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IN THIS ISSUE – “It’s not even on my radar”

Gov. Newsom, when asked if he’s running for President

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 MAY 27, 2022

 

Legislation “Live or Die” Deadline Today

CalMatters

Midnight marks the deadline for bills to make it out of the State Legislature”s “house of origin,” or where the bill was introduced – Senate or Assembly. Busy lawmakers sent hundreds of bills on their merry way.

Some will be dispatched by less-friendly legislators in the other chamber. Others will make it to the governor’s desk. Many will even become law.

Here are are few notable bills that lived to see another day so far:

 

California Recession Risk Likely Within 2 Years

Sacramento Bee & Legislative Analyst’s Office

More signs are pointing to an economic recession in California, if not right away, then in the near future. Key indicators “currently suggest a heightened risk of a recession within two years,” said the nonpartisan California Legislative Analyst’s Office. Odds are 50-50 in the next 12 months, said Sung Won Sohn, president of SS Economics, a Los Angeles-based consulting firm.

The downturn, when or if it comes, could happen “relatively quickly,” said Michael Bernick, a former California Employment Development Department director and now an employment attorney at Duane Morris LLP. California’s fate is closely tied to the nation’s. The state’s economy, the world’s fifth largest, is deeply affected by national trends. Inflation, which is raging at levels unseen in 40 years, is threatening to stifle economic development.

Jobs are a recession’s most obvious impact. Consumers spend less and corporate sales slow. There’s less need and incentive to make and sell goods and provide services, so fewer workers are needed. A recession is traditionally defined as two calendar quarters of economic contraction, though not always.

The last recession was the COVID-19-triggered downturn two years ago. It officially lasted two months, according to the National Bureau of Economic Research, which analyzes economic activity. That recession sent unemployment in California from 4.1% in February 2020 to 15.9% two months later.

Last month’s rate was 4.6%. Often recessions come without warning, spurred by some surprise, such as the Covid-related shutdowns, the housing crisis in the Great Recession of 2007-09 or the oil price spikes of the 1970s.

Any 2022-23 recession looks to follow a more traditional path as the Fed tries to create a ‘’soft landing” that cools the economy without triggering a serious tailspin. “Each of the economic downturns that have occurred in California since the 1980s have followed a common pattern.

Unemployment is down, jobs are plentiful, and the economy looks like it will continue to prosper for a long time. The downturn, when it comes, could come relatively quickly,” Bernick said.

The Fed has raised key interest rates twice this year in an effort to cool demand and thereby curb price increases. It is expected to raise rates again in June and July. The state legislative analyst cited several trends that are causes for concern:

▪ Home sales. They’re down as mortgage rates, roughly 3% for a 30 year loan a year ago, are now averaging about 5.25% and are poised to go higher. April’s state sales pace was down 1.9% from March and 8.5% from a year ago, the California Association of Realtors said.

▪ Consumer sentiment. A key barometer of what people expect to spend, it’s “fallen to levels typically seen only during recessions. Changes in prices of certain U.S. treasury bonds suggest financial markets may be pessimistic about the economic outlook,” said LAO.

“Inflation and the war in Ukraine will continue to pose downside risks to confidence and may further curb consumer spending this year,” said Lynn Franco, senior director of economic indicators at the Conference Board, which surveys confidence monthly. ▪ Inflationary expectations.

Prices have been rising nationally at their steepest pace in 40 years. With gasoline prices continuing to go up steadily and supply chain movement often remaining sluggish, little relief is expected.

Gov. Gavin Newsom’s latest budget assumes that the Federal Reserve’s tighter monetary policy will not induce a sharp economic slowdown. But the budget released May 13 does have what officials call “shock absorbers” in case of an economic slowdown.

