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IN THIS ISSUE – “You come into a budget committee and there’s no numbers. Why is it taking so long?”
Assemblyman Phil Ting, expressing frustration that 70% of State agencies are late in reporting where the money went
- 70% of State Agencies Miss Expense Reporting Deadlines; Legislators Frustrated – Must Write Deficit Budget with Insufficient Data
- Legislators Drafting Climate Bond Ballot Measure…Governor Unsure of Voter Support
- Newsom Has Several Indirect Tax Increases to Help Balance Budget
- Influential Teachers’ Union Launches Budget Ad Campaign Critical of Governor
- Central Valley Water Agencies Ink Drought Resiliency Pact with Feds
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 23, 2024
PUBLISHER’S NOTE: CN&N is being distributed one day early, due to the Memorial Day long weekend. We will have media coverage next issue of the Legislature’s bill deadline actions and progress on a State Budget for FY24-25.
CalMatters
Frustration came through loud and clear as legislators hurled question after question at the head of the state’s homelessness interagency council: Why, after years of planning and billions of dollars invested, is there so little to show for the effort?
“You come into a budget committee and there’s no numbers,” Assemblymember Phil Ting, a San Francisco Democrat, said at the May 6 Assembly committee hearing. “Why is it taking so long?”
Assemblymember Vince Fong, a Bakersfield Republican, took issue with the council saying it needed more money to compile the data. And Chris Ward, a Democrat from San Diego, said he’d been asking the same questions since 2022: “The fact that we’re still now, three years later here as a state is incredibly frustrating because that guides our decision making here as a budget.”
Some public analysis of how programs are working comes from the nonpartisan Legislative Analyst’s Office and state agencies, sometimes at the request of lawmakers.
But a CalMatters analysis published in February found that 70% of the 1,118 state agency reports on how laws were working due in the past year had not been submitted to the Office of Legislative Counsel, which keeps reports. And about half of those that were filed were late.
But even without a full picture of how well the homelessness spending is working, Gov. Gavin Newsom is proposing cuts to cover the state’s budget deficit.
That’s just one example of how the state budget gets put together, often without fully knowing if a program is paying off. Revenue dictates decisions, and voter-passed initiatives direct some spending. After that, legislators use any data that’s available, but they also negotiate with other officials and listen to their constituents.
They’re also lobbied by advocates and interest groups. (More than 650 organizations spent money lobbying on the budget, as well as other issues.)
For the 2024-25 budget now before the Legislature, Newsom released a revised plan earlier this month that calls for dipping into reserves, canceling some new spending and cutting existing programs to cover a remaining shortfall of $27.6 billion.
The independent Legislative Analyst’s Office, which assesses the budget picture through different calculations, cites the deficit as $55 billion, though it generally agrees with Newsom’s overall view of the state’s finances.
Today and through this week, the Assembly and Senate will conduct hearings on Newsom’s proposals. The Legislature faces a June 15 deadline to approve its version.
Jesse Gabriel, who leads the Assembly budget committee, noted that only a handful of legislators have dealt with a deep deficit before. The state had a record budget surplus as recently as two years ago, thanks to federal pandemic aid and a roaring stock market; the last lengthy recession ended in 2009.
“This is a new experience for a lot of people,” the Democrat from Encino told CalMatters. “I think we’re going to have to work really hard together to get on the same page and do the best we can in a really difficult situation.”
Addressing California’s deficit is a two-part equation, where increasing revenue could help. But Newsom has ruled out increasing taxes and instead emphasized “right-sizing expenditures,” telling legislators they shouldn’t expect bills with high price tags to pass.
For Gabriel, the May 6 hearing by the revamped accountability and oversight committee hints at an appetite for culture change in the Legislature — though one that could take time.
“We want to be doing a lot more data-driven decision making about which programs and services are really delivering results for Californians,” he told CalMatters. “For us, that metric is not did the money go out the door? But was it impactful? Did it make a difference in results for the people it was intended to serve?”
California currently uses “incremental budgeting:” Each department’s or program’s funding request starts with what they spent last year, updated with best estimates of what they need in the coming year. Also known as “baseline budgeting,” it’s the most common approach states take, according to the National Conference of State Legislatures.
California’s budgeting approach is in contrast to two other systems: performance-based budgeting and zero-based budgeting.
Performance-based budgeting ties funding to how well programs meet their goals, and allows departments more flexibility to use any savings. The data-driven approach can create more transparency, according to research commissioned by the Assembly’s Budget Committee in 2012.
But it’s difficult to implement and can be inequitable, according to the National Conference of State Legislatures — for example by linking school funding to test scores.
