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IN THIS ISSUE – “No Playbook, No Precedent”
- Legislature on Newsom’s State 2020-21 Budget: “This is Nuts!”
- Newsom’s Covid-19 Recovery Team Goes to Work
- It’s All About the Delta Flow
FOR THE WEEK ENDING MAY 29, 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.
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Dentist appointments for low-income Californians.
A black infant health program.
Housing for California’s foster youth.
These are among the services California lawmakers want to protect from $14 billion in cuts proposed by Gov. Gavin Newsom to plug a $54 billion deficit caused by the coronavirus.
To achieve their goal, state senators instead unveiled Thursday a separate budget plan during a committee hearing that would stave off what they called “draconian cuts” to safety net programs and K-14 schools.
It’s a strategy sure to tee up a fight with the administration on how best to guide California through a deep recession.
Newsom said earlier this month that COVID-19 would make it necessary to scale back a $222 billion proposal he introduced in January. The governor introduced on May 14 a modified $203 billion blueprint that, among other cuts, shaves billions in public education funding and pulls more than $50 million from adult Medi-Cal services, including diabetes prevention programs and eye appointments.
Lawmakers have since complained that Newsom’s plan disadvantages low-income Californians, many of whom have already faced devastating financial repercussions during the pandemic.
Instead, the Senate Budget Committee is proposing to maintain funding for a laundry list of support services for the homeless, seniors and sexual assault victims, health care services, immigrants and child care for working families.
Sen. Holly Mitchell, a Los Angeles Democrat and chair of the Senate Budget Committee, said her house’s plan “uses the governor’s framework,” but adds a “couple of key differences” she believes would safeguard support systems for California’s most vulnerable residents.
“This is the beginning of the process. We are clear that this public health and economic pandemic has catapulted California into a recession,” Mitchell said, following a six-hour hearing. “And the Senate today has taken its first steps toward stabilizing the state’s economy.”
The plan more modestly prunes certain programs using a model that first assumes the federal government comes through with an additional $14 billion in aid that Newsom’s plan does not rely on. Newsom has said some of his cuts won’t be necessary if federal aid comes through.
The Senate’s plan also relies on another $8 billion in reserves, and defers, transfers or borrows an additional $9 billion. The model also anticipates $3.6 billion in savings, assuming that the state’s health and human services caseload won’t be as large as Newsom predicts.
It rejects Newsom’s proposed $8 billion cut to public schools and reduces by half Newsom’s $800 million total blow in funding for the University of California and the California State University.
The proposal also preserves Medi-Cal benefits like optometry and audiology services and physical and speech therapies. It dismisses the administration’s plan to pull funding generated by a tobacco tax to pay Medi-Cal providers, and rejects cuts to services like senior nutrition programs and child welfare services.
“We put a little more empathy in the Senate plan than the governor had,” said Sen. Jim Beall, D-San Jose. “It’s time to learn that we have to protect those most vulnerable populations, which I don’t think the governor’s plan recognizes fully. Empathy has to be part of this process right now with all these people suffering all over the state.”
Sen. Jim Nielsen, R-Tehama, cautioned his colleagues against delay tactics to instead review “structural changes” required to reshape the economy.
“I would admonish us to keep in mind, to not just kick the can down the road, but (address) the structural changes that are going to be required for us to get back on sound footing,” Nielsen said.
Democratic Assembly members similarly have been reluctant to make the cuts Newsom has said are necessary. They spent much of Tuesday during a special committee process criticizing his proposed cuts to classrooms, wildfire recovery programs and undocumented immigrant support systems.
The most direct rebuke came from Assemblyman Jim Wood, D-Santa Rosa, who has spent weeks scolding the administration for a lack of transparency and raising concern over cuts to medical services for sick Californians.
“It’s clear this administration does not understand prevention,” he said. “This is nuts. This budget eliminates a lot of programs, eliminates them. Going away. No pause. This is wrong.”
While the Legislature and the governor are required to reach a budget deal by June 15, the Senate’s proposal builds in wiggle room through September for Congress to approve more money for states. Should federal assistance fall through, the Senate’s plan provides $13 billion in “trigger solutions” that would kick in by October 1, 2020.
