For Clients & Friends of The Gualco Group, Inc.
IN THIS ISSUE – “For lots of Californians — Democrats and Republicans alike — it’s a pox on both parties. They’d like to see a new third party created.”
George Skelton, LA Times commentator & former bureau chief in Sacramento & Washington DC
- State Early Revenues Portend A Budget Deficit Return in FY24-25
- Two-Thirds of Voters Support a New Political Party in California
- $20-Billion Unemployment Insurance Debt Puts State “In A Terrible Position”
- California’s Business Climates Ranks 48th…Again
- Judge Orders Bakersfield to Keep Kern River Flowing
Capital News & Notes (CN&N) harvests 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 NOV. 3, 2023
State Early Revenues Portend A Budget Deficit Return in FY24-25
Sacramento Bee
Gov. Gavin Newsom and California lawmakers may likely need to address a larger deficit next year than previously forecast due to an “increasing likelihood” that state tax revenue will be significantly below projections, according to the state Department of Finance.
The department projected that, because of an unprecedented six-month extension in the state’s tax filing deadline earlier this year, California would collect $42 billion in October. That figure represented nearly a quarter of this fiscal year’s total projected personal income tax and a third of the corporation tax.
But, as of Oct. 25, California collected just $18 billion, according to new disclosures from the agency.
Should the revenue collected and tallied by the state in the coming weeks fail to catch up to its forecasts, Newsom and lawmakers will need to fill a wider budget gap than anticipated next year.
The 2023 Budget Act signed by Newsom in June projected a $14 billion shortfall in the next fiscal year, which begins July 1, 2024. A lot was riding on the amount of state revenue collected this month.
The Internal Revenue Service earlier this year postponed the tax deadline from April to October for the vast majority of California residents and businesses because of destructive winter storms.
The move pushed back the state’s collection of tens of billions of dollars, making for a riskier and more difficult budgeting process. The state, amid a new state bond sale, was required to provide a preliminary financial snapshot of October revenues to potential investors ahead of the end of the month.
H.D. Palmer, a spokesman for the Department of Finance, emphasized that it’s not a final assessment and the state may wind up closer to its target by the time the department releases its routine monthly revenue report in mid-November.
The financial disclosure released as part of the bond sale does not include the revenue raised during the last week of October and some tax returns filed before the report may not have been processed yet. Additionally, the IRS on Oct. 16 announced a postponement of the state and federal tax filing deadline to Nov. 16, which means some Californians who procrastinated until the last day may still not have filed their taxes.
“There is still a lot of important data that’s going to come in,” Palmer said. “How much of it is related to timing issues and how much is related to issues with how personal and corporate cash receipts came in under projections is going to be clearer in the coming weeks.”
Newsom foreshadowed this in many of his veto messages earlier this month when he cited fiscal concerns regarding the state’s current and expected budget deficits in the coming year.
https://www.sacbee.com/news/politics-government/capitol-alert/article281212308.html#storylink=cpy
Two-Thirds of Voters Support a New Political Party in California
LA Times commentary from George Skelton
For lots of Californians — Democrats and Republicans alike — it’s a pox on both parties. And they’d like to see a new third party created.
There have always been people who were sour on both parties and desired another significant option. But their numbers have been substantially increasing in recent years.
And as we approach the 2024 presidential election, one question is whether this growing segment of turned-off voters will even cast ballots, or just snub the contest.
Start with the fact that national polling by practically every survey organization has shown broad dissatisfaction with the prospective choices of the aging President Biden and multi-indicted-and-also-aging former President Trump.
Polling by the nonpartisan Public Policy Institute of California found that one-third of Californians have an unfavorable impression of both parties, including their own.
And 71% feel that the Republican and Democratic parties are doing “such a poor job that a third major party is needed.”
That seems highly unlikely to happen, of course. We’re set up for a two-party system — set up that way by the two parties in power that want to avoid added competition.
Dan Schnur, a former Republican operative who changed his voter registration to independent and teaches political communication at USC and UC Berkeley, uses a football analogy to explain how both parties have become more extreme than California voters.
“Most people are living between the political 40-yard lines and the parties have retreated to the goal lines — maybe to the parking lots,” Schnur says. “If a political party follows the whims of its most ideologically extreme members, it’s going to leave a lot of people behind.”
