CVIndependent

Fri09182020

Last updateMon, 24 Aug 2020 12pm

Ever since the end of the Great Recession, Rancho Cucamonga has been on a tear.

New retailers and restaurants have sprung up to serve the residents of its gated ‘burbs. The city’s population has swelled with Angelenos in search of cheaper housing. And at last count, its unemployment rate sat at just 4 percent. The city earned an upgraded credit rating earlier this year.

But now that shopping and dining have been deemed non-essential activities, the good times are gone, said Rancho Mayor Dennis Michael.

“Since we recovered from the Great Recession, we generated about $9 million in new sales tax revenue,” he said. “We’ve lost all of that gain. We’re basically starting from square one.”

For local governments still sporting the budgetary scars of the last “once in a generation” recession, this downturn is at once familiar—forcing elected leaders to cut, furlough and delay—and entirely new. Never before in state history has so much economic activity ground to a halt so quickly.

“When we came through the Great Recession, we were able to use reserves to have a softer landing over a period of years,” said Michael. “This is worse than the Great Recession, because everything happened all at once.”

Rancho has it better than most cities. It has healthy reserves, low debts and a relatively wealthy population.

In San Pablo, a city just north of Richmond in the Bay Area with a median income just more than half of Rancho Cucamonga’s, City Manager Matt Rodriguez “is bracing for a ‘Worse Case Budget Scenario,’” he said in an email.

San Pablo relies on the local casino run by the Lytton Band of Pomo Indians for 60 percent of its discretionary funds. Since state and county officials declaredshelter-in-placeorders in mid-March, the city has been hemorrhaging $2.3 million every month, said Rodriguez. That’s about 5 percent of the city’s annual general fund every 30 days.

City managers aren’t known for their colorful language, but municipal leaders across the state are now facing economic conditions that seem to define hyperbole.

“Staff estimates that the COVID-19 pandemic will devastate the city’s general fund,” wrote Monterey’s City Manager Hans Uslar last month. The city then voted to ax up to 84 jobs.

Down the coast in Anaheim, home to Disneyland, Mayor Harry Sidhu offered a sober reminder to his colleagues on the council last month: The Magic Kingdom and its ancillary hotels and shops provide half of the city’s jobs and half of the city government’s revenue.

“As to when Disneyland Resort will open, I don’t know. I don’t believe anyone knows,” he said.

And in Yountville, the town of roughly 3,000 in the heart of the Napa Valley wine country, the decline in hotel and sales tax revenue has resulted “in about a 74 percent loss in revenue,” said Mayor John Dunbar, who is also president of the League of California Cities, in a live-streamed discussion with CalMatters.

That’s 3 out of 4 of the city’s expected tax dollars now gone.

“Yes, unfortunately you heard me correctly,” he added. 

Cities without much fiscal wiggle room heading into the pandemic will do particularly poorly, said Bill Statler, a municipal finance consultant who spent decades working for the city of San Luis Obispo.

“The roots of fiscal trouble are in the good times,” he said. “If you have strong revenues during the good times, build reserves, pay down unfunded liabilities, and invest in capital projects, then when the inevitable bad times come, you’ll have more resilience and flexibility.”

Still, in ways that highlight just how unusual the current economic downturn is, there are clear exceptions.

With a strong tourism and hospitality sector, “I would have used Santa Monica as a poster child for how some cities have really good financial DNA,” said Statler.

Last month, Santa Monica’s city manager was pushed out of his job after his proposed budget cuts elicited massive public outcry. Now the city is considering laying off 337 workers.

If there is any type of California city best suited to weather the current recession, it’s bedroom communities.

“Those cities that are highly reliant on property taxes and not sales—it’s not to say that they won’t suffer, but their treasuries won’t get depleted immediately,” said Michael Pagano, dean of the College of Urban Planning and Public Affairs at the University of Illinois at Chicago.

That’s because while sales taxes and tourism-dependent revenue sources like hotel taxes are paid into local coffers with each transaction, property taxes are paid twice a year. Property-tax revenues tend to be stable from year to year, too, because California law assesses residential or commercial buildings based on purchase price rather than current market value.

“For cities that rely on sales,” said Pagano, “it’s not like a downturn that we’ve ever experienced before. This is just an immediate shutting off of the spigot.”

The divide between municipalities that rely heavily on property values versus those that do not is a Tale of Two Cities. According to a CalMatters analysis of municipal tax revenue data from 2018, the cities that rely most on property taxes are Mountain View, Pleasanton, Newport Beach and San Clemente—all wealthy.

Cities that are dependent on sales and hotel taxes are more of a mixed bag, with some well-to-do tourism destinations, but also many working- and middle-class towns with below-average incomes or cooler housing markets: South Gate, Hemet, Merced, Redding.

And for cities hoping for a helping hand, very few have been extended.