The backup plan includes deferring $5.3 billion in funding for schools and would approve cuts to a more narrow set of services. The back-up strategy would also delay $1 billion in payments by one day — from June 30 to July 1 — through a strategy used in 2011 and 2012 during the last fiscal crisis to push spending into the next budget year.
The committee late Thursday evening approved the plan as a whole, with Republicans voting against some elements.
CalMatters & Associated Press
California shouldn’t rely so heavily on money from the federal government to close its budget deficit, a bipartisan chorus of Assembly members told the administration of Gov. Gavin Newsom during an unusual Committee of the Whole session.
Almost every member of the state Assembly spoke out about Newsom’s proposal to slash billions from the budget amid the pandemic-induced recession.
The governor’s approach — which would cut $14 billion to schools, health care and safety net programs unless more funding comes through from the federal government — ignores “pure science in favor of political science,” said Assemblyman Jim Wood, a Healdsburg Democrat.
“It… feels like an overdependence on the federal government with an unpredictable administration,” Wood said. “If you are aged, poor or disabled, this budget is devastating.”
Lawmakers have questioned whether Newsom’s projected $54 billion deficit is accurate, or a worst-case scenario meant to influence decisions by the Legislature and the federal government. Newsom’s proposal calls for deep budget cuts to schools, child care, programs for seniors and environmental protection.
That leaves California “waiting on federal aid that may or may not come,” said Republican Assemblyman Jim Patterson of Fresno. “If this financial aid does not materialize, what is the Plan B?”
One way the state could bring in more money would be to permit sports betting, boost taxes on electronic cigarettes and tax lottery winnings, suggested Assemblyman Adam Gray, a Merced Democrat.
“It certainly won’t solve our budget crisis, but given the incredible impacts of the coronavirus on our bottom line, these proposals provide some flexibility,” Gray said.
Lawmakers normally have months to examine the governor’s proposal while carefully crafting their own. But this year, the Legislature has about a month to act after the coronavirus devastated the state’s economy and tanked its tax collections.
The Assembly met Tuesday as a committee of the whole — a rarely used procedure that lets all lawmakers meet at the same time and hear testimony from people not elected to the Legislature. It’s the first time the state Assembly has met this way since a 1995 hearing to discuss the Orange County bankruptcy.
Most of the lawmakers didn’t use their limited time Tuesday to ask questions and instead told Keely Bosler — Newsom’s chief budget officer — what the administration got wrong.
Democratic Assemblyman Kevin McCarty said Newsom’s proposed cuts to public education were “unacceptable” and would put thousands of teachers out of work.
Assemblyman Richard Bloom, a Democrat from Santa Monica, said the plan “is a defunding of environmental protections” by raiding funds set aside to clean up air pollution. Assemblywoman Rebecca Bauer-Kahan, a Democrat from Orinda, bemoaned the governor for shifting $100 million away from sexual and reproductive health care services to help balance the budget.
“The cuts to our seniors, our children and our women are devastating,” she said. “Is that who we are as a state?”
And Assemblyman Adam Gray, a Democrat from Merced, said it was wrong for Newsom to slash health care spending during a pandemic, saying he considers Newsom’s proposal to be a “worst-case scenario.”
“It makes cuts that are perhaps more painful than necessary while offering little in the way of creative revenue generation, conservation or reform,” he said.
Gray was one of the few lawmakers to offer an alternative plan, proposing the Legislature legalize sports betting as a way to generate an extra $2 billion to help eliminate some of the proposed $14 billion in cuts.
Newsom has said he prefers to let the federal government cover California’s shortfall. His budget includes language that would automatically cancel most of his cuts if Congress approves another round of aid for state and local governments.
“Only the federal government has the capacity to really mitigate the most difficult reductions states and local governments are going to have to make to balance their budgets in the next several years,” Bosler said.
Gabriel Petek, the nonpartisan legislative analyst, noted that any new money from the federal government would likely run out after one or two years. Petek’s office says the state is facing budget deficits through at least 2024.
“In that case, the Legislature will once again be faced with a structural issue when that funding begins to phase out,” Petek said.
Republicans were skeptical that Congress would send California more money, saying the state must have a different plan rather than imposing draconian cuts.
