This is an attempt to mimic the cooling effects of a volcanic eruption, when natural emissions of the same chemical block the sun’s rays. Economists and climate scientists say solar geo-engineering is the most feasible method available to actively cool the warming planet.
And Americans are skeptical of it, Pew found. About 70 percent of Americans told the firm that solar geo-engineering would either do “more harm than good” or have no effect on the environment. Democrats were more likely than Republicans to see promise in geo-engineering, the poll also found.
It was the first time the research agency had asked the question, but the results mirror a 2011 poll from the Brookings Institution. In that survey, about 70 percent of Americans said they agreed with the statement that fighting global warming by “adding materials to the atmosphere will cause more harm than good for the environment.”
The second bit of intriguing news comes from the poll’s dive into generational attitudes in the Republican party. Millennial Republicans are more likely to endorse centrist environmental positions than their Boomer or Gen X co-partisans, the study found.
More than a third of Millennial Republicans agree that the “Earth is warming mostly due to human activity,” as compared to 18 percent of Boomers and older generations. Almost 60 percent of young Republicans say that climate change is having “at least some effect on the United States,” and 45 percent see it active in their community. Nearly half of millennial Republicans say the government is doing too little to “reduce effects of climate change,” as compared to 27 percent of Boomer Republicans, the study found. (In comparison, 89 percent of Democrats say the government should do more.)
This might seem like a promising sign for the environmentally concerned. It comes soon after a coalition of College Republican clubs endorsed a tax on carbon pollution. And it fits with a number of other polls that find young Republicans are more environmentally inclined than their predecessors.
But “it’s not clear that just because millennials are a little more liberal than other generations, that they’re going to stay that way,” said Dan Kahan, a professor of law and psychology at Yale Law School. “It always looks like the upcoming generation is becoming more liberal—but if that’s the case, they must be getting more conservative as they get older.”
“I think that anyone who’s banking on Millennials being more liberal in their 40s or 50s might discover this is not exactly what pans out,” he told me. “What does Trump say? We’ll have to wait and see.”
And even if these shifts do hold—especially in the Republican party—it isn’t clear they would mean anything politically, he said. Climate change and the environment are low-priority issues for most voters, compared to the economy and national security. Americans don’t necessarily choose to vote for a party because of its environmental policy.
Or as Kahan put it: “A congressperson knows that if they don’t do what people want on an issue like this, then they’re not necessarily going to get punished.”
Alaska Climate Change Plan Breaks the Ice for Conservatives
Alaska, a major oil and gas producer, is crafting its own plan to address climate change. Ideas under discussion include cuts in state emissions by 2025 and a tax on companies that emit carbon dioxide.
While many conservative-leaning states have resisted aggressive climate policies, Alaska is already seeing the dramatic effects of global warming firsthand, making the issue difficult for local politicians to avoid. The solid permafrost that sits beneath many roads, buildings and pipelines is starting to thaw, destabilizing the infrastructure above. At least 31 coastal towns and cities may need to relocate, at a cost of hundreds of millions of dollars, as protective sea ice vanishes and fierce waves erode Alaska’s shores.
The state is still finalizing its climate strategy. In October, Gov. Bill Walker, a former Republican who won election as an independent in 2014, created a task force headed by Lieutenant Governor Mallott that would propose specific policies to reduce emissions and help the state adapt to the impacts of global warming. The recommendations are due by September.
In addressing climate change, Alaska will have to grapple with its own deep contradictions. Roughly 85 percent of the state’s budget is funded by revenues from the production of oil, which is primarily exported to the rest of the United States, and local politicians have largely been unwilling to curtail the supply of fossil fuels. Both Governor Walker and Lieutenant Governor Mallott supported the recent decision by Congress to open the Arctic National Wildlife Refuge to oil and gas exploration, a move opposed by environmentalists.
“The state will continue to be an energy producer for as long as there is a market for fossil fuels,” the men wrote in a recent op-ed for the Juneau Empire. But, they added, “We should not use our role as an energy producer to justify inaction or complacency in our response to the complex challenge of climate change.”
To that end, the state’s climate task force released a draft in April that included a proposal for Alaska to get 50 percent of its electricity from renewable sources like solar, wind, hydropower and geothermal by 2025, up from 33 percent in 2016. The draft also proposed cutting statewide greenhouse gas emissions one-third below 2005 levels by 2025, tackling sectors like transportation and “natural resource development,” which includes oil drilling operations.
Alaska, which ranks as the nation’s 40th-largest emitter overall but is fourth-largest on a per-capita basis, has already cut its emissions by 25 percent since 2005, driven by a drop in emissions from both aviation and industry. The state’s main climate impact, however, is through the oil that it exports to the rest of the country, where it is burned in cars and trucks.
The task force trod lightly around Alaska’s heavy reliance on oil and gas exports. An earlier draft had included a line that said, “There is an economic and ethical imperative to pursue a transition away from a global dependence on fossil fuels.” That language was dropped in the latest version, which instead suggests that Alaska develop an “energy transition” strategy, balancing economic concerns with climate change considerations.
“We need to have a revenue stream from nonrenewable energy that will allow us to invest in renewables,” Lieutenant Governor Mallott said.
As one possible approach, the draft proposal says that the state could consider a “carbon fee and dividend program” that would tax carbon dioxide emitters and then reinvest the revenues in local energy efficiency and clean energy programs. The lieutenant governor also suggested that Alaska’s natural gas could be used to help reduce emissions in coal-reliant countries like China. (While natural gas is about half as carbon-intensive as coal, it produces more emissions than renewables or nuclear power.)
The task force will solicit public comment on the proposals before delivering final recommendations to Governor Walker, who faces a tough battle for re-election in November.
