For Clients & Friends of The Gualco Group, Inc.
IN THIS ISSUE – “We should all be in timeout right now”
Jennifer Pierre, State Water Contractors general manager, on need to agree on water resource allocation
- Ongoing Revenue Volatility Makes State Budget Deficit a Long-Term Fiscal Problem
- California Population Rebounds 0.2%
- Good Water Year Highlights Historic Sharing Woes
- Largest State Office Complex Opens Green Doors
Capital News & Notes (CN&N) curates California policy, legislative and regulatory insights from dozens of media and official sources for the past week. Please feel free to forward this unique client service.
FOR THE WEEK ENDING MAY 3, 2024
Ongoing Revenue Volatility Makes State Budget Deficit a Long-Term Fiscal Problem
CalMatters commentary by Dan Walters
As the June 15 constitutional deadline for enacting a 2024-25 state budget approaches, the good news for Gov. Gavin Newsom is that all-important income tax revenues in April slightly exceeded the administration’s $16.3 billion assumption.
Even so, the bad news is that overall revenues from income, sales and corporate taxes are still running $6 billion behind what Newsom’s January budget projected for the current fiscal year, meaning that cumulative deficit will be substantially more than the $38 billion Newsom’s proposed budget assumed.
But how much more?
The Legislature’s budget analyst, Gabe Petek, has estimated that the cumulative deficit for the three-year “budget window” – 2022-23, 2023-24 and 2024-25 – to be $73 billion, largely due to his more pessimistic revenue calculations. Newsom’s January budget assumes that revenues are running $44 billion under last year’s budget projections during the three-year window, while Petek raises that estimate to $68 billion.
With revenue shortfalls driving the state’s deficit number – whatever it might be – everyone involved in the annual budget process was closely monitoring what April 15’s income tax filing deadline would produce.
Newsom even indefinitely postponed his annual state of the state address because of the uncertainty. Governors usually try to strike upbeat themes in such addresses and that would be particularly difficult this year.
With the month’s revenue numbers now known, the next phase will be Newsom unveiling a revised budget later this month, setting the stage for several weeks of intensive – and secretive – negotiations between the governor and legislative leaders. The revised budget proposal, and the budget that emerges from negotiations, will be balanced on paper. That is, projected revenues and projected spending – $291.4 billion in the January budget – will be matched.
However, neither will be balanced in the true sense of the word, because the revenues will include at least $12 billion from the state’s emergency reserves, many billions more in loans from special funds and some accounting gimmickry.
Nor will the June 15 budget be the final spending plan for the 2024-25 fiscal year, any more than the current 2023-24 budget is what Newsom and legislators enacted last June. They have already made billions of dollars in changes in response to stubbornly subpar revenues, trying to get a jump on the state’s chronic gap between income and outgo.
The situation is a sticky wicket, to use an old-fashioned term from the sport of cricket, for the countless interest groups that depend on money from the budget. Even with the injection of money from reserves, the spending side of the budget will have to be trimmed, although by how much and from what programs are still guesswork at this stage.
Budget stakeholders are jockeying for position on the priority list with private lobbying of legislators and public pronouncements of vital need.
In theory, there’s another way Newsom and legislators could truly balance the budget and satisfy those clamoring for money – by raising taxes. Both of Newsom’s last two predecessors, Republican Arnold Schwarzenegger and Democrat Jerry Brown, faced deficits of comparable magnitude and both won legislative or voter approval of tax increases to close their gaps.
Left-leaning legislators have proposed tax increases and one might think that Newsom, who is ideologically to the left of both former governors, would be willing to embrace that solution.
However, Newsom has publicly shunned tax increases, apparently concerned that they might drive more high-income taxpayers or corporations out of the state, but perhaps because a tax hike would also undercut his strenuous efforts to raise his national political standing.
California Population Rebounds 0.2%
Politico & State Dept. of Finance
California has reversed a three-year population decline that proved politically fraught for Democrats and magnified the state’s affordability crisis.
A rebound in legal immigration and drop in Covid-19 deaths fueled the increase of 67,000, or 0.2 percent, in 2023, according to data released Tuesday morning from the state Department of Finance.
California still lost more residents to other states than it gained from them — as has been the case for two decades — but the number of people leaving for other parts of the country fell to pre-pandemic levels.
The trend reversal will be a welcome sign to Democrats in the nation’s largest state, where slowed growth has invited scathing critiques from national Republicans and already cost California a House seat.
“We have again returned to an era of positive growth, certainly lower than some of the go-go growth that we saw in the 70s and 80s and 90s,” said Finance spokesperson H.D. Palmer. “Some of the major reasons that we had declines in population are receding in the rearview mirror.”
California began to shrink in 2020 due to pandemic deaths, federal immigration restrictions and declining birth rates. It was the first time the state lost population since it began recording the numbers in 1900.
People also moved out of the state in increasing numbers, many of them able to work remotely and seek housing cheaper than what was available in costly business hubs including Silicon Valley and San Francisco.
Coastal workers increasingly moved to landlocked parts of California, too, but that trend appears to have slowed. Los Angeles and San Francisco grew last year, in a reversal of fortunes which suggests that a return to hybrid or in-person work is attracting some employees back to major cities.
“Individuals were newly freed from the office in California” in 2021 and 2022, Walter Schwarm, a demographer for the Department of Finance, said in an interview. “Some people temporarily moved places and now are back because their employer wants them to be around a little more often.”
California’s heavy reliance on immigration caused it to be hard hit by a slowdown in professional visa processing under the Trump administration and then a near-halt of movement into the country at the onset of the pandemic. Legal immigration processing has since sped up, counteracting declining birth rates and movement out of the state that have chipped away at the state’s population gains. (The Department’s estimates do not include undocumented immigrants).