“We’re waiting on federal aid that may or may not come, and while we wait, foster youth, resource families, senior citizens, our health care providers are directly now bearing that burden,” said Assemblyman Jim Patterson, a Republican from Fresno. “If this financial aid does not materialize, what is the plan B?”
Huge job losses from the pandemic have left the state confronting a one-two punch: less tax money coming in, but more demand for government services such as health care and unemployment insurance.
New York Times
Locked down in their homes, the four former California governors clicked into a Zoom call and one after another described how they dealt with the crises that had defined their time in office. For Pete Wilson, it was the 1994 Northridge earthquake. Gray Davis evoked the electricity disaster that drove him out in a recall election, and Arnold Schwarzenegger and Jerry Brown lamented the Great Recession.
But the former governors agreed that nothing they confronted was as dire or will be more consequential than what the current occupant of the office, Gov. Gavin Newsom, now faces.
The economic collapse resulting from the coronavirus pandemic “dwarfs any problem the four of us had,” Mr. Davis recalled saying at the meeting, which took place late last month and was convened by Mr. Newsom.
“There’s no playbook,” he said. “There’s no precedent.”
California was the first state to shut down to counter the coronavirus and has avoided the staggeringly high infection and death rates suffered in the Northeast. But the debilitating financial costs are mounting every day. California has an estimated unemployment rate above 20 percent, according to Mr. Newsom — far higher than the 14.7 percent national rate and similar to the estimated rate for New York State, where the virus has hit the hardest.
In Los Angeles, with movie productions shut down, theme parks padlocked and hotels empty, things are even worse: The jobless rate has reached 24 percent, roughly equal to the peak unemployment of the Great Depression, in 1933.
“Economic free fall,” is how Tom Steyer, the former presidential candidate, described it. He is heading the state’s economic recovery task force, a group of business leaders, labor activists, economists and former governors who have begun meeting to plot a way out.
California faces a daunting budget deficit of $54 billion, which could force painful cuts to schools, social programs, health care and road building. And the state was the first to borrow from the federal government to finance its $13 billion in unemployment claims.
California has a hugely diversified economy, and many of the industries that have made it so strong are also the ones getting hit the hardest. By many measures California, which has the nation’s largest tourism industry, public university system, entertainment industry and port system and produces far more food than any other state, stands to lose more in the coronavirus-induced recession than anywhere else.
In a matter of weeks, the number of unemployed Californians, around 5 million, has more than doubled the number of the jobless at the peak of the Great Recession.
A large number of those losing their jobs were already among the most vulnerable, including service workers earning minimum wage and truck drivers who serve the ports of Los Angeles and Long Beach, where trade volume is down substantially. For many, unemployment checks have been arriving, stanching the bleeding temporarily. But thousands of undocumented Californians are unable to collect unemployment because of their immigration status, although the state has offered some aid.
“A number of people who were hit by this were barely recovering from the last recession, barely making it,” said Ann O’Leary, chief of staff to Mr. Newsom.
Mr. Steyer points to the technology sector as one of the most resilient industries in the state and a source of future strength, but adds tech growth might not be enough to offset the sharp declines in all these other areas of California’s economy.
With a gross domestic product larger than 25 states combined, California’s pace of recovery has stark implications for America’s future. After 2008, California helped lead the nation in economic growth and job creation, powered by Silicon Valley, which remains relatively resilient. But this time the pain is being shared across a much broader area of the economy, including rotted strawberries in fields along the Pacific Coast, the empty wine-tasting rooms of Napa Valley and the deserted campuses of the nation’s largest public university system.
With the state mandated by law to balance its budget, experts and officials are urging the federal government to step in and shore up the state’s finances with an immense bailout, a matter subject to partisan bickering across the nation, including in Washington, where many Republican lawmakers are opposed to it.
“I’d say this will be the most serious economic dislocation that America has faced,” said Mr. Brown, who left office with billions in the state’s rainy day fund. “The response should be a Rooseveltian intervention and effort to mobilize the economy the best way we can.”
Others on the state’s economic recovery task force include the former Disney chief executive Bob Iger; the Apple chief Tim Cook; Janet L. Yellen, the former head of the Federal Reserve; and Priscilla Chan, a founder of the Chan Zuckerberg Initiative, the philanthropic organization she runs with her husband, the Facebook co-founder Mark Zuckerberg.