Under zero-based budgeting, agency budgets start each year from $0. But no state uses the system in its true form, the conference notes.
While more states are moving towards performance-based budgeting — including Minnesota, New Mexico and Utah — more comprehensive efforts to change California’s system have fizzled.
This year, Fong, who is vice chairperson of the Assembly budget committee, introduced a bill to require state agencies to use zero-based budgeting, but the measure has not been heard in committee.
In 2011, then-Gov. Jerry Brown vetoed a bill requiring state agencies to use performance-based budgeting, saying it would impose a ‘’one size fits all” budget planning process on every state agency and function.
“The politically expedient course would be to sign this bill and bask in the pretense that it is some panacea for our budget woes,” he wrote in his veto message. “But the hard truth is that this bill will mandate thousands of hours of work — at the cost of tens of millions of dollars — with little chance of actual improvement.”
Instead, Brown advocated what he described as a common sense approach to budgeting that would examine whether some programs or departments should exist at all.
Where data doesn’t tell the whole story of which programs are worth funding, public input can fill in some gaps.
Both Senate President Pro Tem Mike McGuire and Gabriel told CalMatters that the budget hearings from January through June are key to the decision-making.
McGuire said his office also receives thousands of comments from the public — emails, postcards, requests for meetings and more.
“It’s not just one source of feedback, but multiple sources of feedback. And by the way, that’s the way it should be,” he said in an interview with CalMatters. “It’s coming from the public, from members themselves, shaped by their lived experiences and opinions, through advocates for nonprofits.”
Various interest groups have mobilized to push back on Newsom’s proposed cuts, including rallies at the Capitol or through virtual campaigns.
Julie Baker, CEO of CA Arts Advocates, said building coalitions has helped the arts community secure funding from legislators in the past.
“They need to know what their constituents care about, and showing up and telling them that we oppose, in this case, the arts cuts — letting them know how that will impact their own communities — is critical for them to understand the decisions that they’re making.”
Greater transparency can help the public form an opinion about state spending, but getting that information isn’t easy. State Sen. Roger Niello, a Roseville Republican, introduced a bill that would have required state agencies to post their expenditures in a clear and accessible way for the public, but the Senate’s appropriations committee killed the bill in last week’s “suspense file” hearings.
Legislators Drafting Climate Bond Ballot Measure…Governor Unsure of Voter Support
CalMatters
The Senate and the Assembly have passed competing measures that would seek voter approval in November for a bond to pay for climate programs. Gov. Newsom has not endorsed either of them.
The tough budget choices come after the state budget ballooned with record surpluses after the COVID-19 pandemic, buoyed by an influx of federal spending, a soaring stock market and higher earnings, particularly for high-income Californians.
Newsom saw that windfall as an opportunity to shore up a state reeling from calamitous wildfires, droughts and floods. In 2021 he began setting aside two consecutive years of surplus to combat climate change, but then began cutting back last year.
Now, facing the large deficit, Newsom said he would rather not eliminate or scale back climate programs that he supported. Earlier this month, Newsom said the 83% of the climate funding that he is proposing keeping intact is significant.
“There (are) no material cuts to the climate agenda,” Newsom said during a May 10 press conference. “There was a lot of creativity.”
But environmental advocates disagree, saying that the cuts will affect California’s efforts to fight the effects of a warming planet.
California is already in danger of failing to meet its ambitious goals unless it almost triples its rate of reducing greenhouse gases through 2030, according to recent analysis. If the state has to scale back programs aimed at reducing emission, those goals may become harder to meet.
“It’s very fair to say we’re slowing down California’s transition to its climate goals and its clean energy goals,” said Barry Vesser, chief operating officer of The Climate Center, an advocacy group. “Unfortunately, as you and I know, physics and chemistry and climate change do not really care about the state’s fiscal condition.”
Facing a June 15 deadline to pass a revised budget, legislators are pressing for a bond measure that would fund some of those programs.
Assemblymember Eduardo Garcia, a Democrat from Coachella and author of the Assembly’s bond bill, AB 1567, said “advancing a climate bond offers a can’t-miss opportunity to alleviate funding disparities while making the investments we need to protect” Californians from climate change. Sen. Ben Allen, a Democrat from El Segundo, author of the Senate’s bond proposal, SB 867, said in a statement that California “urgently needs to invest in solutions to mitigate the worst impacts of climate change.”
At the press conference, Newsom would only say that “we’re maintaining a posture of engagement” on a climate bond.
He said he is wary of another bond measure after suffering a ballot box setback in March, when voters approved his $6.4 billion mental health bond by the slimmest of margins, 50.2% to 49.8%. That experience, Newsom said during his press conference, “sobered, I think, a lot of the conversation up here.”