It assumes continuing higher inflation that will mean “state services are likely to cost more than currently estimated.” And most of the spending spurred by the budget surplus is one-time only so that it can be adjusted depending on economic conditions. Whether smooth or bumpy, storm clouds are easy to spot these days.

https://www.sacbee.com/news/california/article261740902.html#storylink=cpy

Legislative Analyst’s report:

https://lao.ca.gov/reports/2022/4602/Multiyear-Budget-Outlook-052422.pdf

 

Legislative Analyst Warns of “Fiscal Meltdown of Epic Proportions”

CalMatters commentary from Dan Walters

The Legislature’s own budget advisor, Gabe Petek, is warning the politicians that they should be very careful because the budget could be in big trouble in the years ahead. If they ignore his advice, there could be a fiscal meltdown of epic proportions.

Petek believes that the governor’s revenue estimates — on which the huge surplus estimate is based — could be too optimistic because he ignores a very real threat of recession. Petek also faults the governor’s budget for ignoring long-term effects of the Gann Limit, a constitutional provision that imposes tight controls on revenue windfalls.

“Although predicting the next recession is impossible,” Petek says in a report released on Tuesday, “economic indicators currently suggest a heightened risk of recession within two years. Past recessions — with the exception of the one induced by the pandemic — have resulted in cumulative revenue losses of tens of billions of dollars. In two recent recessions, in fact, total revenue losses were around $100 billion.”

“Under our estimates of revenue and spending in the out-years, the state would have a very narrow operating deficit in 2023-24, a small operating surplus in 2024-25, and a larger operating deficit in 2025-26.” Petek says.

Although Newsom’s budget makes passing reference to the possibility of recession, it assumes that the state’s recovery from the pandemic-caused downturn will continue to be strong, and thus will generate a strong flow of revenues.

Petek reserves his sharpest criticism, however, for the budget’s lack of a plan to cope with the effects of the Gann Limit. Once the calculated limit is reached, any revenue beyond that point must be either returned to taxpayers or spent on a few exempt categories.

“These requirements would far exceed the state’s narrow operating surpluses — and would compound operating deficits,” Petek notes, adding that without corrective action “the state likely would have significant budget shortfalls in the out-years.”

As drafted, Newsom’s budget avoids triggering the Gann Limit in 2022-23 by clever accounting, but Petek warns that it’s likely to hit home within the next few years, forcing Newsom — assuming he’s re-elected this year — and the Legislature to reduce spending on other programs to meet Gann Limit requirements.

Although Newsom and legislative leaders have indicated they may ask voters to repeal or modify the Gann Limit’s stringent requirements, “In the meantime, we strongly caution the Legislature against passing a budget with a structural deficit stemming from unaddressed State Spending Limit (Gann Limit) requirements,” Petek says.

He suggests that one way to make the budget more resilient to both recession and Gann Limit requirements is to devote more of the surplus to reserves, which would mean spending less of it on things that the governor and legislators want, such as a massive election year giveback of cash to voters.

“Economic indicators point to a recession on the horizon within the next two years, not three-to-four years from now,” Petek warns. “The state has a $52 billion surplus this year — now is the time to prepare for these looming budget problems.”

https://calmatters.org/commentary/2022/05/newsom-legislators-given-stark-budget-warning/?utm_source=CalMatters+Newsletters&utm_campaign=ea5c4aea07-WHATMATTERS&utm_medium=email&utm_term=0_faa7be558d-ea5c4aea07-150181777&mc_cid=ea5c4aea07&mc_eid=2833f18cca

 

June 7 Primary Election Opens “Seething Political Intrigue” for Legislators

CalMatters

Democrats have super-dooper majorities in both houses of the California Legislature, which means its few Republican members are completely irrelevant.

However, the Capitol still seethes with political intrigue as left-leaning Democrats vie with moderates for control of the legislative agenda.

This year’s elections, beginning with the June 7 primary, are a particularly yeasty venue for the perennial conflict, occurring after all 120 legislative districts have been redrawn and with term limits and personal ambitions creating a dozens of open districts.

Progressives complain that moderates, known colloquially as the “mod squad,” have done the bidding of corporate interests and thwarted efforts to expand services and financial support for the poor, tighten environmental regulation and broaden rights for workers.

“We haven’t been able to pass significant bills to address climate change, our housing crisis, economic inequity, or healthcare in years,” a Courage California representative said during a recent progressive conclave.

“That’s because corporations and special interests have been able to effectively insert themselves between communities and their elected leaders and create a high-stakes pay-to-play system here in California. “We still struggle to get to 41 votes in the Assembly and 21 votes in the Senate, bill after bill.”

As progressives raise money from kindred interests for their candidates this year, mod squad operatives are openly appealing to business groups for support, warning that gains by the left could generate a slew of costly regulation, mandate and tax legislation.

The conflict initially erupted in the late 1990s as Republican legislators became an endangered species and Democrat Gray Davis became governor following 16 years of Republican governors.

Business groups, realizing they could no longer count on Republicans to protect their interests, began cultivating a cadre of business-friendly Democrats. The California Chamber of Commerce led the effort, which included creating an annual “job killer” list of bills deemed to be anti-business.

The campaign has cost millions of dollars but has staved off countless billions of dollars in costly legislation. About 90% of “job killer” bills have been defeated or been neutralized, thanks largely to mod squad influence, particularly in the Assembly. Progressive causes, ranging from shutting down the oil industry to single-payer health care, have been stalled.

Progressives hopes soared when Gavin Newsom was elected governor in 2018 with their enthusiastic support, fueled by his strident support for its causes. As governor, however, Newsom has traveled a more centrist course, allowing single-payer health care bills to die in the Assembly, refusing to shut down petroleum extraction and even vetoing some progressive agenda measures.

Two facts of legislative life add even more urgency to this year’s progressive-moderate duels: Term limits will force dozens of incumbents out over the next couple of election cycles, including Assembly Speaker Anthony Rendon and Senate President Pro Tem Toni Atkins. Which faction prevails this year thus will gain an advantage as the Legislature and its leadership turn over.

A key element of the power struggle has been a change in how California conducts its elections, shifting from closed partisan primaries to a system in which candidates that finish in the top two face each other in the November election, regardless of party.

The closed system favored candidates on the ideological margins – the most liberal Democrats and the most conservative Republicans. With the top-two system, placed on the 2010 ballot by a maneuver engineered by Republican Gov. Arnold Schwarzenegger, moderates have a better chance of earning a place on the November ballot and appealing to a broader range of voters.

That’s how the moderates have made gains and that’s why the progressives feel embattled and see an opportunity to recoup this year.

https://calmatters.org/commentary/2022/05/california-legislature-democrats/

 

Top-Two Primary Election Tactics…Savvy or Cynical?

Politico’s California Playbook

In the years since California adopted a top-two primary system — which allows the highest vote-getters to advance to the general regardless of party — campaigns have perfected the art of strategically elevating the opponent they’d most like to face in November.

That often takes the form of “attack” ads that actually serve to elevate a desired, further-right foe among his conservative base. Another cycle has brought a fresh round of machinations and accusations. Depending on whom you ask, it’s the type of disingenuous and cynical tactic that toxifies politics for most voters — or it’s just savvy strategy.

Republicans gathered yesterday to decry Democratic Assembly member Kevin Cooley’s move on this front. The moderate Democrat looks vulnerable to a challenge from Capitol GOP chief of staff Joshua Hoover in a D+5 district during a Republican-tilting year. But a mailer from Team Cooley doesn’t mention Hoover.

It spotlights Republican Jeffrey Perrine as “a pro-Trump patriot who calls himself an ‘anti-establishment’ conservative,” noting Perrine got booted from a local GOP organization without clarifying it was after Perrine was outed as a Proud Boy.

Cooley “is playing with fire,” Hoover warned. He is “better than this,” Assembly Republican leader James Gallagher added.

Allies of Attorney General Rob Bonta are following a similar script. Few analysts think conservative Republican attorney Eric Early is best positioned to ride public safety concerns to unseating Bonta — no-party-preference Sacramento District Attorney Anne Marie Schubert is seen as the bigger threat, or Republican former U.S. Attorney Nathan Hochman.

Hence a labor-funded, pro-Bonta PAC spending nearly $750,000 so far attacking Early, including with spots that call Early a “Trump Republican” who will “end Obamacare” and for whom “protecting the Second Amendment is everything.” Another pro-Bonta PAC has run radio spots nominally stumping for Bonta while characterizing Early as the “pro-Trump, pro-guns, pro-life” candidate.

So it goes. A primer on earlier iterations: Gov. Gavin Newsom “assailing” Republican John Cox in 2018 for standing “with Donald Trump and the NRA,” sidestepping well-funded Democratic challenger Antonio Villaraigosa and going on to crush Cox in November.

National Democrats in 2018 “attacking” Assembly member Rocky Chavez for backing a gas tax increase, after which Republican BOE member Diane Harkey made the general and lost by 13 points.

A 2020 mailer promoting an obscure Republican in the open, heavily Democratic CA-53. Real estate players spending around $175,000 in the last primary boosting the scandal-beset Democratic former Assembly member Steve Fox, who in November didn’t come close to knocking GOP Assembly member Tom Lackey from a D+11 seat.

Newsom Cultivates National Media, But Says White House “Not On My Radar”

Politico

“Sub-zero interest,” you say?

That was Gov. Gavin Newsom’s response to the San Francisco Chronicle’s editorial board last week when asked to promise California voters that he wouldn’t bail halfway through a second gubernatorial term to take a run at the White House in 2024.

“It’s not even on my radar,” he told the Chron, saying that the next president should be Vice President Kamala Harris.

This is not the first time Newsom has brushed off suggestions about running (he did so in 2018 and again last year), but it is a reminder that, if Newsom wanted to run for president, a number of precarious pieces would have to fall perfectly into place. President Joe Biden is angling for a second term, and it’s widely assumed that the VP will take on the role of his Democratic successor whenever he leaves office. Harris could very well run in 2024, 2028 or 2032, depending on the length of the Biden administration and, of course, her own electability.

If Newsom truly has no presidential aspirations , his rhetoric doesn’t show it. The governor is known for bashing Republicans across the country (particularly those in Florida and Texas) and often positions California — and himself — as a national defender of liberal values. He’s not afraid to go after state and federal laws that he deems unsavory, he talks up California’s successes on national daytime television, and he posts contemplative photosof himself reading banned books to needle political opponents.

Earlier this month, following POLITICO’s report of a draft opinion overturning Roe v. Wade, the governor even expressed frustration with his own political kin, saying he has felt an “enormous sense of frustration” with national Democrats as he’s watched Republicans barrel forward with their agenda.

“Where’s the party?” he said. “Why aren’t we standing up more firmly?”

At very least, it sounds like Newsom isn’t interested in challenging Harris, both of whom came up in the San Francisco political scene. But deferring to Harris means potentially delaying a run for multiple election cycles, and the further out from office he gets, the harder it could be to mount a comeback into political life.

There are a few scenarios where Newsom’s White House window gets wider. If a Republican wins in 2024, and Harris declines to run in 2028, Newsom would only be two years out of the governor’s office and a likely candidate for the top job.

The same thing could happen if Biden wins in 2024 and Harris doesn’t run in 2028, but in that case, voters may be less inclined to put a Democrat in power for the third term in a row.

 

Governor & State Water Board Start Statewide Water Conservation Rules

Sacramento Bee

Californians can expect to see more yellow grass around hospitals, hotels, office parks and industrial centers after water regulators voted Tuesday to ban watering of “nonfunctional” turf in commercial areas.

The State Water Resources Control Board also moved to order all the state’s major urban water providers to step up their conservation efforts. The moves are the strongest regulatory actions state officials have taken in the third year of the latest drought.

They come a day after Gov. Gavin Newsom warned urban water providers that mandatory cuts could be coming unless Californians do more to conserve. So far, Californians have failed to cut their urban water use as much as they did during the last drought that ended in 2017.

“There is a sense of urgency here,” Water Board Chairman Joaquin Esquivel said before Tuesday’s vote. Parks, sports fields, golf courses, residential lawns and other areas where people regularly gather aren’t covered under the rules the board approved Tuesday.

The restrictions only prohibit potable water being applied to “nonfunctional” turf around the state’s “commercial, industrial, and institutional sectors.” The ban also doesn’t prohibit Californians from watering trees, which help cool urban areas.

Outdoor watering of lawns and landscaping accounts for the bulk of California’s urban water use. Banning decorative lawns would save enough water to supply 780,000 households each year, according to the governor’s office.

The other portion of the regulations the water board approved on Tuesday requires nearly all of the state’s local water districts to move to the “Level 2” tier in their drought response plans or reduce watering to no more than two days a week. After the last drought ended,

California required the state’s urban water suppliers to come up with plans that have six levels of conservation, based on how much water they have available. Newsom had already asked water providers to move to Level 2, which assumes that each district is facing up to a 20% cut to their supply. Before Tuesday’s vote, only about half of the state’s population was under a water district that had moved to Level 2.

Esquivel, the board chairman, said the rules approved Tuesday were necessary to save water this year as California’s blistering summer months take hold and to ensure there’s enough water statewide if the drought continues into a fourth dry season.

“It’s hard for anyone in the state to … say, ‘We’re good,’ ” Esquivel said. But several water providers told the board just that, as they argued against a one-size-fits-all regulatory approach.

“We have no shortage because we have done what the state has asked,” said Stacy Taylor of the Mesa Water District in Southern California. Taylor spoke on behalf of the nearly ⅓ of urban water providers in California that she said have “no water shortage now, nor in the anticipated future.”

Taylor and several other local water district officials testified they’ve already asked customers to cut back substantially over the decades. They’ve also spent millions of their ratepayers’ dollars on finding new water sources. They argued the moves left them well prepared for this drought.

For instance, the San Juan Water District, serving wealthy Granite Bay, and other Sacramento-area water districts have enough groundwater reserves that they’re going to send some this summer to other regions in the state that “desperately need” it, said Paul Hellike, the district’s general manager.

Environmentalists, however, argue all Californians should be required to cut their use if the water board wants to make good on its slogan, “Conservation is a way of life.”

“It’s time to actually, if not kill our lawns, reduce the impact of inappropriate landscaping in the state as we get drier and drier,” said Conner Everts, a board member at the Water Impact Network, an environmental group.

The board, however, acknowledged that some water providers are in better shape than others. The rules approved Tuesday give some leeway in moving to Level 2 to a handful of damp coastal areas such as the city of Santa Cruz, whose residents don’t use very much water and that have ample local supplies.

Meanwhile, the state’s sprawling agricultural industry, which uses substantially more water than urban areas do, already has seen dramatic cuts to its water supplies.

The board’s move came a day after Newsom met with a group of the state’s urban water suppliers in Sacramento and warned them he would issue mandatory cutbacks if the districts’ customers didn’t cut their use.

So far, Newsom has been trying a locally-driven approach to conservation. Newsom stopped short of imposing mandatory cuts like his predecessor, Jerry Brown, did during the last drought.

Brown ordered all Californians to cut their water use by 25%. Newsom in July called on Californians to voluntarily reduce water use by 15%, but per-capita urban consumption continues to rise.

State figures show that Californians’ water use grew 7% in March compared to a year earlier, and was up 18.9% when compared to March 2020. On Monday, Newsom told water providers that wasn’t good enough.

https://www.sacbee.com/news/california/water-and-drought/article261754207.html#storylink=cpy