In California, we barely even have a second party.
No GOP presidential nominee has carried the state since 1988. That was also the last year a Republican won a U.S. Senate race in California. No Republican has been elected to statewide office since 2006. Democrats greatly outnumber Republicans in the U.S. House delegation, 40 to 12, and hold supermajority control of both state legislative houses.
Democratic voters outnumber Republicans by nearly 2 to 1, with independents — No Party Preference — slightly below the GOP.
But just because Democrats run the state government — along with most major cities — and hold a whopping advantage in voter registration doesn’t mean that their voters are doing cartwheels about the party.
The PPIC poll showed that 28% of California Democrats have an unfavorable impression of their party. And 70% feel a third party is needed.
Among Republican voters, 32% view their party unfavorably. And 61% desire a new party.
Independents, of course, already have opted out of both parties. They overwhelmingly would like to see a new party.
Overall among California adults, 51% view the Democratic Party negatively, 76% are down on the GOP and 33% don’t like either — up from 20% three years ago.
The grumpy attitude has gotten worse in recent years. In 2016, only 37% of Californians had an unfavorable impression of the Democratic Party. Just three years ago, far fewer people were negative about the GOP, 58%. In 2012, fewer than half the people thought a third party was necessary. Now it’s nearly three-fourths.
PPIC pollster Mark Baldassare blames Congress for most of the voters’ growing complaints. In the survey, 81% of voters disapproved of Congress’ job performance.
And the poll was conducted even before weeks of leaderless chaos in the House following the ouster of Bakersfield Rep. Kevin McCarthy as speaker. GOP rebels complained that McCarthy compromised with Democrats to avoid a government shutdown. In today’s House, that is an unpardonable GOP sin.
“It’s really about what’s going on in Washington,” Baldassare says. “A large share of Californians feel Congress is not working.”
The state Legislature may pass bills that voters don’t like, the pollster says, but “things get done. People aren’t left worrying about whether the government is going to run out of money or who’s in charge when Israel is attacked by Hamas.”
He adds: “There’s a growing and large share of voters who are going to decide whether they’re going to sit out the next election. Or look for a third party candidate and throw a monkey wrench into partisan politics. They want more choices.”
Mike Madrid, a Republican consultant and critic of the GOP for not adjusting to California’s growing ethnic diversity and progressive culture, says just because California is so ‘blue,’ that doesn’t mean it’s a Democratic state.
“Voters just don’t view the Republican Party as a real option. They’re choosing between the lesser of two evils. They still view the better choice as evil. Democrats are the less odious option.
“It’s not that Californians believe Democrats are doing a great job. It’s just that they’re afraid of what Republicans would do in power. Republicans are so out of step on culture issues in California.”
Younger voters — those under 35 — especially feel the need for another major party. That could be bad news for the future. Or good news.
The GOP was created out of the strength of a brave new American savior, Abraham Lincoln. The conservative Whig Party collapsed. God help us if the nation is ever threatened that much again from within.
But we did have a president and his minions — including this new Republican House speaker — try to overturn a presidential election three years ago. So few things are absolutely certain.
$20-Billion Unemployment Insurance Debt Puts State “In A Terrible Position”
CalMatters
California’s unemployment insurance fund is $20 billion in debt, putting the state in a terrible position in case of a recession.
The deep debt — incurred during the COVID-19 pandemic as millions of people lost their jobs and the state borrowed money from the federal government for unemployment benefits — is on Gov. Gavin Newsom’s mind.
He cited it as a factor in his recent veto of a bill that would have allowed striking workers to be eligible for unemployment benefits, mentioning that the state is paying hundreds of millions of dollars of interest on the debt.
It’s also top of mind for businesses, which face an increase in required contributions toward the state’s unemployment insurance fund as a result. And it’s on the minds of those who are concerned about whether the state’s unemployment system can handle another crisis such as a pandemic or a recession.
The unemployment insurance fund had regular solvency issues even before the pandemic.
Now the situation is more dire, with the Employment Development Department issuing a spring forecast that the debt — which the Legislative Analyst’s Office has said does not include the infamous unemployment fraud that mostly involved temporary federal benefits that the state doesn’t have to pay back — would grow to $19.7 billion at the end of the year.