“The public wants to see results,” the governor told reporters. “They are not interested in inputs, they are not interested to talk about how much money we’re spending.”
Jon Coupal, president of the Howard Jarvis Taxpayers Association, said he was wary of bonds that might pay for climate programs, especially if those programs don’t pan out.
“Are they really going to create those kinds of projects with a long-term benefit?” he asked.
On Wednesday, the state budget committee overseeing climate programs delved into the governor’s proposal in detail. Assemblymember Steve Bennett, a Democrat from Oxford and chair of the committee, said he hopes to avoid some of the reductions.
“I will continue to fight for maintaining and restoring funding for wildfire preservation, water resilience, sustainable agriculture and environmental justice within the bounds of the budget constraints that we have,” Bennett said. “Given this budget shortfall, and our current fiscal reality, for every dollar we try to restore, we have to cut somewhere else.”
Newsom is increasingly relying on the state’s cap-and-trade program — the market for companies buying and selling greenhouse gas credits — to make good on his previous spending commitments. He is proposing funding $5.2 billion of his climate agenda from cap and trade’s Greenhouse Gas Reduction Fund.
Environmental justice advocates oppose the cap and trade program because it allows pollution from some facilities to continue, largely in the state’s poorest communities.
Newsom Has Several Indirect Tax Increases to Help Balance Budget
CalMatters commentary from Dan Walters
When Gov. Gavin Newsom unveiled a much-revised 2024-25 state budget this month, he became visibly irritated when reporters pressed him about raising taxes to cover a $44.9 billion deficit, particularly the corporate tax hikes that left-leaning groups have suggested to avoid spending cuts in health, welfare and education programs.
“When considering the 8.84 % corporate tax – which is the highest, arguably, depending on how you analyze it, in the country – no, I’m not prepared to increase taxes,” Newsom replied. “We have among the highest tax rates in the United States of America for high wage earners, we have among the highest tax rates, as I noted, for corporate taxes. … I feel strongly that we have to live within our means.”
However, the fine print of Newsom’s budget contains several indirect tax increases on businesses – mostly by reducing offsets of taxable income – that over the next few years would raise as much as $18 billion.
That number comes from the California Taxpayers Association, which pulled together tax-related items from the budget and the dozens of budget trailer bills submitted to the Legislature. It approximates the $6 billion year in income and sales taxes that Newsom’s predecessor, Jerry Brown, persuaded voters to approve in 2012 to close an earlier deficit.
The biggest, in terms of financial impact, would eliminate the ability of corporations with annual revenues over $1 million to deduct net operating losses from their taxable incomes and limit business tax credits to $5 million a year. CalTax estimates it would increase corporate tax revenue by $15.9 billion over the next four years.
It would not be the first time that the state has limited or eliminated the net operating loss deduction, a history that the Legislature’s budget analyst, Gabe Petek, cited in an analysis of the maneuver.
The deduction, Petek said, “allows businesses to smooth profits and losses such that businesses with similar profits over time pay similar taxes. Without this smoothing, businesses in riskier or more innovative industries – such as the technology, motion picture, and transportation sectors – could end up paying more taxes than businesses with similar but more stable profits. As such, suspending NOL deductions would lead to a less equitable tax system.
“Should the governor’s proposal take effect, the state will have disallowed NOL deductions in nearly half of years between 2008 and 2027,” Petek continued. “At this rate, it seems reasonable to ask whether suspensions have begun to meaningfully undermine the purpose of allowing NOL deductions in the first place.”
The second largest – and perhaps most intriguing – indirect tax increase Newsom proposes is to overturn a recent decision of the state Office of Tax Appeals favoring Microsoft in a complex, years-long dispute with the Franchise Tax Board over the tax treatment of foreign earnings.
In effect, the appeals panel declared that the Franchise Tax Board erroneously applied state law on taxing multinational corporation earnings. The FTB estimates that it could cost the state $1.3 billion in refunds immediately and hundreds of millions more in future years.
However, the administration’s trailer bill would nullify the ruling by declaring that the FTB correctly applied the law. It would be in effect retroactively and potentially allow the FTB to promulgate new regulations to enforce without going through the normal rule-making processes.
In addition to its fiscal impacts, the legislation sets a questionable precedent of retroactively changing tax laws after taxpayers have won appeals. Such ex post facto legislation undermines the integrity of the tax system.
If nothing else, Newsom’s proposals underscore again the premise that declaring who or what is taxed is an arbitrary political act, not a rational exercise.
