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IN THIS ISSUE – “These were difficult choices”
Assemblymember Jesse Gabriel, Budget Committee Chair, on the pending FY24-25 State Budget
- Budget Countdown – Governor & Legislators Must Solve Deficit Math
- Tribe Donates $4 Million to Lt. Gov. Politico Action Committee
- Court OKs Accelerated CEQA for Sites Reservoir
- Managing California’s Water Trickles Down to Who Has the Rights
- “This is a Shocker”: New York Governor Halts Traffic Congestion Charge for Motorists
Capitol 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 JUNE 7, 2024
Deficit Countdown – Governor & Legislators Must Solve Deficit Math
LA Times
With a deadline looming, Gov. Gavin Newsom and Democrats in the state Legislature are working to settle their differences over access to public healthcare services, delaying minimum wage increases for workers and pausing tax credits for businesses as they cut their way out of California’s $45-billion budget deficit.
The governor’s proposal takes $12.2 billion from the state’s rainy day reserves to help cover the shortfall over the next two years and reduces funding to address climate change, provide broadband internet and increase subsidized child care, among dozens of other cuts.
Lawmakers responded last week with their own plan, which largely aligns with the governor’s strategy but pushes back on some of his proposals to reduce funding for homelessness and housing. Democrats in the Legislature called for substantially deeper cuts to climate change programs and the state prison system.
The Legislature’s proposal highlights key differences between the governor and lawmakers in his own party over funding for some of his marquee policies, including homelessness and prison reform.
Lawmakers proposed an additional $1 billion in cuts to the Department of Corrections and Rehabilitation, which includes at least $12 million in reductions to the governor’s project to transform San Quentin.
Newsom’s cuts included $80.6 million in savings from the newly announced deactivation of 46 housing units at 13 state prisons.
Democrats in the Legislature also want to spend $1 billion more than the governor on a sixth round of Homeless Housing, Assistance and Prevention grants to local governments to combat the homelessness crisis. At the same time, lawmakers proposed cutting $100 million in funding to clean up homeless encampments in the current budget year.
Assembly Budget Chair Jesse Gabriel (D-Encino) said the Legislature’s budget pitch restores “many of the most painful cuts to safety net programs, housing and health, including rate increases for health providers” proposed by the governor.
Lawmakers have targeted some of Newsom’s marquee programs, such as decreasing grants to curtail homeless encampments and money to support behavioral health.
“These were difficult choices,” Gabriel said in an Assembly budget hearing last week. “But we had to set priorities and create a plan of action because that is what this moment requires.”
California is experiencing a deficit largely because tax revenues came in lower than expected, which Newsom has described as a return to normal after the economic boom brought on by the COVID-19 pandemic and billions of dollars in federal stimulus payments and business loans. Overspending, due to poor revenue forecasts, has also worsened the state’s financial troubles.
Staff members for legislative leaders and the governor have negotiated privately for the last week in hopes of reaching an agreement before the June 15 deadline for the Legislature to pass a state budget.
If lawmakers and the governor fail to reach a budget deal in the coming days, the Senate and Assembly are expected to pass a preliminary budget next week. Lawmakers will then adopt additional bills that reflect an agreement with the governor before the budget takes effect on July 1.
These are a few key differences they are expected to resolve in a final budget agreement:
Newsom and lawmakers renewed a tax last June on managed care organizations, known as the MCO tax. The tax applies to health insurance providers that charge fixed monthly payments for services and is based on the number of people enrolled in plans each month.
The tax essentially acts as a mechanism to allow California to collect billions in additional federal funds for Medi-Cal, California’s healthcare system for low-income residents, as Democrats expand eligibility to all income-qualifying immigrants.
The law Democrats approved last year extends the MCO tax through 2027 and dedicates a portion of the revenue to increase payment rates to doctors and other Medi-Cal providers, in some cases, for the first time in two decades.
But Newsom’s budget proposal repurposes the funding, taking $6.7 billion over multiple years that was intended to go toward higher provider rates and using that money instead for general Medi-Cal costs. By tweaking the tax, Newsom’s changes could generate $9.7 billion to support the Medi-Cal program in total, with federal approval.