The state, for one, has its own financial troubles. Gov. Gavin Newsom’s Finance Department is now projecting a $54.3 billion deficit for the coming fiscal year. That’s twice the size of the state’s “rainy day” reserve fund. 

“I’m going to do everything I can to work with these cities and counties,” Newsom said at a press conference last week before the deficit projection was announced. “But I can assure you this: We are not going to be in a position, even as the nation’s fifth-largest economy, to provide for the needs of all the cities and the counties without federal support.”

The federal government has already directed $150 billion to cash-strapped state and local governments through the CARES Act, the financial-relief bill signed into law last month. About $9.5 billion of that went directly to the state government, with another $5.8 billion for cities or counties—though only to those with populations of more than 500,000.

Even for the lucky six California cities that qualify for the help, the funding comes with strings attached, said San Diego Mayor Kevin Faulconer, who was also in the CalMatters live-streamed conversation.

“It has to be COVID-related; it’s not supposed to be used for revenue replacement,” he said. It’s not entirely clear how those guidelines will be enforced, but the intent is clear: the funding is not to be used to plug budgetary holes. While city leaders “try to get clarity” from the federal government, said Faulconer, San Diego is projecting a $300 million deficit.

Though Democrats in Washington, D.C., are clamoring for more federal assistance to state and local governments, Republicans remain divided. Last month, Senate Majority Leader Mitch McConnell of Kentucky likened providing additional aid to a “bail out” for state and local governments and their underfunded pension systems. McConnell has since softened his rhetoric.

Another possible benefactor for desperate cities: the voters.

The California constitution generally requires cities, counties and school districts to receive voter approval to raise taxes or borrow. And while the state electorate has historically been inclined to back most revenue-raisers, it may be feeling less generous this year.

In the March 3 primary, only 40 percent of local fiscal measures—bonds and taxes—were approved by voters, according to an analysis by Michael Coleman, who maintains the California Local Government Finance Almanac. That’s compared to a 77 percent passage rate in 2018, and 81 percent in 2016.

There were many more measures on the ballot this year overall—including a record-breaking $15 billion school construction bond—which may have given voters sticker shock. A recent change in state law governing how ballot measures are described could have also turned some voters off. The coronavirus pandemic was only beginning to register as a national concern on primary Election Day, but that, too, could have diminished the public’s appetite for new costs.

Whatever the reasons, said Coleman, it does not bode well for cities hoping to patch up their budgets via the ballot box this November.

“I think we’re going to continue to have this malaise about what’s going on in the economy, about job security, about how the world is changing. That’s the sort of psyche that causes people to wonder if this is the right time for a tax increase,” he said.

Many in local government—and the campaign staff they hire—are hoping that local budget cuts will have the opposite effect.

In a conference call this week, San Francisco Mayor London Breed championed a statewide ballot measure by framing it as a conflict between necessary government services during a pandemic and commercial property owners.

“Any local official will have a tough time explaining to their constituents why in the midst of this crisis they didn’t support closing corporate tax loopholes,” she said.

Sometimes known as the “split roll” initiative, the measure would change the way that many commercial properties are assessed, resulting in much higher property taxes on some businesses and much higher tax revenue for cities, counties and school districts.

Industry groups and low tax advocates argue—and will likely continue to argue until November—that now is precisely the wrong time to raise taxes on businesses.

Jared Boigon of TBWB Strategies, a consulting firm that helps to pass local bond and tax measures in California, said he’s optimistic that “most voters don’t want to see their community services be completely gutted.” Despite the economic climate, if a local government is thinking of going to voters for money this November, “they shouldn’t just automatically rule it out,” he said.

Not many have yet, said Curtis Below, a partner at the Oakland polling outfit FM3 Research.

“There have been a few more clients who said they want to sit out the cycle, but the vast majority still want to explore this year,” he said. “A lot of our clients are going full steam ahead.”

But both Dunbar of Yountville and Faulconer of San Diego are skeptical that the funds that could be raised at the ballot box would be even remotely enough to fit the pandemic’s fiscal bill.

“We’re not going to be able to tax our way out of this recession,” said Faulconer.

CalMatters.org is a nonprofit, nonpartisan media venture explaining California policies and politics.

Published in Local Issues

Ladies and gentlemen, it’s time to play the exciting game that is most definitely NOT sweeping the nation: Six Degrees of Separation: Whackadoo Conspiracy Theory Edition!

However, Kevin Bacon was not available, so we will be seeing how many degrees of separation you—YES YOU!!!—are from the newest conspiracy star in all the pandemic-stricken land!

We’ll start off with Judy Mikovits, Ph.D. She’s the star of that new documentary you’ve likely seen some of your friends posting on social media, even though they really should know better. In an effort to be fair and open-minded, I actually tracked it down and watched it today. My Impression: The documentary is 1) well-crafted and slick, 2) undeniably interesting and 3) completely packed with easily refutable and deeply-harmful-if-believed nonsense! I’ll never get that almost-half-hour of my life back! Is it time for a cocktail yet?