Influential Teachers’ Union Launches Budget Ad Campaign Critical of Governor
Politico
One of the nation’s largest teachers’ unions is escalating its pressure campaign against Gov. Gavin Newsom, unveiling TV ads that swipe at a loyal ally over education spending cuts amid a massive budget shortfall.
The California Teachers Association released a spot that features Newsom himself, in 2021, promising not to let the education system backslide. The ad is set to begin running on TV in Sacramento later this week.
“Tell lawmakers and Governor Newsom to pass a state budget that protects public schools for our students and communities,” the union’s ad urges, after ticking through a bleak picture of crowded classrooms, teacher layoffs and cutbacks on nurses and counselors.
While the ads challenge Newsom in far less personal terms than the union has unleashed on past adversaries like former Republican Gov. Arnold Schwarzenegger, the very fact that it green-lighted the incursion represents a surprising and sudden rebuke of the Democratic governor from within his own party.
The 310,000-member union is a dominant force in Democratic politics and a key Newsom ally that endorsed his last two campaigns for governor, helped him fend off a recall effort and donated to a mental health ballot initiative he championed. Its incoming advertising bombardment places Newsom, who is widely expected to run for president in 2028, in unfamiliar territory.
Newsom’s office was notified ahead of the teachers union’s ad campaign launch. A spokesperson for the governor declined to specifically comment on the blitz. An official from Newsom’s Department of Finance, H.D. Palmer, told POLITICO the plan is actually meant to shield the education system from cuts.
“This budget proposal is not only legal and constitutional in our view, but is designed to provide predictable and stable support for K-12 schools and community colleges in the wake of last year’s unprecedented disruption in revenue projections,” Palmer said in a statement.
The governor has defended his leaner budget proposal as the most prudent way to dig the state out of two consecutive $28 billion shortfalls, while acknowledging that the proposed cuts are difficult. To avoid clawing back more than $8 billion in school spending, he has outlined a complicated accounting maneuver that would largely spare education funding now but reduce the amount of money guaranteed to schools by nearly $12 billion in the future.
“We have a math problem,” he conceded earlier this month when presenting his updated budget proposal to reporters in Sacramento. “Is this what I want to do? No. But the alternative [is] we can eliminate our expansion of health care. We can eliminate wages, we can do furloughs, we can do layoffs, we can do a lot of things. I don’t want to do those things.”
The nonpartisan Legislative Analyst’s Office also warned the proposal would set a problematic precedent, calling it “bad fiscal policy.” Asked earlier this month about that assessment, Newsom defended his plan as an effort to leave core education programs intact.
“We respectfully disagree with that position,” Newsom said, “I want to maintain the commitments in terms of the investments we’ve made, which I think are incredibly important. I don’t want to see thousands and thousands of pink slips go out. I don’t want to see the disruption in the system.”
MORE:
https://www.politico.com/news/2024/05/21/teachers-gavin-newsom-budget-cuts-00159261
Central Valley Water Agencies Ink Drought Resiliency Pact With Feds
SJV Sun
Major Central Valley water agencies have signed an agreement with the federal government to establish a new drought resiliency framework.
The partnership is funded by the Infrastructure Investment and Jobs Act and the Inflation Reduction Act.
The U.S. Bureau of Reclamation, the Friant Water Authority, the San Luis & Delta-Mendota Water Authority and the San Joaquin River Exchange Contractors Water Authority all signed a memorandum of understanding on Tuesday to establish a South of Delta Drought Resiliency Framework.
The MOU establishes an approach to implement drought resiliency projects and framework, which includes a drought plan that allows the agencies to conserve and store or exchange a portion of their water deliveries for use in future years with lower supplies.
It also allocates costs for Large Extraordinary Maintenance Projects, including the Delta-Mendota Canal Subsidence Correction Project, among other components.
Friant also agreed to a resolution on the Del Puerto Canyon Reservoir Project to ensure that it supports all objectives outlined in the Drought Plan.
Friant CEO Jason Phillips said it is critical for water agencies and water managers to work together to find creative ways to meet their common goals as once reliable water supplies continue to take a hit.
“The agreement between our neighbors in the Valley, the San Luis & Delta Mendota Water Authority, and the San Joaquin River Exchange Contractors Water Authority, as well as our partners at the Bureau of Reclamation, will help bring some predictability to water allocations and will help to provide certainty for the farms and communities we represent,” Phillips said.
“These efforts and outcomes are not easily achieved, but are a welcomed development and hopefully a sign of more partnering in the future.”
https://sjvsun.com/ag/water-agencies-feds-agree-to-new-drought-resilience-program/