In addition, the state Legislative Analyst’s Office said this summer that for the first time during a period of job growth, it expects California’s unemployment insurance fund to have fewer contributions coming in than benefits being paid out.
“The administration’s forecast of a UI trust fund deficit adds urgency that may not have existed last year, making this one of the key issues facing the Legislature in the near future,” said Chas Alamo, principal fiscal and policy analyst for the Legislative Analyst’s Office.
The required repayment of the debt has triggered automatic tax increases on employers, which under federal law are responsible for paying down the principal, while the state typically pays the interest.
The governor last year proposed using $3 billion from a projected budget surplus to pay off some of the debt, but ended up paying only $250 million toward the principal. The state has since swung to a budget deficit, and this year paid $306 million in interest by borrowing from the disability insurance fund.
Alamo has forecast that depending on interest rates, the debt could cost the state anywhere from a total of $3 billion to $7 billion in interest payments for the next several years, possibly through 2033.
The California unemployment insurance fund’s solvency problems go way back.
The state also borrowed from the federal government for unemployment benefits during the Great Recession; that debt cost the state $1.4 billion in interest payments from 2011 until 2018, when it was paid off.
The fund was solvent as recently as 2018 and 2019, but still below the recommended standard of having enough funds to distribute benefits for a year, according to Department of Labor data analyzed by the Century Foundation, a progressive think tank that advocates for equity in domestic and foreign policy. In 2017, and each year before that going back to 2009, the fund had been insolvent.
The last time the state’s unemployment insurance fund met the standard was 1990.
The current debt has triggered a $21 increase per employee that employers must pay in payroll taxes starting this year.
Employers’ rate will keep rising an additional $21 per employee each year until the state pays off the debt to the federal government, for a total of $945 per employee through 2031, according to projections by the Legislative Analyst’s Office based on the average state unemployment insurance tax rate.
“California’s business community is terribly concerned about our state’s unemployment insurance fund debt and the increased taxes it is bringing to businesses and will continue to bring for the next decade,” said Rob Moutrie, a policy advocate for the California Chamber of Commerce.
“We believe all the factors affecting California’s unemployment insurance fund, including eligibility issues and EDD’s failures, must be considered when looking at the unprecedented debt.”
But others say the state’s system to fund unemployment has for years been structured to favor businesses in the first place.
“Big businesses haven’t been paying the true cost of unemployment for decades,” said Alissa Anderson, a senior policy fellow at the California Budget & Policy Center, who said she plans to speak with Portantino’s office about the issue. Anderson added that shifting unemployment insurance debt to the state, as businesses have called for, is “a backdoor tax break for businesses.”
The state’s unemployment fund is funded by a variable percentage tax, currently 3.46%, on employers based on the first $7,000 each employee earns, the minimum taxable wage base required by federal law — a base California has not raised since 1983.
That same wage base also applies to employers of both high-wage earners and low-wage earners, even though high-wage earners are eligible for higher unemployment benefits when they lose their jobs.
Other states have raised their taxable wage bases as high as 100% of average weekly wages; in states like Washington, the taxable wage base this year is $67,600.
Economists say the fact that California’s taxable wage base has been the same for so long is one of the main reasons its unemployment fund is consistently underfunded or insolvent.
Another reason is that the state has added benefits and eligibility over the years without adjusting how the system is funded.
“California never has sufficient funding,” said Stephen Wandner, senior fellow at the National Academy of Social Insurance and author of the book “Transforming Unemployment Insurance for the Twenty-First Century: A Comprehensive Guide to Reform.”
Wandner called it “unreasonable… to have fairly generous benefits and extremely weak financing. It’s not sustainable.”
“The last time I checked, 1983 was about 40 years ago,” Wandner added. “What’s happened since then? Wages and prices have gone up every year.”
In his book, Wandner recommends that states such as California should index their taxable wage base by setting it at 50% or more of the Social Security taxable wage base, or by indexing it to wage growth.
But Alamo, of the state Legislative Analyst’s Office, said that while the state’s wage base is lower than others, the percentage employers pay on that wage base is actually greater than the percentage employers in many other states pay on higher wage bases. “The amount contributed on behalf of workers is pretty middle of the pack,” he said.
The state should take action to address the problems with the fund, said Jenna Gerry, senior staff attorney for the National Employment Law Project who covers unemployment insurance issues in California.