Also helping: The net loss of California residents to other states fell from a peak of 356,000 in 2021 to 91,000 in 2023.
Construction of desperately needed housing remained steady last year, according to the new data. California added 116,000 units, or 0.8 percent of the state’s inventory. Around half of those were single-family homes, while most of the rest were multi-family homes like apartments.
Such construction should have put downward pressure on prices, “which certainly helps affordability,” said Schwarm, and that may have helped urban areas stem population losses.
The Department of Finance is projecting slow, positive growth over the coming years. But it could take more than that for California to regain a House seat, as some landlocked states continue to grow rapidly.
Dept of Finance full report:
https://capitolmr.com/wp-content/uploads/2024/04/E-1-Press-Release-43024.pdf
Good Water Year Highlights Historic Sharing Woes
Politico
California is having a really good water year. But all the rain and snow is doing almost nothing to lubricate the state’s perpetual conflicts between fish and farms.
Neither farmers, cities nor environmentalists feel like they’re getting enough water from the State Water Project and the federally run Central Valley Project, a semi-coordinated labyrinth of reservoirs, canals and pumping stations that together irrigates nearly 4 million acres.
Farmers and cities are arguing that the storms mean they should get more than the 40 percent of their contractual deliveries that they’ve been promised so far (they get about 63 percent on average).
They’d have more of an argument if endangered fish weren’t also losing population at the pumps: The water projects have already exceeded their take limit for the season for steelhead trout, meaning they’re violating the Endangered Species Act.
Everyone is frustrated with Gov. Gavin Newsom and President Joe Biden’s administrations, which operate the systems, as well as with themselves:
“That water is not recoverable,” said Jennifer Pierre, general manager of the State Water Contractors, which represents the 27 water agencies that get supplies from the State Water Project, including the Metropolitan Water District of Southern California and the Santa Clara Valley Water District. “We should all be in timeout right now.”
With so many cooks in the kitchen, there’s a variety of culprits. Westlands Water District, which gets its water from the CVP, is blaming the Biden administration, which runs the project through the Interior Department’s Bureau of Reclamation and the Commerce Department’s National Marine Fisheries Service.
Westlands General Manager Allison Febbo said she thinks the high steelhead losses could have been due to the fish returning in above-average numbers, rather than to pumping decisions. She’s calling for a hearing in the Republican-led House into how the CVP applied the Endangered Species Act this year.
“We are frustrated,” she said in an interview. “The actions being taken have real world consequences in our district, and we don’t see those actions particularly substantiated.”
Jon Rosenfield, science director of the environmental group San Francisco Baykeeper, is pointing at Newsom’s Department of Water Resources, which he argues loosened protections for fish during the last drought.
“This is a direct result of the Newsom administration waiving its water quality rules, which it already acknowledges are inadequate, for three years in a row,” he said. He also said the state ran its pumps too early, when there were a lot of fish present.
Newsom administration officials are penitent and vowing to change, but are also making the argument for more investment.
DWR Director Karla Nemeth called the low allocations “unusual” and traced them in part to more real-time efforts by the state to protect endangered fish after a severe die-off roughly two decades ago prompted lawsuits.
She outlined a series of “fixes,” including increasing genetic testing of fish to better figure out which ones absolutely need to be protected and building the Delta Conveyance Project, a controversial tunnel to reroute deliveries underneath the overplumbed Sacramento-San Joaquin Delta.
“This year was kind of a poster child for infrastructure that’s not really up to the challenge of the next century, and more work that needs to be done,” she said in an interview.
(Reclamation didn’t respond to a request for comment, while NMFS said “We limit impacts on threatened and endangered species based on all of the best available science to protect them and provide opportunities for their recovery.”)
The fight will continue playing out in several venues: State and federal agencies are currently renegotiating the underlying fish-science documents that guide management decisions, which are still governed by Trump-era rules.
And last week, they kicked off the monthlong process to plan summer releases from Lake Shasta, the largest reservoir in the state, which will crystallize the conflict as well as anything: Water managers will try to find a balance between releasing water for farms when they need it in the summer and maintaining cool-enough water reserves to send down rivers to protect endangered salmon eggs in the fall.
On one point, everyone agrees: California’s water system is broken, whether it’s a wet, a dry or average year.
“I don’t think that we are well-positioned for the type of adaptive management and real-time response that’s going to be needed in order to maximize our resources for the environment and for people and farms,” Pierre said. “This year really highlighted that.”
https://www.politico.com/news/2024/05/02/why-no-one-won-this-years-water-wars-california-00155675
Largest State Office Complex Opens Green Doors
Sacramento Bee
The state of California opened its largest office complex on Wednesday, a $1.03 billion, 1.25 million-square-foot group of buildings on Richards Boulevard in Sacramento.
The May S. Lee State Office Complex will serve as a workplace for more than 5,000 state workers, including employees of the Department of Tax and Fee Administration, the Department of Health Care Access and Information, the Department of Housing and Community Development, the state’s Civil Rights Department, the Department of Financial Protection and Innovation, the Department of Real Estate and the state Commission on Teacher Credentialing.
Built to a high level of sustainability, the complex features 90 EV charging stations and the largest all-electric kitchen in the country, according to California Department of General Services. The complex is named after May S. Lee, the state’s longest serving worker, who died last year at age 102. She worked for 79 years for the state of California.
https://www.sacbee.com/news/politics-government/the-state-worker/article288031985.html#storylink=cpy