First degree of separation: Judy Mikovits, before she became a celebrity on the anti-vaccination circuit, worked at the Whittemore Peterson Institute, a nonprofit based in Reno, Nev., that does research into myalgic encephalomyelitis (aka chronic fatigue syndrome) and other neuroimmune diseases. I won’t go into all the details of Mikovits’ work there, other than to say that 1) one of the studies she published while there wound up being so shoddy that the digest which published it had to later retract it, and 2) she was arrested and accused of stealing materials from the lab after she was fired by the institute. What fun! Anyhow, one the founders of the Whittemore Peterson Institute is Harvey Whittemore, a Reno attorney who was once one of the most powerful lobbyists in the state of Nevada. (Then he was convicted of three felonies and sent to prison for a couple of years for violating campaign-contribution laws. Oops!)

Second degree of separation: Harvey Whittemore has five kids, one of whom is DJ Whittemore, a perfectly nice guy who is a collegiate baseball coach. He graduated from Earl Wooster High School in 1993.

Third degree of separation: Jimmy Boegle, the editor and publisher of the Coachella Valley Independent, and the humble scribe of this Daily Digest, is also a member of the Earl Wooster High School class of 1993. What a small and sometimes horrifying world!

Fourth degree of separation: YOU are reading this Daily Digest, written by Jimmy Boegle.

Congratulations! You are a mere four degrees of separation from Judy Mikovits! I am so very sorry about that!

Today’s links:

• The big state news of the day: Gov. Newsom offered more information on which businesses can begin to reopen as early tomorrow. He was actually rather light on the specifics, according to the Los Angeles Times.

• The other big state news: As expected, the state is facing a massive budget deficit—far bigger than anything the state faced during the great recession. That means some deep cuts are coming.

• The big national news: The Trump administration has decided not to follow the reopening guidelines created by the Centers for Disease Control and Prevention. Because, you know who needs science and knowledge and experts and stuff?

• The other big national news: The Justice Department is dropping the case against former National Security Adviser Michael Flynn. This line, from The New York Times, earns the Understatement of the Day Award: “The decision for the government to throw out a case after a defendant had already pleaded guilty was … highly unusual.

• I, per usual, took part in the I Love Gay Palm Springs podcast today. Hear what the knowledgeable Dr. Laura Rush has to say about the coronavirus in the Coachella Valley.

One of the president’s personal valets has tested positive for the virus. The president says he has tested negative, however, and will continue to get tested daily.

More than 12,000 Catholic churches (out of 17,000) in the U.S. received federal Paycheck Protection Plan loans that were supposedly meant for small businesses. Wait, what?!

• Also from the “Wait, what?!” files: Frontier Airlines is making people pay extra to be socially distanced.

• The California Restaurant Association has sent to Gov. Newsom a proposed plan on how to reopen the state’s restaurants. Get more details, via The Associated Press, here.

A group of hair salons is getting ready to sue Gov. Newsom over the fact that they have not been allowed to reopen yet. (Search for hair salon after clicking the link.)

• Finally, some good news: While nothing is sure yet, there’s increasing evidence that almost all people who recover from COVID-19 indeed have antibodies—and that MIGHT mean they have at least temporary immunity.

• Oh, and there’s increasing evidence blood thinners may help some people who get critically sick from COVID-19.

• The Wheels Are Coming Off, Chapter 96: Some Southern California churches are starting to have in-person services, the law (and possible spread of the virus) be damned.

Coronavirus survivors will be disqualified from joining the military. Yes, really.

The DMV is opening 25 offices—including the one in Palm Desert—for in-person service tomorrow. However, you’ll need an appointment.

• Could lasers soon be used to test for COVID-19—and other diseases, too? The Conversation breaks down how that is a possibility.

That’s enough for today. Wash your hands. Wear your mask. Don’t spread easily disproven conspiracy theories. Buy our amazing Coloring Book. Chip in a few bucks, if you can afford to do so, to help us continue doing what we’re doing. Back tomorrow!

Published in Daily Digest

As the stock market tumbled and oil prices collapsed earlier this week, Gov. Gavin Newsom’s top economic officials sought to project calm from the world’s fifth-largest economy in the wake of the coronavirus pandemic and a Russia-Saudi Arabia oil price war.

Lenny Mendonca, the governor’s chief economic and business adviser, said that California is assessing the growing economic impact of the virus, which has shut down schools, suspended in-person classes at UC Berkeley and Stanford, canceled major tech conventions such as Google I/O, and sidelined dockworkers at the ports of Long Beach and Los Angeles.

Mendonca sought to strike a balance between reassurance and prudence.

