For Clients & Friends of The Gualco Group, Inc.
IN THIS ISSUE – “We don’t have the money”
State Sen. Anna Caballero, Appropriations Committee Chair, upon killing hundreds of bills
- Newsom Brings Tough Fiscal Reforms to Legislative Budget Talks
- Troubled California Economy Adds to State Budget Deficit
- Budget Reality Bites Legislative Ambitions – Fiscal Committees Kill, Reduce Hundreds of Bills
- 2026 Aspirants for Governor Throw Elbows & Dial for Dollars…”There Is No Big Behemoth”
- Pumped Up: CA and NV Governors Trade Barbs Over Gas Prices
- Delta Conveyance Project Cost & Necessity Increase, DWR Says
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 17, 2024
Newsom Brings Tough Fiscal Reforms to Legislative Budget Talks
LA Times commentary from George Skelton
Here’s a novel idea: Don’t spend money until you’ve got it. What a concept!
Gov. Gavin Newsom proposed that as a way to head off future crippling state budget deficits. They’ve become all too common as Sacramento politicians muddle through cycles of economic booms and busts.
State budgeting in California is a constant roller coaster ride because of our volatile, outdated tax system. Politicians don’t have the guts to fix it because there’d be losers as well as winners. They balk at alienating any friendly interest group or voter.
California, unlike the federal government, is too dependent on rich people’s capital gains to finance its generous programs. When the stock market soars, the state reaps a hefty chunk. When the market tumbles, so does state tax revenue.
This again was made clear when Newsom on Friday sent the Legislature a revised and reduced $288-billion state budget proposal for the fiscal year that begins July 1.
In 2022, capital gains comprised 13% of total personal income taxes owed, according to the state Department of Finance. Those taxes were primarily paid in 2023 and they’re currently helping to finance the red-ink state budget. But that was a huge drop in capital gains revenue from the previous year. In 2021, capital gains accounted for 25% of total income tax liability.
That amounted to an $18-billion reduction in capital gains revenue from one year to the next.
And it’s worse than that. Those figures “understate the impact of capital gains revenue on the budget,” a finance department numbers cruncher told me. That’s because they don’t include the capital gains tax liabilities of nonresidents, partnerships and corporations. They’re equally unstable.
Here’s a more familiar example of the volatility: In the 2022 tax year, during a bear market on Wall Street, the top 1% of California earners paid 38.7% of the state personal income tax. But in 2021 when stocks were booming, the top 1% kicked in virtually half — 49.9% — of the income tax.
What all this adds up to is Newsom and the Legislature crafting budgets based on revenue projections that fall far short of expectations. The budgets then develop huge holes. And now they need to be filled with spending cuts, borrowed money, savings and gimmicks.
Newsom’s revised budget indicates a budget deficit of about $45 billion, up $7 billion from what he projected in January. But no one really knows what the actual number is. Independent state Legislative Analyst Gabe Petek has pegged it at $73 billion over a three-year period.
“The volatility is incredible,” Newsom repeatedly said, one way or another, while outlining his revised budget proposal.
Back to the governor’s partial longtime solution: He wants to hold up some spending until the projected revenue — particularly from capital gains — actually arrives in the state banking account. In fact, he’d create a new account for “excess revenue.”
“Limit the appropriation of funds until they materialize,” Newsom told reporters. In his budget document, he puts it this way: “Ensure that the state does not commit certain amounts of future anticipated revenues until such revenues have been realized.”
Newsom offered no details beyond that — a familiar pattern for this governor and the Legislature. The specifics will be negotiated behind closed doors, away from public sight and hearing.
Finance Director Joe Stephenshaw said the administration hopes to include the concept in the new budget.
By law, the spending plan must be passed by June 15. If it isn’t, legislators will lose their pay and expense money. But many details won’t be rolled out until later in so-called trailer bills. So the budget deadline isn’t really met — only in name.
Newsom considers his proposed budget account a necessary step toward enacting a requirement that the state sock away more money in a rainy day reserve. That would necessitate voter approval. He thinks the account would help build public support needed to overcome likely opposition from the spending lobby to more savings.
But California’s antiquated tax system can’t be reformed and made less volatile without flattening the tax base.
Newsom admitted that needs to be done, but said he didn’t know how, given political realities.
“Shall we, or should we, reform the tax system? The answer is yes,” Newsom told reporters, anticipating they’d ask. “How we do that is a more difficult and challenging conversation. And the volatility is foundational in terms of the tax system we have — the progressive tax system.”