As the debate on reopening is increasingly shaped by the country’s partisan divide, many conservative states are moving more quickly to restart their economies and many liberal states, like California, are taking more precautions. According to location data compiled by Google, Californians have more strictly abided by stay-at-home orders than people in other states, with fewer visits to retail stores and pharmacies.
Last year 83 million people arrived in the state on flights to participate in conventions, conduct business and spend money on tourism, far more than Florida, Texas and New York, the next three states that rely heavily on air travel, according to the U.S. Bureau of Transportation Statistics.
Ms. Yellen’s personal circumstances are emblematic of how the California economy could lose revenue. She and her husband, who are holed up in their Washington home, were planning to head to Northern California for the summer but have decided to stay put.“I’m really not sure that we want to get on a plane,” Ms. Yellen said.
Eight out of 10 overnight visitors to San Francisco and five out of 10 in Los Angeles arrived by air. Last year, California made $145 billion from tourism, more than any other state.
“Everyone is holding on, holding their breath,” said Linsey Gallagher, the president of Visit Napa Valley, a tourist association in wine country. On a recent weekday, Ms. Gallagher gave the latest tally: Of 5,500 hotel rooms in Napa, only 328 were occupied, mostly by medical personnel and families isolating from infected relatives.
Amelia Morán Ceja, the founder of Ceja Vineyards in Napa Valley, says 40 percent of her revenue disappeared with the closure of her tasting room. Yes, some locked-down customers have been consuming more wine but overall spending on California wines is down 25 percent this year, according to Jon Moramarco, a wine market analyst.
“This is not sustainable for anyone in the wine industry,” Ms. Ceja said. She is helping coordinate guidelines for wine tasting to resume, including having customers wear face masks, spacing tables far apart and offering tastings by reservation only.
The swift decimation of the nation’s largest tourism industry has consequences far beyond the 600,000 travel industry employees who have lost their jobs in the state. Taxes related to travel are a key source of revenue for California cities, amounting to $12 billion last year.
“I don’t see California having a full recovery until the tourism and hospitality industry is able to come back online,” said Caroline Beteta, the president of the state’s tourism bureau.
As a measure of the breadth of the crisis, industries as disparate as oil and strawberries are also being threatened. California Resources Corp, an oil and gas producer and a major employer in Kern County, north of Los Angeles, warned this month that it risked going out of business if it could not restructure its billions of dollars’ worth of debt.
The strawberry industry, which employs 55,000 people, is an example of how crucial federal assistance has been to California. In April, tens of millions of pounds of strawberries were left to rot in fields, according to Rick Tomlinson, president of the California Strawberry Commission. The federal government then agreed to buy $35 million worth of frozen strawberries for distribution in food banks as well as nearly $500 million for a variety of fresh fruits and vegetables including strawberries and other California crops.
The ports system in the state, the largest in the nation and the primary gateway for goods from Asia, has also contributed to the economic pain.
Volumes of shipments are down some 15 percent, compared with a year ago, and the shutdown of the economy has rippled through the system: Ships filled with jet fuel bound for Los Angeles’s empty airports sit anchored off the coast; warehouses throughout the region are overstuffed with clothing as retailers across America have cut orders, while exports of manufactured goods like computers have fallen; and truck drivers and dock workers have seen their hours cut drastically.
California’s economic success over the past decade stems in part from the state’s position as the country’s gateway to the Pacific Rim, harnessing the dynamism of Asia through trade into Long Beach, Los Angeles and Oakland as well as an influx of technology workers and students, a competitive advantage blunted by the virus.
Adrian Ma, a student at the University of California, Riverside, left for his home in Hong Kong in mid-April, when the number of new cases were rising sharply in California.
“I definitely would not come back to the U.S. right now,” Mr. Ma said. “I am currently in the safest place on earth, why would I want to go back to a high-risk place like America?”
Along with other educational centers like New York and Massachusetts, California stands to lose billions of dollars in revenue if foreign students do not return. Last year, California had more international students than any other state, around 160,000, and their contribution to the state’s economy amounted to $7 billion, according to the State Department.
All of these factors will make recovery difficult for the state, but the big question that will determine how long the recession lasts is whether employers quickly hire back workers once the virus recedes. Across California there is a growing sense that the pandemic will reshape the state’s economy, with long-lasting pain.
“The world has just fundamentally shifted,” said Rick J. Caruso, a real estate developer in Los Angeles, who sits on Mr. Newsom’s task force. “Consumer habits, how we live our lives — there will be fundamental shifts.”
He believes it will be a long time before employment levels bounce back, adding, “I think businesses are going to hire back far fewer people than they let go.”
CalMatters Commentary from the Public Policy Institute of California
It seems like everyone is suing each other over water. But what are they really fighting over?
To the uninitiated, the details of this conflict are hard to follow; a good summary can be found in Western Water. This is made more confusing by an array of contradictory narratives.
At the heart of the controversy is “Delta outflow.” This is the volume of water that flows from the Sacramento-San Joaquin watershed, through the Delta and into San Francisco Bay.
Regulatory changes in required Delta outflow are a big deal because they come with potential trade-offs between supplying water for farms and cities or for the ecosystems that support endangered species, recreation and other uses of the Delta.
We conducted a study in 2017 of the destination of water once it enters the Delta. About a quarter of it is either pumped from the Delta by the state and federal projects or used within the Delta. The rest becomes fought over and misunderstood outflow into San Francisco Bay.
One common narrative is that outflow is water “wasted to the sea.” Closer examination shows that most outflow either cannot be used or is needed to maintain water quality for water supply. The portion fought over – water allocated to protect the ecosystem – is surprisingly small.
Most Delta outflow is water that can’t be captured because it’s simply too costly to store, divert and use – capturing it would require new expensive reservoirs and aqueducts. These uncapturable flows come during winter storms or periods of very high snowmelt runoff, occurring even in dry years. And this outflow is not “wasted” since it plays a vital role in the health of San Francisco Bay.
Additionally, to keep the Delta fresh enough to use for farms and cities, a large amount of water must flow into the bay year-round. If outflow drops too low – especially when export pumps are operating – the Delta gets too salty. The amount of this outflow is large – roughly four times the amount of water exported to Southern California cities.
The big fights are over the third category: the outflow allocated to protect the Delta ecosystem and fish protected by state and federal Endangered Species Acts. This is the volume of outflow over and above that required to keep the Delta fresh enough for water supply.
Environmentalists have claimed that ecological outflow is insufficient, and that it has remained largely unchanged despite 40 years of regulation. For the former claim, the uncertainties are large, but more water for the environment – more effectively allocated and paired with habitat improvements – is likely needed to improve the health of the Delta ecosystem. But for the latter claim, they are wrong. Since 1995 the amount of water dedicated by regulation to the ecosystem has grown significantly from virtually nothing in 1980 to about 12% of average inflow today, except during dry years when the proportion is much lower.
Many in the water user community point to Delta outflow to protect the ecosystem and fish as a primary cause of water scarcity. But again, this claim is often overstated. At times, natural runoff is sufficient to meet ecological standards with no net cost to water supply.
We estimate that since 2008, when the most stringent regulations were enacted, roughly half of the ecological outflow has come at the expense of supply. That is still a lot of water – enough to support more than 400,000 acres of farmland or more than 2 million households – but far less than commonly claimed. And focusing solely on water supply costs ignores the broader benefits of a healthy Delta ecosystem.
These facts don’t change the roots of the disagreement. The various interests are fighting over real trade-offs between water supply for farms and cities, and Delta outflow to protect the ecosystem. But both sides tend to talk past each other and overstate their cases.
The numerous lawsuits are also a high-risk, low-reward strategy for addressing this problem, because the solution involves much more than a judge changing the Delta outflow equation. Instead, the answer lies in getting back to the table and negotiating a comprehensive agreement – with more on the table than just outflow – that most parties can live with, even if they don’t like everything about it.
Authors: Jeffrey Mount is a senior fellow at the PPIC Water Policy Center, firstname.lastname@example.org. Greg Gartrell is an independent consulting engineer and an adjunct fellow at the PPIC Water Policy Center, email@example.com.