“I want to emphasize that there will always be economic ups and downs, but people will continue to visit our state as they always have,” he told a meeting of state agency heads gathered at the Capitol for an update on international trade efforts. “Our arms will be wide open when our friends from China and around the world are ready to travel again.”

Agency officials all sounded the alarm on how the coronavirus outbreak might affect demand for California products from almonds to computer chips. On the same day the Grand Princess cruise ship docked in Oakland, the state’s tourism bureau reported a significant hit from people taking precautions against further spreading the virus.

Business travel has dropped and cities are hemorrhaging convention business, said Visit California president and CEO Caroline Beteta, adding that the sector is unlikely to recover this year. 

California’s overall tourism economy is $145 billion, but the state has been disproportionately impacted by the quarantines of millions of people in China. In 2019, California welcomed about 1.8 million Chinese visitors, who spent $4 billion in the state. Instead of a projected 3 percent growth in Chinese tourism, Beteta said the state now is projecting a 28 percent drop for the year.

“It’s high, high impact from that market alone,” Beteta said. In response, the state’s tourism arm has targeted Chinese tourists with a marketing campaign.

Up and down the coast, California’s ports are experiencing a negative impact on trade and goods shipments. Last week, Gene Seroka, the executive director of the Port of Los Angeles, said 25 percent of the port’s traffic has vanished. 

Max Oltersdorf of the Governor’s Office of Business and Economic Development, or Go-Biz, said that as of Monday, there have been at least 60 vessel cancellations at the ports of Long Beach, Los Angeles and Oakland.

Port officials in Long Beach and Los Angeles report some dock workers are being paid to stay home because there’s not enough work. The ripple effects will be felt by truck drivers, farmers and many other workers.

Economic forecasters say California may be better off enduring the short-term economic pain of shutting down public spaces such amusement parks and public gatherings such as conventions in order to limit virus transmission and improve the chances of a quick recovery.

“You want people to overreact right now to nip this thing in the bud,” said Chris Thornberg, founding partner of Beacon Economics, an independent economic research and consulting firm. “If this thing does get out of control and starts to affect the third quarter, then we have deep, deep trouble.”

Thornberg said while it may be inconvenient for businesses and their workers for a few weeks, it’s a lot better than a widespread outbreak that takes down the state’s economy.

As if the coronavirus news wasn’t unsettling enough, an oil price war between Saudi Arabia and Russia further disrupted the world economy over the weekend, sparking a historic collapse in oil prices as traders prepared for the Saudis to flood the market with crude to regain market share.

U.S. oil prices sank to a four-year low—and shares of California-based Chevron fell with them, though by less than energy stocks elsewhere in the country, where oil companies are less diversified and less financially prepared.

Newsom’s advisers note that California’s state budget does have some built-in resilience. The governor has proposed a $222 billion budget, which includes $21 billion in reserves from several sources.

Workers have a safety net, too. In addition to activating an array of public health initiatives, the governor is reminding workers that state support is available to workers impacted by the virus. Employees who have or have been exposed to the coronavirus can file for disability insurance. Employees who have hours reduced or are laid off due to coronavirus can file for unemployment. And employees who are caring for a sick or quarantined family member with coronavirus can file for paid family leave.

Those benefits, however, are often unavailable to gig workers and other freelancers, leaving them choose between staying home and giving up pay or increasing their chances of exposure.

“It’s so early, so fluid—it’s hard to see the arch of where things are going,” said Lt. Gov. Eleni Kounalakis, who is overseeing trade efforts for the state.

CalMatters.org is a nonprofit, nonpartisan media venture explaining California policies and politics.

Published in Local Issues

They don’t call it the Golden State for nothing, at least not lately: California’s fiscal health is in extraordinary shape.

Income-tax receipts surpassed expectations for the pivotal month of April. Projections of a $21 billion-plus surplus are not out of the question. Nearly 3 million jobs have been added since the depths of the Great Recession, yielding record low unemployment. And having already met a 10 percent rainy-day fund requirement, the state is socking away billions in additional reserves to buffer against the next downturn. Impending Silicon Valley IPOs could provide an even bigger windfall.

Yet California isn’t as prepared as it may seem for the next recession—and, economists say, there will be a next one. Because voters have willingly taxed the rich, California’s $209 billion budget is more volatile than ever, overly reliant on top earners whose fortunes are tied to Wall Street.

And what’s different this time—and perhaps more worrisome—is that when the next pullback hits, California may have to fight off red ink without a historically crucial ally: Washington, D.C.

It’s not just that there’s no love lost between President Donald Trump and California leaders, or that Congress is gridlocked in its political divisions. Fiscal choices that have been made in the past couple of years may make it tough for the federal government to help states much in the next recession, even if Congress and the Trump administration want to.

Fiscal analysts warn, for example, that the federal deficit is soaring just as historically low interest rates are limiting the Federal Reserve’s monetary firepower.

“Whether it’s because of a worsening fiscal picture at the federal level or just the politics, I wouldn’t be counting on them coming to some agreement about helping out states,” said Gabriel Petek, the Legislature’s nonpartisan budget analyst.

“If you go from that premise, then the state has to be thinking about contingency planning for the next recession and getting through it on its own.”


The Macro View

During the economic downturn that followed the Sept. 11, 2001, terrorist attack and the financial crisis that struck in late 2008, the federal government poured billions of dollars into state coffers by enhancing support for anti-poverty programs, health care and infrastructure.

But Petek and other analysts warn that with U.S. government coffers drawn down by Trump’s tax cuts—and without an extraordinary and unifying cause like a terrorist attack or near-depression—California and other states may not be able to count on the federal government again to backfill fiscally.

Given political priorities, casualties could easily include services that impact millions of Californians: anti-poverty programs such as CalWORKS for working parents, in-home supportive services for low-income seniors, or the state’s Medicaid program known as Medi-Cal, which serves one in three residents.

“Gabe is not alone in having those thoughts,” said John Hicks, executive director of the National Association of State Budget Officers in Washington, D.C. “States did get assistance in the Great Recession and a smaller version of that in the early 2000s. That prevented them from having to make more significant cuts in education or other priority areas or have to raise revenues more.”

Petek, who was appointed in February after two decades at S&P Global Ratings, estimated the state will need $25 billion just to weather a moderate recession. That would wipe out everything the state has been able to save.

According to the Department of Finance, for instance, the state’s general-fund spending on Medi-Cal alone is $22 billion, and trimming that line item in a recession would threaten the $100 billion a year in matching federal money that underpins health care for the poor in California.

“It’s a huge part of how we fund our health-care system,” said Gov. Gavin Newsom’s finance director, Keely Bosler. And that’s just one need among many that would be competing for the state’s surplus should the economy turn.

In addition to the unpredictable economy, Bosler worries about the federal support that hinges on the fate of the Affordable Care Act, which is facing a legal challenge, and the next Census, which would be dramatically impacted if California residents are spooked by a proposed citizenship question.


Recalling the Recession

So as California strides toward the longest economic expansion in state history this July, Newsom and his fiscal advisers are keenly aware of what could happen. Many of them, longtime government staffers, were tasked with making cuts during the last recession and are steering the governor to limit his commitment to ongoing spending.

Bosler, who was a staff consultant in the Senate in 2010, recalls emotional, daylong committee hearings a decade ago when developmentally disabled children, working mothers and destitute patients suffering from chronic illnesses lined up, pleading with state lawmakers to spare them from cuts.

“I remember it so clearly, because it was really, really hard,” said Bosler, who later joined former Gov. Jerry Brown’s finance team.

On the brink of becoming a failed state, California drastically reduced spending on the poor then—with particularly long-lasting impacts on women. From cutting programs that provide child-care assistance to preschool subsidies for mothers holding low-income jobs, the pullback made the dream of self-sufficiency that much harder. For older women and women with disabilities, the state reduced safety-net programs intended to help them stay in their own homes by paying someone to help with housework, shopping and cooking.

In health, California slashed payments to doctors, dentists and clinics seeing patients covered by Medi-Cal, a move that discouraged providers from seeing them. The developmentally disabled were told to take generic drugs and prevented from participating in experimental treatments. And podiatry and optometry were no longer covered, because they were deemed optional.

Those cuts have lasting impacts. “No program was spared,” recalled Bosler. “Significant damage was done to core state services.” Welfare advocates are still fighting today to restore medical benefits slashed during the recession.

So the Democratic governor and the Democratic-controlled Legislature are making a conscious choice to build reserves now.


Building Resiliency

When Newsom updates his spending plan in mid-May, he is expected to maintain his three-pronged approach for savings, paying down debt and making targeted investments in affordable housing and early education.

One bucket of about $3 billion would be used to expand ongoing services for the poor, particularly in-home supportive services program and CalWORKs. A portion would be used to boost higher education to stave off a tuition hike in the University of California and California State University systems, as well as fund a second year of free community college.

The second bucket would be targeted for affordable housing and to confront California’s homeless epidemic; lay the ground groundwork for extending full-day kindergarten to all Californians; and provide an extra $3 billion toward districts’ teacher pension payments.

The last and largest bucket would be used to help the state weather a potential economic downturn for what Newsom has termed “budget resiliency.” He would finish paying off the state’s Wall of Debt that had accumulated from years of internal borrowing and undo a 9-year-old accounting trick that pushed the June state payroll into July so it looked like the state was spending less.


A Safety Net

Last year, the state put $200 million toward seeding a new account intended to protect anti-poverty programs in a downturn. Newsom has embraced the safety-net reserve by proposing to increase the fund to $900 million.

Senate President Pro Tem Toni Atkins, a Democrat from San Diego, told a crowd of policy advocates in Sacramento in March that even though Newsom’s style is much different from his predecessor Brown’s, their underlying strategy is similar.

“If you look at what Gov. Newsom has done in terms of the rainy-day fund, paying down debt, and those kinds of issues, and if you extrapolate that, then what you see is a fairly conservative approach to resources to make sure that we are trying to keep a sustainable, resilient foundation of a budget going forward,” Atkins said.

Atkins credits that extra safety-net reserve to the Senate’s budget committee chair, Sen. Holly Mitchell. Both lawmakers indicated they would like to go beyond $900 million, because the money would protect just a fraction of those in need.

If the state were to set aside $900 million, it would protect roughly 435,000 Medi-Cal recipients or 132,000 CalWORKS families for a year based on the state’s average spending on those programs. Currently, about 13 million people are on Medi-Cal, and nearly 400,000 families rely on CalWORKS—with demand growing when people fall on hard times.

Lawmakers haven’t said how much they will try to set aside. “It’s a technical term: A whole lot of money,” Atkins quipped.


The Course Ahead

Petek, the Legislature’s budget analyst, suggests lawmakers could do even more. He notes, for example, that while paying off California’s so-called Wall of Debt sounds nice, lawmakers may not want to undo that payroll accounting trick, because it’s administratively burdensome to do it again if the state needs to free up cash.

All this prevention is ironic, says Jeffrey Michael, director of the Center for Business and Policy Research at the University of the Pacific in Stockton. If the state is overly reactive to economic cycles, Californians have no one to blame but themselves.

It’s voters, he notes, who have decided again and again to tax the rich, a choice that has made the system more reliant on the investment income of high earners and therefore more volatile.

And for the record, he doubts that California will have any more or less to worry about than any state should a recession hit during the Trump administration.

“While California is acting to oppose or counteract the president’s policies in many areas, I don’t believe the federal fiscal response to a downturn is an area where California needs to take special precautions against the actions of Congress or the president,” he said.

But polls show the state is generally in sync with Newsom’s mix of priorities for the current surplus. A recent survey by the Public Policy Institute of California found majorities support additional funding for working poor tax credits, wildfire preparedness and developing more housing. Only 47 percent approved of one-time spending to pay down unfunded pension liabilities.

And, like the governor, a lot of taxpayers remember the last two recessions, and remain cautious.

“If they’re not going to give (the surplus) back in a refund,” said Charles McLaughlin, a board member of the Ventura County Taxpayers' Association, “then they should save it for a rainy day.”

CALmatters.org is a nonprofit, nonpartisan media venture explaining California policies and politics.

Published in Politics

What would you do with a $21.4 billion windfall?

That’s essentially the question California is confronting amid record surplus projections during Gov. Gavin Newsom’s first year in office.

On one hand, the former San Francisco mayor showcased his progressive agenda by setting ambitious goals for universal preschool, expanding health coverage for undocumented immigrants, and proposing the nation’s most-generous paid family leave program.

On the other, Newsom made the case that he’s still being fiscally conservative by projecting a modest growth rate of 3.2 percent, socking billions more into the state’s rainy day fund, and paying down debt and public-employee retirement liabilities.

“I think, arguably, it’s even more conservative in that respect than previous administrations,” Newsom said of his overall $209 billion state budget.

The governor’s finance department broke the $21.4 billion surplus into three buckets: roughly $3 billion for ongoing spending, $8.5 billion in one-time spending, and $10 billion to build what Newsom is calling “budget resiliency.”

The initial $3 billion bucket would be used to expand ongoing services for the poor, particularly the in-home supportive services program and CalWORKS for working parents. A portion of that would be used to boost higher education to stave off a tuition hike in the state's university systems, and fund a second year of free community college.

The second bucket of $8.5 billion would be targeted toward Newsom’s ambitious push for affordable housing and to confront California’s homeless epidemic; to lay the groundwork for extending full-day kindergarten to all Californians by providing money to build or retrofit classrooms; and to provide school districts much-needed relief by contributing an extra $3 billion toward the districts’ teacher pension payments.

With the remaining $10 billion surplus, Newsom wants to pay off debts, which he says would help the state weather a potential economic downturn. Specifically, he would finish paying off Brown’s so-called $28 billion Wall of Debt that had accumulated from years of internal borrowing; undo a 9-year-old accounting trick that pushed the June state payroll into July so it looked like the state was spending less; set aside $2.3 billion for operating reserves; and most significantly, make an extra $3 billion contribution to the state’s main pension fund.

So how did California wind up with an extra surplus? Essentially, the sales and income taxes passed during Gov. Jerry Brown’s tenure coincided with an economic recovery. One week after Newsom won the election, the Legislative Analyst’s Office announced that state finances were in remarkably good shape, with a $14.8 billion expected surplus for the fiscal year that begins July 1.

Newsom and his finance director, Keely Bosler, say there are two reasons the surplus grew by $6.6 billion. One comes from positive balances state accounts carried over from past years, and the other is that the Newsom administration is choosing to project less growth in Medi-Cal, the state’s Medicaid program for the poor.

“We’re projecting more modest growth in the Medi-Cal budget, which makes sense, because we’ve seen this big ramp-up on the expansion of the (Affordable Care Act), and it’s beginning to level off,” Newsom said. “That affords us the opportunity to make these historic investments, and pay down debt and unfunded liabilities.”

Bosley, who also served under the Brown administration, said she was hesitant to modify assumptions about Medi-Cal caseloads and costs, but ultimately felt it remains adequate. That’s because the state has seen the number of uninsured Californians drop as the state aggressively signed people up for private insurance plans offered through Covered California while also expanding Medi-Cal coverage for the poor.

On Monday, the legislative analyst weighed in with its assessment of Newsom’s budget and commended him for paying down debt, a move it called prudent. The analyst, however, now projects the state will have a $20.6 billion surplus, nearly $1 billion less than the governor’s figure, and included a word of caution.

“The governor’s budget proposal reflects a budget situation that is even better than our estimates,” the analyst wrote. “Largely as a result of lower-than-expected spending in health and human services programs, we estimate the administration had nearly $20.6 billion in available discretionary resources to allocate. That said, recent financial market volatility poses some downside risk for revenues.”

CALmatters.org is a nonprofit, nonpartisan media venture explaining California policies and politics.

Published in Politics

California’s resistance began before there was a resistance.

When Gov. Jerry Brown unveiled his final budget on Jan. 10, it bookended eight years of a progressive march to reduce greenhouse gases, expand health care, grant more rights to undocumented immigrants and raise the minimum wage to $15 an hour. Along the way, voters have assented by passing temporary taxes on the rich—not once, but twice. The top marginal income tax rate is now 13.3 percent, the highest state income tax rate in the country.

In short, policies that are now labeled acts of resistance to President Donald Trump were alive and ascendant in California long before Trump won the White House. But the contrasts have become much more stark.

Instead of cutting taxes, the Democratic governor and his party’s legislative leaders have passed a gas tax to help pay for aging infrastructure. Instead of trying to shift government out of the healthcare marketplace, California is looking for a way to fund single-payer health care, including coverage for undocumented immigrants. Instead of criminalizing pot, the state is looking forward to collecting taxes on marijuana sales.

In the months between now and the June deadline for a final budget, the governor and the Legislature will hammer out details. The focus this year: what to do with an expected surplus of $6.1 billion—and there are definitely differing opinions all around. Republicans say return it to California’s 40 million residents as a nice tax refund. The governor's priority is to fill up the state’s rainy-day fund. Democratic legislators mostly want to spend it.

“We have a very different approach,” said Assemblyman Phil Ting, D-San Francisco, who chairs the Assembly Budget Committee. “Our focus, the people who we think need tax relief, are the working Californians who are making less than $25,000. That’s where we want to spend our money, making sure they have money to pay rent, to pay for food.”

Rather than giving out “huge corporate tax breaks and a huge tax break for the wealthiest in this country,” Ting has a long list of how he would like to spend that extra money, including:

• Increasing the state’s Earned Income Tax Credit, which puts money into the hands of the working poor.

• Expanding Medi-Cal health care for poorer Californians to cover all remaining uninsured residents, mostly undocumented immigrants.

• Expanding early education for 4-year-olds through preschool and transitional kindergarten programs.

• Increasing college aid.

• Expanding mental and social services to reduce the number of criminals who go on to re-offend.

As supportive as Brown might be of these Democratic aspirations, his administration is urging legislative leaders to proceed with caution. The state’s tax structure is more vulnerable than ever to the stock market gains and losses of its wealthiest citizens, and the governor said California must prepare for the next economic downturn, because a mild recession could wipe away at least $20 billion a year in revenues.

He also warns of uncertainty from Washington, D.C.

“There are certain policies that are radical departures from the norm, and California will fight those, whether it’s immigration or offshore drilling,” Brown said. “We don’t know what will happen. I wouldn’t want to portray a California-Washington battle, although there are some key differences, and we’ll espouse our values.”

Since Brown was elected to begin his second stint as governor in November 2010, the state has climbed out of the recession and enjoyed economic prosperity. The unemployment rate, which topped 12 percent, now stands at 4.6 percent. Since his return, California has added 2.4 million jobs, and hourly wages are up $4.76 an hour. The state, which carried a $25 billion deficit in his first year back, has enjoyed billion-dollar surpluses in recent years, and the state now has a rainy-day fund.

The governor’s proposed $190 billion budget is dominated by spending on education (29 percent) and health care (32 percent). Health care spending has been growing particularly fast since the state embraced the Affordable Care Act, also known as Obamacare. The act not only grew the marketplace for private health plans; it allowed states to expand their Medicaid health insurance programs for the poor.

Because California is among 30 states that expanded Medicaid, the federal government is paying at least 90 percent of the cost for newly eligible enrollees. That has allowed California to draw billions in extra funding from the federal government to bolster Medi-Cal, the state’s version of the national Medicaid program. As a result, the number of people without health coverage in the state has dropped to a historic low: from 17.6 percent in the 1980s to 7.6 percent in 2016. Today, one in three Californians is covered by Medi-Cal.

Public schools too have greatly benefited since the recession, with much of the extra spending on schools going to improve teachers’ salaries.

However, if the federal government doesn’t reauthorize the Children’s Health Insurance Program for 1.3 million children, that could add more than $850 million in costs to the state over two years.

Worse, if Republicans in Washington slash Medicaid funding in 2018, the state could lose between $25 billion and $50 billion, said Chris Hoene, executive director of the California Budget and Policy Center, a progressive think tank in Sacramento.

“The reality is California could not afford the scale of the cuts the GOP has been proposing,” Hoene said. “That’s going to put state leaders in a position of deciding who gets state services and how do they fund that.”

Other factors are straining the budget. For example, pension costs for public workers continue to be one of the fastest-growing liabilities—driven by lower investment-rate assumptions, higher health care costs and longer life spans.

Voters, too, could turn on Brown and lawmakers. Early polling suggests Republicans have a decent shot at repealing a gas tax hike that went into effect late last year. Brown said at a press conference Wednesday that he believes a repeal initiative could be defeated.

The Legislature’s nonpartisan budget analyst is also urging lawmakers not to commit to too many new spending programs.

“As it crafts the 2018-19 budget and future budgets, we encourage the Legislature to consider all of the uncertainty faced by the budget in future years and continue its recent practice of building its reserve levels,” the analyst wrote.

On the flipside, Republicans are calling for a tax refund, if not an outright repeal of state income taxes. They argue that California’s high taxes chase residents out of state.

“This surplus is a direct result of Capitol Democrats overtaxing hard-working Californians,” said Assemblyman Matthew Harper, R-Huntington Beach. “Rather than expanding an ever-growing list of government programs, our leaders should figure out a way to return that money to the people who earned it in the first place.”

Assemblyman Vince Fong, R-Bakersfield, said he plans to introduce tax cuts aimed at helping families and small businesses stay in California.

“As we see all too often now, we are losing families and small businesses to neighboring states that have tax burdens much lower than California’s high-priced tax code,” Fong said on Twitter. “We have an opportunity to change that.”

Brown dismissed the refund idea, saying it would only prompt service cuts to public schools and universities later. “If you want to budget responsibly, you need big surpluses in years that are good,” he said.

Still, there’s a growing sentiment that California may have to respond to recent changes in the federal tax plan, specifically a $10,000 cap on state and local deductions that will hit millions of households.

According to the state Finance Department, the average deduction for state and local income taxes alone is nearly $16,000 per return, while state and local property taxes average less than $6,000 per return. Because a portion of those taxes will no longer be deductible, it acts as double taxation for California taxpayers.

Senate President Pro Tem Kevin de León, who is running for U.S. Senate, introduced legislation Thursday to shield Californians from bearing the costs of the tax overhaul. The bill, dubbed Protect California Taxpayers Act, would allow taxpayers to make charitable deductions to the state and receive a dollar-for-dollar tax credit on the full amount of their contribution. By having residents donate to the state government as a charitable contribution, the contribution remains deductible on federal taxes.

“The Republican tax plan gives corporations and hedge-fund managers a trillion-dollar tax cut and expects California taxpayers to foot the bill,” de León said in announcing his legislation. “We won’t allow California residents to be the casualty of this disastrous tax scheme.”

Brown was particularly vocal against the GOP tax proposal, calling it a “tax monstrosity,” but the governor expressed reservations about whether the state could sidestep federal law.

“It looks interesting,” Brown said. “But two questions: Can it work? If it does work, can the Internal Revenue Service issue a regulation and completely subvert it?”

De León responded that he was confident it would work, because similar charitable deductions have already been given out for education-based contributions.

For now, state Democrats are in agreement about a common threat.

Whether it’s federal tax changes or entitlement cuts, the leader of the Assembly, Anthony Rendon, D-Paramount, said he’s most concerned Republicans in Congress and the Trump administration will take another swipe at liberal California in 2018. “We’re worried about the next shoe to drop.”

CALmatters is a nonpartisan, nonprofit media venture explaining California policies and politics.

Published in Politics