Translation: California liberal government is fueled by soaking the rich and imposing the nation’s highest state income tax rate, 13.3%.
Well, here’s an idea: How about doing as the federal government does? Tax capital gains at less than ordinary income. California taxes them the same as salaries.
As I’ve written ad nauseam, the highest income tax rates should be lowered and the sales tax extended to services that the wealthy use, such as attorney, architect — and political consultancy. We’re one of the few states that doesn’t tax services. And we’ve evolved into a service economy.
Newsom did a shout-out for former state Sen. Bob Hertzberg (D-Van Nuys), who championed tax reform unsuccessfully for years.
Hertzberg offered “the broad approximation of the approach that I’ve long thought made sense,” Newsom said.
The former legislator tried to promote, among other things, taxing services that businesses pay and could deduct on their income tax. No sale.
In their closeted negotiations, legislators at least should agree with the governor not to spend money they don’t have.
Troubled California Economy Adds to State Budget Deficit
CalMatters Commentary from Dan Walters
As Gov. Gavin Newsom and state legislators spend the next few weeks fashioning a state budget that’s plagued by a multibillion-dollar deficit, they can’t count on a booming economy to make their task easier.
California’s recovery from the devastating economic impacts of the COVID-19 pandemic has been sluggish at best, trailing what’s happening in the nation as a whole and in the state’s archrivals, such as Texas and Florida.
According to Employment Development Department data, there are 200,000 fewer Californians in the labor force – those employed or seeking employment – than there were in February 2020, just before the pandemic exploded. There are 500,000 fewer employed, and 200,000 more unemployed.
While California’s unemployment rate of 5.3% in March was just a third of what it was at the height of the pandemic-induced recession, it was still the highest of any state, markedly higher than the national rate of 3.9% and nearly two percentage points higher than it was before the pandemic.
By the federal government’s more nuanced measure of employment called U-6, which counts not only the unemployed, but workers who are “marginally attached” to the labor force and those who are involuntarily working part time, the state’s 9.5% rate of underemployment is also the nation’s highest.
Those numbers imply an economy that’s not even operating at cruising speed, much less accelerating. Even the state’s technology sector, centered in the San Francisco Bay Area, has cooled off as its once high-flying corporations announce layoffs virtually every day.
“California’s civilian employment growth has been essentially flat since the second half of 2022 while the U.S. has remained relatively healthy, resulting in the state’s unemployment rate rising faster than the nation,” the revised budget Newsom unveiled last week acknowledges.
The pandemic erased about 3 million jobs in California as Newsom shut down large segments of the state’s economy. Countless employers, particularly small businesses, never reopened after the health crisis eased and those that did survive have had to contend with inflationary costs, tighter loan conditions and changed consumer habits.
The budget blames stubborn inflation and the high interest rates imposed by the Federal Reserve System to tame inflation for California’s slowdown, but economies of other states have experienced the same factors and prospered despite them.
However, they don’t contend with factors unique to California, such as extremely high costs for housing, utilities and labor that make job creation more difficult here. Until recently, California has been losing population, thanks to outward migration to other states. The state has also seen employment shifts, particularly in technology.
Those conditions underscore the sluggish recovery that sets California apart from other states. For instance, Texas’ unemployment rate, 3.9%, is identical to the national rate while Florida’s 3.2% is even lower.
So, one might ask, where is California’s once-booming economy headed?
Newsom’s Department of Finance says it “has not modeled a recession scenario. However, if inflation takes longer to cool and interest rates remain high for longer than projected in the May Revision baseline forecast, continued tight credit conditions could further discourage economic activity.”
A few days before he released his revised budget, Newsom stood at the top of a Golden Gate Bridge tower to record a video celebrating the tourism industry’s recovery.
Visitors to California spent $150.4 billion last year, he said, surpassing the previous record of $144.9 billion in 2019.
That’s good news, even though an adjustment for inflation would probably reduce the recovery’s relative impact. But while it’s a high-profile economic sector, tourism is scarcely 3% of the state’s overall economy. It’s the other 97% we should be nurturing.
Budget Reality Bites Legislative Ambitions – Fiscal Committees Kill, Reduce Hundreds of Bills
CalMatters
California’s budget crunch is forcing the Legislature to scale back its agenda this session, with bills to legalize psychedelic therapy, offer reparations to the descendants of enslaved people, and require more transparency around who is paying for lawmakers’ sponsored travel among the early carnage.