The governor’s proposal frustrates doctors and other healthcare providers, who have argued for years that the state’s reimbursement rates for serving Medi-Cal patients are too low to sustain a practice. The low reimbursements rates, they say, leave the state system short of providers and California’s most vulnerable populations without access to care. Doctors are leading the charge to pass a measure on the 2024 ballot that would permanently establish an MCO tax and direct a portion of the revenue to higher provider reimbursement rates.
The budget plan offered by Legislative Democrats rejects Newsom’s plan to eliminate more than $2.4 billion in provider rate increases scheduled to take effect Jan. 1, 2025. Lawmakers instead delay most of the rate hikes until 2026.
The California Medical Assn., which is among a coalition opposed to both proposals, said the governor and lawmakers “have a generational opportunity to achieve true equity in health care.”
“Too many families cannot get the care they need because we have refused to appropriately fund Medi-Cal,” said Dustin Corcoran, chief executive of the CMA. “The state has added millions of new patients in Medi-Cal and this funding would ensure we will have the providers to care for them.”
Newsom signed legislation in October that increased the minimum wage for healthcare workers to $25 per hour. Labor unions celebrated their hard-fought wage hike, which will mostly benefit workers who are not directly involved in providing care.
At the time, no one, including the governor, publicly mentioned a major caveat he laid out behind closed doors before he agreed to sign the bill: If state revenues ended up as dire as forecasts predicted, there was “no way in hell” he would allow the law to take effect as planned in June.
Within weeks after signing the law, Newsom began calling for reforms to reduce funding for the wage increase as the budget deficit grew. Negotiations, between the administration, labor unions, and the healthcare industry, have played out privately for months without a resolution.
The governor since has been crystal clear about his concerns over the plan’s price tag, originally pegged at $2 billion from the state general fund, with another $2 billion paid with federal funds, in its first year. Other estimates suggest the administration is overestimating the cost, which could be closer to $300 million.
With negotiations with labor ongoing, Newsom provided no funding for the wage increases in his May budget proposal. Democratic lawmakers, siding with unions, want to spend $100 million for the pay raises in 2024-25, which would increase to $300 million in the third year of implementation.
In the early stages of the pandemic, Newsom and lawmakers paused the ability of businesses with income of more than $1 million from deducting net operating losses from their tax bills, and limited business tax credits in the state to $5 million per filer in 2020, 2021 and 2022.
The changes were adopted to temporarily boost state tax revenues during a chaotic time when the pandemic created economic uncertainty across the nation and California projected massive revenue losses.
Newsom restored the deductions and ended the tax limits one year early in 2022 when the state anticipated a massive budget surplus. Now with California facing a deficit, he wants to suspend and cap the tax breaks again for the 2025, 2026 and 2027 tax years, with the ability to restore the credits if revenues turnaround.
Lawmakers agreed with the governor’s plan, but sought to apply the changes one year earlier. Implementing the tax credit adjustments in 2024 allows the Legislature to adopt fewer cuts to other programs in its budget plan, saving more than $3 billion into 2026.
Loren Kaye, president of a think tank affiliated with the California Chamber of Commerce called the California Foundation for Commerce and Education, said that companies factor the credits into their future business plans and that abruptly losing those savings can force them to scale back on employees or inventory to cover the cost of an unexpected tax bill.
“In this case, the Legislature has made it a little bit worse because at least with the governor’s proposal you have a heads up because it begins in tax year 2025,” Kaye said.
This could serve as a disincentive to companies that operate in California because of generous research and development or motion picture credits, Kaye said.
“We’re all about innovation,” Kaye said. “It’s one of our great competitive advantages and it could be heartbreaking to see people think that we’re not supporting innovation the way we have historically.”
Tribe Donates $4 Million to Lt. Gov. Politico Action Committee
Politico’s California Playbook
The Federated Indians of Graton Rancheria are kicking in $4 million to Californians for Choice, the Super PAC recently launched by Lt. Gov. Eleni Kounalakis to help Biden and bolster her profile in California.
The contribution, first revealed to Politico, is the biggest donation yet to the PAC. The tribe has also signed up more than 4,000 volunteers for the effort.
“Women are facing an existential threat to their fundamental freedom and the right to make decisions over their bodies,” Greg Sarris, the tribe’s chairman, said in a statement. “Californians for Choice is mobilizing volunteers across California to fight back, and the Federated Indians of Graton Rancheria is proud to partner with Lieutenant Governor Kounalakis in this effort.”
The Federated Indians of Graton Rancheria have a history of backing abortion rights efforts, and in 2022 donated $5 million to the campaign to enshrine reproductive rights in the California Constitution.
Court OKs Accelerated CEQA for Sites Reservoir
Sacramento Bee
California is one step closer to building its largest water storage facility in nearly 50 years, after a court ruled in favor of the Sites Reservoir project following a challenge by environmental groups.
The Yolo County Superior Court issued the 65 page ruling late last week, marking a possible end to the project’s environmental litigation. The relatively quick ruling stands in contrast to a typical, multi-year litigation period under the Environmental Quality Act (CEQA).
Gov. Gavin Newsom accelerated the project’s CEQA litigation period in November under an infrastructure streamlining package passed the previous summer. He celebrated the court’s ruling in a news release Tuesday.
“California needs more water storage, and we have no time to waste — projects like the Sites Reservoir will capture rain and snow runoff to supply millions of homes with clean drinking water,” Newsom said.
The proposed $4.5 billion reservoir would inundate nearly 14,000 acres of ranch lands in Glenn and Colusa counties to store water diverted from the Sacramento River through new a system of dams, pipelines and a bridge.
With a maximum capacity of 1.5 million acre-feet of water, proponents say Sites will boost storage amid unpredictable climate swings.
The court ruling marks the first time a CEQA process has been streamlined under Newsom’s SB 149, which allows the governor to certify certain projects for judicial fast tracking.
Under the law, courts must decide CEQA challenges within 270 days. Sites Reservoir is currently acquiring a multitude of state and federal permits to start construction, which is expected to begin late 2026.
That includes a water rights process with the state Water Resources Control Board, which will kick off public hearings later this month. Water rights hearings are scheduled to take place over several days and extend through October.
Critics warn it will threaten river habitat for fish and other wildlife and lead to minimal water storage benefits. The lawsuit against the project was filed by a coalition of environmental groups including Friends of the River, Center for Biological Diversity, Save California Salmon and the Sierra Club.
But the court found that the environmental review of the project and consideration of alternatives was sufficient, and within the jurisdiction of the Sites Reservoir Authority.
The coalition of environmental groups have 5 days to appeal the ruling issued Friday.
https://www.sacbee.com/news/politics-government/capitol-alert/article289005314.html#storylink=cpy
Managing California’s Water Trickles Down to Who Has the Rights
CalMatters commentary by Dan Walters
California is a semi-arid state in which the availability of water determines land use, and in turn shapes the economy.
That, in a nutshell, explains why Californians have been jousting over water for the state’s entire 174-year history.
The decades of what some have dubbed “water wars” may be approaching a climactic point as climate change, economic evolution, stagnant population growth and environmental consciousness compel decisions on California’s water future.
A new study, conducted by researchers at three University of California campuses, projects that a combination of factors will reduce California’s water supply by up to 9 million acre-feet a year – roughly the equivalent of all non-agricultural human use.
They include effects of climate change, new regulations to stem the overdraft of underground water, reducing Colorado River diversions and increasing environmental flows, especially those through the Sacramento-San Joaquin Delta.
In an average year, around 200 million acre-feet of water fall on the state as rain or snow. Evaporation and percolation take most of it, leaving about 80 million acre-feet to be divvied up among three major uses. Agricultural irrigation and environmental flows to the ocean are roughly equal at around 35 million acre-feet while residential, commercial and industrial users take the remainder.
The latter is not only the smallest of the three uses but has been remarkably stable – even declining somewhat, despite decades of high population growth – thanks to intensive conservation programs.
Although water officials constantly beseech Californians to limit their personal consumption of water, the real conflict in recent years, particularly during periods of drought, has pitted agricultural interests against environmentalists over the flows needed to nurture fish and other wildlife.
Environmentalists have pressed state water officials, particularly the Water Resources Control Board, to compel farmers to reduce diversions from rivers to enhance flows. Agriculture is also being squeezed by new restrictions on tapping aquifers via wells. Moreover, California’s largest-in-the-nation agricultural sector has also been shifting from seasonal crops to nuts, grapes and other permanent, high-value products, which need year-round watering.
“Good management and policy for this situation requires organized serious attention and consistent long-term policy, without complacency or panic,” the UC study concludes.
The new study bolsters a 2022 policy paper issued by the Newsom administration calling for 4 million acre-feet of new water storage, another 1.3 million in savings through conservation and reuse of wastewater, and new supplies from desalination and other processes.
The study also arrives as legislation that would set new targets for increased water supply, Senate Bill 366, makes its way through the Capitol with broad support from water interests of all varieties.
It’s one thing to point out that California faces a potential water supply crisis and should be earnestly trying to avoid the effects, but actually doing something confronts two steep hurdles: the glacial pace of water projects of any kind, and unresolved conflict over water rights, some of which date back to the state’s founding in 1850.
The Sites Reservoir exemplifies the former. The western Sacramento Valley project, which would add 1.5 million acre-feet of off-stream storage, has moved closer to reality in recent years after seven decades of sitting on the shelf. Ditto for the long-planned canal or tunnel that would bypass the Sacramento-San Joaquin Delta.
The notion of a comprehensive, long-range program making California’s uncertain water supply more resilient sounds great, and the clock is ticking. However, it assumes that officialdom has the legal authority to make it happen.
Until and unless the issue of water rights is resolved, the much-discussed reallocation of supplies – more for environmental flows and less for agriculture – will remain stalled.
https://calmatters.org/commentary/2024/06/californias-water-supply-resilient-system/
“This is a Shocker”: New York Governor Halts Traffic Congestion Charge for Motorists
Bloomberg
New York Governor Kathy Hochul halted a plan to charge motorists driving into Manhattan, upending an initiative years in the making that was finally set to kick in at the end of this month.
The governor cited inflation and financial pressures on working-class New Yorkers as reasons to not implement congestion pricing, but the initiative was shaping up to be a political albatross ahead of this year’s congressional elections.
“The decision is about doing what’s right for the people who make our city thrive,” she said Wednesday in a pre-taped statement posted to the state’s website. “My focus must be on putting more money back into people’s pockets.”
The new pricing system was set to begin June 30 and would have been the first of its kind in the US. It was expected to bring in $1 billion a year to help modernize a more than 100-year old transit system that’s been ravaged by episodes of heavy rain and severe flooding. The money was meant to finance subway signal upgrades to reduce train delays, new electric buses and extending the Second Avenue subway to Harlem. “This is a shocker,” said Andrew Albert, an MTA board member who voted in favor of congestion pricing. “It’s just unreal. The longer you wait, the more expensive things get.”
The shift away from the tolling initiative is a stunning reversal for Hochul, who just two weeks ago touted the plan as a way to reduce the city’s idle traffic. Virtually all of the tolling gantries are already installed on Manhattan streets and ready to charge drivers.
“It took a long time because people feared backlash from drivers set in their ways,” Hochul said at the time. “But, much like with housing, if we’re serious about making cities more livable, we must get over that.”
Unpopular Policy
Hochul was facing the implementation of an unpopular policy that could have hurt Democrats in key congressional races in November. A Siena poll from April found 63% of New Yorkers disapproved of the plan, including majorities of Democrats, Republicans and independent voters. And although Hochul isn’t up for reelection until 2026, her own approval ratings have been suffering, with a May Siena poll finding her with a 38%-46% favorability rating among New Yorkers.