“People need to understand the historic nature of this, and that something needs to be done now,” Gerry said, adding that fixing the system is also an equity issue in a high-cost state.
The state’s unemployment benefit has been at a maximum $450 a week since 2005. “Who can live on that in California?” Gerry asked. Gerry added that the state needs to fix the unemployment fund’s solvency issues before it can raise the benefit limit.
Bill Sokol, who teaches labor law at San Francisco State University, said the system to fund unemployment insurance hasn’t changed all these years because the business lobby is strong.
Sokol also said labor is fighting for more pressing issues that affect employed workers, not unemployed ones.
Lorena Gonzalez Fletcher, head of the California Labor Federation, agreed.
There are different ways to “sculpt” a solution, Gonzales Fletcher said, including lowering the percentage all employers pay into the fund but bumping up what employers of higher-wage workers are required to pay.
That gets into the fact that employers of different sizes have differing concerns.
Small Business Majority, a national nonprofit organization that advocates especially for under-resourced entrepreneurs and small businesses, wants to address equity issues including the disproportionate effect the funding system has on smaller businesses.
Bianca Bloomquist, the organization’s California policy director, called the system “regressive” and said it will be important to gather data about its impact on small businesses.
Bloomquist added that a well-funded unemployment insurance fund is vital because small businesses understand that “when a community is suffering (from unemployment), small businesses suffer.”
Meanwhile, CalChamber and other business groups in 2021 asked the governor to form a working group to address the fund’s debt and solvency issues.
Moutrie of CalChamber said there has been no meeting about the matter so far, but that he expects meetings to happen next year.
Stack, the governor’s spokesperson, said a working group has not been created, and that Newsom’s office had no comment on a possible push by business groups to discuss the issue.
California’s Business Climates Ranks 48th…Again
Sacramento Bee
For the 12th year in a row, California’s business tax climate ranks a dismal 48th among the 50 states, the latest survey from the Tax Foundation finds.
The state’s perennially low ranking from the Washington-based research group, which generally is wary of higher taxes, is the result of high income, sales and corporate tax rates.
California’s individual income tax rates rank 49th, topped only by New York. Its corporate tax burden is 45th and its sales tax rate is 47th. The state’s unemployment and property taxes rank roughly in the middle of all the states.
“The state has substantial built-in benefits, and the tech sector in particular has long thrived in California, but the state has experienced years of (people leaving the state),” said Jared Walczak, Tax Foundation vice president of state projects and a co-author of the State Business Tax Climate Index.
He predicted as people and businesses become more mobile, and the tech industry is less concentrated in Silicon Valley, “California’s uncompetitive taxes will become increasingly important.” Sung Won Sohn, president of SS Economics, a Los Angeles-based economic consulting firm, found it was “not surprising that California is near the bottom of the Business Climate Ranking. We don’t need the Tax Foundation to tell us how poor California’s business climate is.”
He, too, cited tax rates as a problem. “When it comes to taxes, less is more,” Sophn said. “With lower tax rates, economic growth speeds up generating more tax revenues.”
Gov. Gavin Newsom has made an aggressive effort to lure and expand businesses in the state, whose economy is roughly the world’s fourth largest.
His Department of Business and Economic Development cites data from independent sources showing that California has led the nation in business start-ups and access to venture capital funding.
Newsom has just returned from a trip to China where, among other things, he touted California’s business opportunities. His office Monday provided a lengthy list detailing why the state’s economy is thriving.
Citing independent sources, it explained how the state has 12% of the nation’s population but contributes 14.8% to the country’s Gross National Product. Of Time Magazine’s 2022 list of the nation’s 100 most influential companies, 34 are based in California, more than any state.
California’s is the leading agricultural state, with more than one third of the nation’s vegetables and three-fourths of its fruits and nuts grown there. And California’s small businesses employ 7.42 million people, far ahead of second place Texas with 3.1 million.
But the state has lagged in major measures of economic health. Its unemployment rate has consistently been above the national average. The state September rate was 4.7%, up from 4% a year ago.
The national rate last month was 3.8%. California’s Gross Domestic Product, the value of the economy’s goods and services, was up at an annual rate of 1.2% in the first three months of this year, below the nation’s 2% average.
The Tax Foundation regards taxes as an important culprit in its rating of California’s business climate. “At every turn, California not only has among the highest taxes in the nation, but also some of the worst-structured taxes,” Walczak said.
Only New York and New Jersey ranked lower overall. Wyoming and South Dakota were first and second.
One reason for the rankings: New Jersey has the nation’s highest corporate tax rate, 11.5%. California’s tax rate is 8.84%, below four other states, but well above North Carolina’s nationally-lowest rate of 2.5%.
California is notably hurt by its income tax rates. Its top rate of 13.3%, which applies only to income of more than $1 million, is the nation’s highest. Next are Hawaii, 11%, New York, 10.9%, New Jersey, 10.75%, Oregon, 9.9% and Minnesota, 9.85%. Seven states have no individual income tax, while Arizona and North Dakota have a 2.5% rate.
The study also saw California’s tax base as broad. It included the state along with seven others in citing the tax base as being “found to cause an unnecessary drag on economic activity.” Sales and excise taxes also are criticized in the report. California’s taxes on motor fuel, when combined with the federal gasoline tax, are the nation’s highest at 76 cents per gallon.
https://www.sacbee.com/news/california/article281206333.html#storylink=cpy
Judge Orders Bakersfield to Keep Kern River Flowing
Bakersfield Californian
In what one attorney called a “moment of truth” for the city of Bakersfield, a judge ordered the city to keep enough water in the normally dry Kern River to protect fish populations.
The 21-page preliminary injunction was issued by Kern County Superior Court Judge Gregory Pulskamp Monday afternoon.
Colin Pearce, who represents the city on Kern River issues, declined to comment, saying the city is still reviewing the order. It’s unclear if the city, or other Kern River interests, will appeal the injunction.
The plaintiffs called the ruling “amazing.”
“There isn’t a single disagreement from the court with our arguments,” said Adam Keats, an attorney representing Bring Back the Kern, which, along with Water Audit of California and several other groups, sought the injunction against the city of Bakersfield.
The injunction was sought as part of an ongoing lawsuit by those groups that seeks to force the city to study the environmental impacts of diversions off the river made under more than 135 years of agreements and contracts.
The plaintiffs felt they had to file the injunction after this year’s epic runoff created a full and flowing river that brought fish back.
“There was something magical about the timing of this and there’s no question it helped from a legal perspective,” Keats said. “It made all the difference in the world because now there are fish in the water.”
The original lawsuit, as well as the injunction, are based on California Fish and Game Code 5937, which requires enough water to flow past dams to keep downstream fish populations in “good condition.” The injunction will be in place through the duration of the lawsuit.
“The law is simple, direct and clear,” Keats said. “There’s just no wiggle room.”
Asked if there might be an opportunity to settle the case, Keats gave an unequivocal “yes.”
“The city would be crazy not to settle this case and (the) court just gave us a clear roadmap that this is solvable,” he said.
The city owns or operates six diversion weirs from Hart Park to west of Allen Road that move water to other so-called Kern River interests including Kern Delta Water District, the Kern County Water Agency and the North Kern, Buena Vista and Rosedale-Rio Bravo water storage districts.
The judge didn’t decree how much water is needed in the river to protect fish, instead leaving that up to the city and plaintiffs to determine. In fact, Pulskamp notes in his order that the city has worked in various ways over the years to keep as much water flowing in the river through town as possible.
“They’re the ones saying they’ve been trying to do this. So, if the city can’t figure out how to do this now, then they never wanted a flowing river,” Keats said. “This is Bakersfield’s moment of truth.”
He discounted the layers of contracts and agreements, known collectively as the “law of the river,” and noted Pulskamp’s order includes the city and plaintiffs, not the other Kern River interests.
“This is a rights issue and that’s superior to any possible breach of contract issues,” he said.
The order notes that there should be enough water for all uses — people, agriculture and the environment.
“What is clear, however, is that the average annual Kern River flows of approximately 726,000 acre-feet is an enormous amount of water that should suffice for the reasonable use of all interested stakeholders,” the order states. “In the words of the State Constitution, our vast water resources should be used in a manner that reflects the ‘reasonable and beneficial use thereof in the interest of the people and for the public welfare.’”
“To me, that says the court recognizes ag needs to play well with others and it’s not the end of the world for them to do so,” Keats said.
He predicted this order would have generational impacts for the Kern River.