Facing estimated deficits of tens of billions of dollars over the next two years, leaders of the Legislature’s appropriations committees said today that they had to make especially difficult decisions as they held or amended hundreds of proposals with a significant cost during the biannual culling process known as the suspense file — though most of the bills in each committee still passed.
“The budget had a huge impact on what we did,” state Sen. Anna Caballero, a Salinas Democrat who leads Senate appropriations, told CalMatters. “We were trying to keep costs down and really trying to live within our means. Authors were asked to amend their bills to take out the more expensive stuff,” Caballero said. “We don’t have the money.”
Of the 341 bills on the Senate suspense file, 87 — or about 25.5% — were held, in line with the average over the past decade. But another 121 were amended, even as they advanced to the floor ahead of a crucial deadline next Friday for measures to pass their house of origin.
The Assembly’s appropriations committee held 233 of the 668 bills on its suspense file, or about 34.5% — slightly higher than last May, when 29% were shelved.
Those included Assembly Bill 2751 by Assemblymember Matt Haney, a San Francisco Democrat, that would have barred employers from contacting workers outside of scheduled hours, and AB 2808 by Assemblymember Buffy Wicks, an Oakland Democrat who chairs the committee, which would have limited companies such as Ticketmaster from being able to exclusively resell event tickets.
“We have an obligation to balance the budget here in California — we can’t go into debt,” Wicks told reporters after the hearing, where she killed another attempt to establish a single-payer health care system in California, a policy she has supported in the past. “We needed to be responsible with taxpayers’ money, so that’s why we had to make some tough calls today.”
Assemblymember Ash Kalra, who authored the single-payer bill, said after two years of negotiations, he was confident it would have passed the Assembly.
“I am deeply disappointed the Assembly Appropriations Committee failed to recognize the significant cost-saving potential of AB 2200,” he said in a statement. “Study after study has shown that a single-payer system will not only cost less than our current system, but can safeguard the State from future deficits while stimulating economic growth.”
Both Caballero and Wicks are newly in charge of their respective committees this year, overseeing their first suspense file hearings as the state is working through how to close a massive deficit.
Gov. Gavin Newsom unveiled his proposed spending plan last week to address the looming shortfall, estimated at $56 billion over the next two fiscal years — and more by legislative finance officials — even after he and lawmakers took early action to reduce it.
With more than $30 billion in cuts to education, public health, environmental and other programs on the line, Newsom is likely to have little appetite this year for pricey new legislation. He has already urged discipline over the past two sessions, as California’s finances softened, vetoing dozens of bills that he said would add unaccounted costs to the budget.
The suspense file, where all legislation with a major fiscal impact is considered concurrently and dispensed within a rapid-fire hearing, has also long provided the Legislature with an easier way to kill controversial or undesirable bills.
Caballero refused to discuss any of her specific decisions, citing only cost considerations, including shelving Senate Bill 1012, which would have legalized the use of hallucinogenic drugs in therapeutic settings. Newsom vetoed a broader decriminalization of psychedelics last year and supporters hoped their focus on therapy would provide a path forward.
MORE:
2026 Aspirants for Governor Throw Elbows & Dial for Dollars…”There Is No Big Behemoth”
Politico
The contest to succeed Gavin Newsom in the nation’s biggest, bluest state is already turning bitter. And it’s still more than two years away.
California’s gubernatorial sweepstakes are well underway in a stampede for early blessings from powerful insiders, scheming among the growing field of contenders and hushed conversations with major donors.
The tortuous path to 2026 — when Newsom’s term ends — started last year and is among the longest-running electoral battles in America given the immense challenge of nurturing a statewide profile. It’s also a revealing snapshot of California in the 21st century: Candidates are engaged in a race to the left where all of the competition is in the Democratic Party, no political giants are lying in wait and none of the candidates have more than a regional base of support.
“Never has it been more true,” said Bill Wong, a veteran California Democratic operative. “California is its own little nation state.”
These dynamics were on display inside a San Diego museum earlier this year, where Democratic former legislative leader Toni Atkins was announcing her campaign to be the first woman and LGBTQ+ governor before a boisterous crowd of union members.
The scene of orange-vested carpenters mixed among the throng of electrical workers, home care providers and other representatives from the influential world of organized labor irritated state Attorney General Rob Bonta, a likely rival to Atkins. Soon after the January event, Bonta started calling top California union leaders to cross-examine them about their members’ attendance, according to three people familiar with the outreach.
The intensifying clash for the imprimatur of unions — some of the Democratic Party’s most loyal and active footsoldiers — is matched only by the candidates’ need to show their viability through fundraising. In interviews, more than 15 campaign operatives and Capitol insiders described the twin efforts.