Any carbon tax proposal within the state could face pushback from Alaska’s oil and gas industry. “I think they need to be focusing on things that will actually have an impact,” said Kara Moriarty, president and chief executive of the Alaska Oil and Gas Association. “Climate change is a global problem, so unless you’re talking about a global carbon tax, I’m not sure this would move the needle in a state with only 750,000 people.”
There is broader consensus that the state will need to take more immediate action to prepare for the impacts of higher temperatures. The Arctic is already warming faster than the rest of the planet. Wildfires are growing larger during the Alaskan summer, menacing homes and roads. Native communities that rely on walrus hunting are seeing catches declineas sea ice disappears. And, in May, the rural village of Newtok received a $22 million federal grant to help relocate residents threatened by erosion and flooding.
The state’s draft proposal urges more scientific research on threats like ocean acidification, which could threaten state fisheries, as well as new strategies to ensure food security in indigenous communities. By taking the lead on such efforts, the draft notes, Alaska could potentially export its adaptation know-how to the rest of the world.
“Many climate impacts are unfolding more quickly and sooner here,” said Nancy Fresco, a scientist studying climate adaptation at the University of Alaska in Fairbanks. “But that could mean that the rest of country might be able to learn from our successes and failures.”
CA Birth Rate At Record Low
California’s birth rate fell to its lowest level in at least 100 years during 2017, even dipping below rates seen in the Great Depression, according to new figures from the U.S. Centers for Disease Control and Prevention.
About 471,500 California babies were born in 2017, down by 17,000, or 3 percent, from 2016, according to the CDC data, which is provisional. Births also fell nationwide.
The state’s birth rate fell to 11.9 births per 1,000 residents. By comparison, there were about 21 births per 1,000 residents in 1990. During the height of the Great Depression, there were 13.1 births per 1,000 Californians.
California women are waiting longer to have children — or deciding not to have children at all.
In 1980, almost 50 percent of 25-year-old California women lived with their own child, census figures show. By 2016, that figure had dropped to 29 percent.
About 84 percent of 36-year-old California women lived with their own child in 1980. By 2016, that figure had dropped to 74 percent.
The trend crosses all ethnic lines. Even though the number of California women between 15 and 50 grew during the past decade, the number of births fell among all ethnicities.
US Businesses Set Capital Expenditure Record
Wall Street Journal excerpt, May 15
U.S. companies are ramping up spending on their businesses at the fastest pace in years, a long-awaited development following years of tepid growth.
Spending on factories, equipment and other capital expenditures by companies in the S&P 500 is expected to have risen 24% in the first quarter to $166 billion, on track for the fastest quarterly pickup since 2011 and a record for the first quarter of a year, according to Credit Suisse data going back to 1995. The jump has been aided by a tax-code overhaul that is putting more cash in companies’ pockets.
The biggest spenders run the gamut, from technology behemoths such as Google parent Alphabet Inc. to auto maker General Motors Co. and oil firm Exxon Mobil Corp.
Investors and economists agree capex is good for long-term corporate profits and the broader economy, which has languished for years without such spending. Yet history suggests it could also pressure share prices—leaving investors questioning whether it is worthwhile to bet on companies with costly projects that may not pan out, especially at a time when many are wondering whether corporate earnings are as good as they will get in this cycle.
“When it works, it’s a home run. But for investors who are sometimes much more short-term oriented, it’s easy to understand why a dividend increase that I’ll get next month is a little more exciting than capex, which might not yield me anything for a long time,” said Dave Donabedian, chief investment officer at CIBC Atlantic Trust Private Wealth Management.
The jump in capital spending comes as companies whittle away at massive stockpiles of cash—something that has allowed them to funnel money into their businesses and increase their dividends, as well as buy back their shares at a record pace. Buybacks often provide a short-term boost to stock prices, although they have been maligned by critics who feel that, unlike capex, they do little to boost long-term profitability.
But data suggest shares of companies with large and growing capex tend to underperform the broader market—which could weigh on returns just as the stock market has become more volatile.
Shares of the 20 companies in the S&P 500 that spent the most on capex in the first quarter are up 1.1% for the year, trailing the broad index’s 2.1% gain, according to analysis of data from S&P Dow Jones Indices. The trend becomes even more pronounced over longer time horizons: Since 1986, companies with the highest capex-to-sales ratios have underperformed their benchmarks by more than 2 percentage points a year, according to Bank of America Merrill Lynch.
As a share of gross domestic product, a measure of capital spending has been rising for more than a year, although it remains below levels hit in 2014, when soaring crude-oil prices pushed energy companies to spend heavily, according to a Credit Suisse analysis of government data.
The capex boom could be a tonic for a stock market lull that has kept the S&P 500 and Dow Jones Industrial Average in a narrow range for months and offer a further boost to corporate earnings. But research shows it isn’t that clear cut.
“Greater investment and high valuations imply that we probably won’t experience a stock market boom in the next couple years,” said Christopher Anderson, a University of Kansas professor. His 2006 research found that companies that have the biggest increases in capital spending have subsequently had damped stock returns.
To be sure, not all big capex spending companies have struggled to gain ground in the stock market. Shares of e-commerce giant Amazon.com Inc. have soared 35% in 2018, adding to double-digit percentage gains in 2017, as the firm’s sales growth outshone increased spending on warehouses, expanding its delivery network and amping up its digital offerings.
“You do not want to see companies spending above their normal trend. That historically has been negative for stock prices,” said John Bailer, a senior portfolio manager at BNY Mellon Asset Management North America.
A cut to the corporate tax rate and a deregulatory agenda in Washington are giving companies more certainty about how to spend their growing cash piles. But rising interest rates and the threat of more restrictive trade policies could restrain economic growth. Economists surveyed by The Wall Street Journal expect a U.S. recession could come as soon as 2020.