A few months after Atkins’ January kickoff, at one of the largest annual fundraisers for the state Senate, she had tongues wagging after being spotted taking meeting after meeting with representatives for special interest groups around the Capitol.
The 2026 governor’s race, a marathon to run the world’s fifth-largest economy, officially commenced on April 24, 2023, when Lt. Gov. Eleni Kounalakis became the first candidate in the field.
Her entry came 1,044 days before California’s March 2026 primary election and 561 days before the presidential contest between Joe Biden and Donald Trump. That contest’s outcome will change the tenor of the following two years.
After Kounalakis’ announcement, Atkins and two more Democrats joined the crowd: State Superintendent of Public Instruction Tony Thurmond and former Controller Betty Yee. Bonta has said he doesn’t expect to make a decision until after the November election, at which point he still could take an offramp and run for reelection as AG.
In addition, POLITICO last month reported that Health and Human Services Secretary Xavier Becerra is considering leaving the Biden administration to compete for governor. And Becerra, a former longtime member of Congress from Los Angeles, is doing more than just privately musing — with himself or emissaries already approaching political firms about standing up a campaign.
Former Los Angeles Mayor Antonio Villaraigosa has been reviewing polling data and is expected to make a decision in the coming weeks, said a person briefed on his timeline. Republicans are unlikely to win the office but could play spoiler to Democrats by securing a spot in the November runoff.
On the Republican side, Southern California Sheriff Chad Bianco, a conservative fixture on Fox News and an unsparing critic of Newsom, is looking at joining the race, POLITICO also has reported.
The scramble has produced no clear favorite in the mold of Newsom in 2018 or Jerry Brown in 2010 (after Newsom stood down for him that cycle). There are no governors-in-waiting such as Ronald Reagan, who defeated the incumbent Gov. Pat Brown in 1966, or then-Sen. Pete Wilson, who beat Dianne Feinstein in 1990. There also aren’t intimidating shoo-ins like Kamala Harris or Adam Schiff, from California’s 2016 and 2024 Senate races, respectively.
“There is no big behemoth,” said Andrew Acosta, another Democratic consultant based in Sacramento, who is not involved with any of the candidates challenging for governor.
Some organizations looking to put their stamp on 2026 aren’t waiting around. Sal Rosselli, founder and president of the National Union of Healthcare Workers, has received commitments from three of the announced candidates to appear at a forum this fall. (Kounalakis has yet to confirm). The event, on Sept. 29 at the Hyatt Regency San Francisco Airport, is occurring even before the presidential election.
The healthcare workers union is planning to livestream the forum in English and Spanish, after which Rosselli said members will hold a straw poll. That’s a concession of sorts to the unsettled field. In the past, NUHW members voted on an official endorsement directly following their events.
MORE:
Pumped Up: CA and NV Governors Trade Barbs Over Gas Prices
Politico
Democratic and Republican governors of neighboring western states are duking it out over high gas prices.
Nevada Gov. Joe Lombardo, a Republican, sent a letter Tuesday to California Gov. Gavin Newsom warning him against imposing a cap on oil refineries’ profits that he said could affect his own state’s fuel prices.
“While we have no details on what this might look like, I’m concerned that this approach could lead to refineries either constraining supplies of fuels to avoid a profit penalty or even leaving our shared fuels market entirely,” Lombardo wrote, pointing out that 88 percent of his state’s fuels are delivered from California via pipeline or truck. “Either scenario would likely lead to limited supplies and higher fuel costs for consumers in both of our states.”
Newsom’s staff offered a tough response, accusing the Republican governor of politicizing rising gas prices on behalf of oil industry allies and trying to pass off blame.
“This is a stunt to appease Governor Lombardo’s Big Oil donors, who contributed tens of thousands of dollars to his campaign,” Newsom spokesperson Alex Stack said in a statement.
“He’s parroting their talking points, and he knows full well that oil refiners are driving up gas prices and making massive profits — harming residents of both of our states. Price spikes are profit spikes, and California is holding Big Oil accountable.”
Newsom’s California Energy Commission is set to decide on the profit cap at a time when fuel prices are rising in both states. California lawmakers, who authorized the CEC to impose the profit cap in a law that Newsom signed last year, have since expressed some concerns that it could end up driving fuel prices higher.
Newsom has fought bitterly with oil companies, imposing new levels of scrutiny on their prices, joining state Attorney General Rob Bonta in a massive lawsuit over their role in advancing climate change and backing the November campaign to keep California’s oil well setback law. On Wednesday, Newsom arrived at the Vatican for climate talks with the Democratic governors of New York and Massachusetts.
On the other side is Lombardo, a former Clark County sheriff who last year pulled Nevada out of a multistate coalition focused on combating climate change’s effects. Lombardo also appointed a fossil fuel executive to head the state’s Office of Energy.
Last week, a representative from Arizona testified at a California state Senate committee hearing on the CEC’s proceeding. Arizona state Rep. Justin Wilmeth, a Phoenix Republican, said a potential maximum refinery margin and penalty “may actually increase retail prices for California, Nevada, and Arizona consumers alike.”
“It may also cause California refineries to close prematurely,” he said. “These decisions will harm Arizona and they will harm Nevada.”
But the neighboring states have not engaged in the process until recently, with no representatives from the Nevada government weighing in during California’s special session on gas price gouging. “Not the state,” Stack said of Nevada. “No state entities. We can confidently say that.”
https://www.politico.com/news/2024/05/15/newsom-lombardo-gas-prices-profit-caps-00158173
Delta Conveyance Project Cost & Necessity Increase, DWR Says
Sacramento Bee & Dept. of Water Resources
The estimated cost for California’s controversial Delta Conveyance tunnel just went up by more than $4 billion. The state Department of Water Resources (DWR) on Thursday released an analysis that estimates the price tag of the project at $20.1 billion, up from a 2020 assessment of $16 billion.
The project, in the works for decades, would create a 45-mile tunnel to divert water from the Sacramento River beneath the Sacramento-San Joaquin River Delta and through a pumping station in Tracy.
It was approved in December. Proponents including Gov. Gavin Newsom and DWR Director Karla Nemeth argue that the project is necessary in the face of water supply crises that are becoming more frequent and dire due to climate change.
Once diverted, the water would flow through the State Water Project to Central and Southern California.
“Twenty-seven million people rely on these surface water supplies that support a $2.3 trillion economy in California,” Nemeth said in a prepared statement. “There is a very real cost to do nothing. It is vastly more efficient and economical to avoid declining supplies.”
Environmental leaders, Native American tribes and other stakeholders vehemently oppose the project on the grounds that construction and the drawing of water would decimate native fish populations and ruin vast tracts of farmland.
The final environmental impact report in December said the project would also disturb tribal cultural resources including human remains.
DWR must “analyze and include the impacts to California tribes, Delta communities and economies, the fishing community, and environmental and public safety concerns,” Barbara Barrigan-Parrilla, executive director for Restore the Delta, said in a statement.
A coalition including Restore the Delta, tribes and other organizations filed a formal protest petition Tuesday with the State Water Resources Control Board, arguing the project is “unlawful and not in the public interest.”
Environmentalists and others, including water agencies not affiliated with the State Water Project, have also filed a number of lawsuits.
DWR in a news release called the 2020 and 2023 estimates “similar in cost” when accounting for inflation. The value of the dollar rose about 16% between the previous report and the end of 2023, according to a U.S. Bureau of Labor Statistics inflation calculator.
The cost in 2023 dollars, went up by 26%, according to the new report, prepared by a joint powers authority called the Delta Conveyance Design and Construction Authority. But the report said that factoring in federal guidance on the time value of money discounts the $20.1 billion figure down to about $17.3 billion.
The report estimated the project cost at $38 billion, leading state water officials to claim: “For every $1 spent, $2.20 in benefits would be generated.” DWR also said Thursday that the project could be trimmed by another $1.2 billion through design and engineering improvements currently under consideration.
The state project’s new figures include a “Community Benefits Program,” which DWR says is $200 million in grant funding it will set aside for local projects associated with the Delta Conveyance.
State Water Contractors, a nonprofit that represents 27 public water agencies that participate in California’s State Water Project and deliver water to more than 27 million residents and about 750,000 acres of farmland, is another vocal supporter of the Delta Conveyance tunnel.
Those water agencies, led by the Metropolitan Water District of Southern California, had scuttled earlier iterations of the project during Gov. Jerry Brown’s tenure because of the price tag and would pay the bulk of the project’s cost.
“If we do nothing to shore up the State Water Project’s aging infrastructure, California’s primary and most affordable water supply faces continued reliability risk and remains vulnerable to increasing weather extremes that could lead to supply disruptions,” Jennifer Pierre, general manager of the State Water Contractors, said in a statement.
https://www.sacbee.com/news/california/water-and-drought/article288529304.html#storylink=cpy
DWR media release & report access: