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Last updateTue, 18 Sep 2018 1pm

Despite speculation about bold moves—in a far-left direction, even for this blue state—Gov. Gavin Newsom and legislative Democrats actually landed a budget Thursday that’s surgical about new taxing and spending while still keeping promises to help poor Californians and working families.

Under the $214.8 billion spending plan, the state inched closer to universal health coverage, expanding Medi-Cal to all low-income young adults regardless of immigration status. State lawmakers also charted a course to increase tax credits to the working poor and boost subsidies to middle-income Californians to buy health coverage. There were significant investments in early education and housing, while a portion of the surplus was diverted to pay down pension liabilities.

While Democrats began the year with a surplus of ideas for taxing Californians, only a few strategic levies survived the negotiation process, specifically a fine on individuals who don’t have health insurance under a state mandate. There’s even a little tax relief: Parents, for instance, will get a temporary tax exemption on diapers.

One hitch? The devil is in the details, some which have yet to be worked out. Though Democrats met their deadline for a balanced spending plan, most of the underlying policy to enact the budget wasn’t hashed out—and may not be for weeks. Call it a learning curve: This was the new governor’s first time negotiating with seasoned legislative leaders who know how to count votes. Look for more action in coming trailer bills.

Here’s what you need to know about California’s new budget—including maybe, just maybe, the first steps toward the establishment of a four-year college in the Coachella Valley.

Yes to Health Care for Undocumented Young Adults

The Legislature agreed to the governor’s plan to expand Medi-Cal, the state’s Medicaid program for low-income people, to young adults ages 19-25. It’s a step toward offering free health care to all undocumented adults since the state already makes Medi-Cal available to children regardless of immigration status.

The Senate had proposed going further by offering Medi-Cal to undocumented seniors 65 and older. However, none of the leaders backed offering health care to all low-income immigrants.

The state expects an estimated 90,000 young adults could gain coverage when the benefit begins next year. Already, 76,000 have registered for a limited version of Medi-Cal that covers emergency services and prenatal care available to low-income people regardless of immigration status. The price tag for this expansion? About $98 million a year.

It’s worth noting the state also affirmed its commitment to restoring optional Medi-Cal benefits. During the recession, coverage for audiology, optical, podiatry, speech therapy and incontinence creams had been taken away.

Obamacare Lives: A $695 State Mandate to Carry Health Coverage

Starting next year, California will join New Jersey, Vermont and the District of Columbia in requiring residents carry health coverage or face a $695 state penalty—a fine that will go up each year with inflation.

The state individual mandate aims to replace the federal one that Republicans repealed in their effort to dismantle the Affordable Care Act. The administration says California needs to act, because without a mandate, the number of Californians without coverage—10.4 percent in 2016—will go back up. Separately, a study conducted by the University of California estimated the uninsurance rate will rise to 12.9% by 2023, or 4.4 million people, without state action.

Money raised from the penalties, about $450 million over three years, will be used to give bigger subsidies to those who purchase private insurance through the state’s health coverage exchange, Covered California.

Newsom and lawmakers hope to expand assistance to 190,000 middle-income Californians making between $48,000 to $72,000 a year, according to Health Access California, a health advocacy group.

Fear of Recall = Not Many New Taxes

The budget includes a plan to impose a fee—that still needs to be voted on—of no more than 80 cents a month on each telephone line to help digitize the state’s 911 system, which is still analog. The next-generation system would improve call delivery, better location data and incoming text capability.

Other than that and the health-care mandate, lawmakers opted against most of the new taxes proposed early in the session. In fact, California parents and women will get a sales tax exemption on diapers and menstrual products (though only for two years).

Notably rejected, given the state’s current $21.5 billion surplus, was Newsom’s push for a 95-cent tax on most residential water bills to fund-clean-drinking water initiatives in the Central Valley. Instead, the Legislature worked out a deal to clean up toxic water by diverting money generated from big polluters under the state’s cap-and-trade program.

Some environmental groups questioned using clean air money to pay for drinking water, but supporters reasoned that water is being contaminated with arsenic and other toxic chemicals from the heavy use of fertilizers, so it makes sense to draw the $100 million for cleanup from the agriculture industry’s portion of the greenhouse gas fund.

One issue that won’t be resolved this week is whether California will conform its tax code to match federal changes made by Republicans in 2017. Newsom is relying on the projected $1.7 billion increase in net revenue from that to expand the state’s earned income tax credit, the centerpiece of his anti-poverty agenda.

Assembly Democrats in swing districts are skittish about limiting deductions and losses that can be claimed by some businesses. They know the fate of former Sen. Josh Newman, who was recalled from his Orange County seat after voting to raise California’s gas tax. Tax conformity requires a two-thirds vote in the Legislature to pass, so the pressure is on.

Paying Debt and Rainy-Day Saving

Lawmakers embraced the governor’s proposal to use some of the surplus to make extra pension payments, a step Newsom says is necessary to tame the state’s $256 billion retirement liability for state workers and teachers.

The Legislature approved supplemental payments of $3 billion to the California Public Employees’ Retirement System and $1.1 billion to the California State Teachers’ Retirement System for the state’s portion of unfunded liability.

To relieve school districts across the state, the Legislature will contribute a total of $3.15 billion toward paying down their liabilities and reducing their payroll contribution rates. One difference is where it will go.

Previously, Newsom had all the extra payments going to the teachers' pension fund—a reaction, in part, to teachers strikes that erupted as he took office. Now a portion of that money will be doled out to CalPERS. The change was made in recognition that while teachers are members of CalSTRS, many other school employees from janitors to bus drivers belong in the state’s other public-employee pension fund.

Besides paying down California’s “wall of debt,” as former Gov. Jerry Brown called it, the state is shoring up for a downturn—or in Newsom-speak, “building budget resiliency.” The new budget carries a roughly $20 billion reserve from several rainy-day funds. This amount, while hefty, would be easily wiped away in a downturn. According to the Legislative Analyst’s Office, the state would need as much as $40 billion to cover the budget in a moderate recession.

Big Spending on Housing

With new commitments topping $2 billion, the budget represents the most important action the governor has taken so far on housing and homelessness. The lion’s share will target the state’s homeless population, including $650 million in grants for cities and counties to build and maintain emergency shelters, and $100 million for wrap-around care for the state’s most vulnerable residents. Another $500 million will go toward quintupling the size of the state’s affordable housing financing fund, plus hundreds of millions earmarked for cities to update their often outdated housing plans.

While lawmakers and Newsom have agreed to cut big checks, it’s not clear who’ll get the money, and with what strings attached. Big-city mayors and lawmakers want homelessness grants directed towards the state’s largest 13 cities, while Newsom wants to spread out the money to include counties.

Newsom also wants to deny transportation funds to cities not building enough housing. As of Thursday, lawmakers were still negotiating a scaled-back version of the proposal. Another Newsom proposal that speeds construction of homeless shelters by sidestepping environmental laws also remains unresolved.

Lending a Hand to Working Families

Expanding California’s earned income tax credit has quickly become one of Newsom’s signature anti-poverty programs, because it gives a cost-of-living refund to low-income working families. Lawmakers are poised to triple the program from $400 million to $1.2 billion to provide a $1,000 refund for families with children under 6 and expand income eligibility from $24,950 to $30,000.

Anti-poverty advocates had wanted Newsom to include undocumented workers who file with individual taxpayer identification numbers instead of Social Security numbers. That proposal did not make the final version of the budget. Still, the administration estimates the current expansion will increase the number of beneficiaries from 2 million to 3 million households.

The budget also will make it easier for low-income families with children to qualify for assistance, increasing the CalWORKs asset limit to $10,000 and the motor vehicle exemption to $25,000—changes that will allow people to save and hang on to cars that can get them to work.

And parents of all incomes will get a longer paid family leave to care for new babies—eight weeks, up from the current six weeks, starting in July of next year. The goal will be to boost the benefit to 90 percent of most wages, up from the current maximum of 70 percent.

The K-14 Kids Did All Right

As required by law, the lion’s share of the budget goes to public schools, with nearly $102 billion in state money to be pumped into California classrooms and community colleges, plus another $389 million in a special reserve fund for schools. Though the figure is an all-time high, California is still viewed as lagging in per-pupil spending, in part because of the high cost of living.

Democrats are also demanding more stringent oversight of charter schools, which can operate like private schools, tend to be non-union and have proliferated in big cities such as Oakland and Los Angeles. Newsom proposed prohibiting charter schools from blocking or disenrolling special-education students who require more support for disabilities. Lawmakers readily embraced that change.

The budget includes $300 million to build more kindergarten classrooms in an effort to boost full-day kindergarten programs. Newsom had initially proposed $750 million but that was reduced after a study found most part-day kindergarten programs are in wealthier communities.

After-school programs will get a $50 million boost over the $600 million or so the state is currently spending. The money will help cover the cost of minimum wage increases enacted during Brown’s tenure.

So Did the Little Ones

In emphasizing early education, Newsom and lawmakers agreed to expand day care and preschool slots by the thousands while investing in training for child care providers.

Newsom gets $50 million in seed money to start child savings accounts for college and post-secondary education. He initially asked that all of it go toward pilot projects with First 5 California and local governments, but the Legislature is designating $25 million to that. The other $25 million will create a state program with the Scholarshare program in the Treasurer’s Office.

More Free College and Help for Student Parents

Newsom and legislators delivered on a $45 million promise to fund a second year of tuition-free community college for first-time, full-time students at campuses participating in the state’s College Promise program.

Other big winners include students with children, who will be eligible to receive grants of up to $6,000 to help cover their families’ living expenses. The budget boosts by about 15,000 the number of competitive Cal Grants—a significant jump, but far less than the 400,000 qualified students who applied for the state scholarships last year and didn’t receive them.

The University of California and California State University systems will receive money to increase enrollment, and waive tuition during the summer to help low-income students graduate faster. Lawmakers also set aside funds for campuses to combat hunger and homelessness, strengthen veterans resource centers, and provide more mental health counseling. A center at the University of California San Francisco is getting a $3.5 million earmark for dyslexia screening and early intervention.

Backers of the state’s controversial new online community college fended off an effort to slash the college’s funding, clearing the way to enroll its first class this fall. And CSU will get $4 million to study five possible locations for a new campus: Stockton, Chula Vista, San Mateo, Concord and Palm Desert.

Lots for Police Training; a Little for Police Records

Reflecting the Legislature’s focus this year on reducing police shootings, the budget includes $20 million to train police officers on de-escalation tactics, and how and when to use force. Outside the budget, bills to set a tougher standard for police to use deadly force and require more officer training are advancing through the Legislature, reflecting a compromise between civil rights advocates and law enforcement groups.

Attorney General Xavier Becerra’s office will get $155,000 to implement the new state law he’d been resisting: making law-enforcement misconduct records public. Becerra will also have to report to the Legislature on how many requests his office processes, and how much time is spent on that. A judge ruled in May that Becerra must produce the records; previously he had said he would not release them until the courts clarified whether he had to.

Powering Down to Cope With Wildfires

Besides beefing up the state’s firefighting capability and disaster preparedness, California will add powering down to its to-do list for coping with climate change-driven wildfires.

The budget doles out $75 million to state and local agencies whenever investor-owned utilities decide to shut off electricity during red flag weather warnings. One note: The Assembly added language to track how the money is used.

CALmatters reporters Matt Levin, Felicia Mello and Laurel Rosenhall contributed to this report. CALmatters.org is a nonprofit, nonpartisan media venture explaining California policies and politics.

Published in Politics

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

Tax reform may not be much more than a glimmer in the eye of Republicans in Washington D.C., but their promise of lower rates and closed loopholes appears to be already affecting state and local finances.

Exhibit 1 comes in the form of a disappointing haul for California tax collectors this summer: In June, the most recent month for which figures were available, the state took in $361 million less than lawmakers planned for in the state budget.

While there are plenty of reasons for revenues to miss their projected mark—an unexpected economic cold snap, perhaps, or a forecasting model miss—the fiscal sleuths at the Legislative Analyst's Office suggest that something else could be afoot. They wrote in a recent report that “high-income taxpayers may be deferring income and/or tax payments to late 2017 or even 2018 in anticipation of a federal tax cut."

It’s a phenomenon that may be sweeping the nation: States such as New York and Massachusetts, both of which levy state income taxes, report lackluster receipts.

The evidence for California is incomplete, but compelling.

For one, state sales taxes actually came in higher than expected. So did withholding receipts—the money that gets taken out of your paycheck. That rules out the possibility that the state economy has taken an unexpected dip.

What came in under expectations are the estimated payments, made four times per year, that high-earners pay on income from capital gains, businesses, interest payments and dividends. Corporate tax payments also came in below the forecast.

More importantly, says Justin Garosi, an economist at the Legislative Analyst’s Office and one of the authors of last month’s report, estimated payments are only up 3 percent since last June, despite the S&P 500 stock index booming over 15 percent over the same period. Corporate America and Wall Street have had a blowout year, so where are their tax payments?

“For wages and salaries, it is generally not possible to have your employer delay a paycheck, so it gets recorded in 2017 instead of 2016,” said Garosi. But those who earn a living by, say, selling stocks, often have the luxury of picking their payday. These taxpayers also have the option to simply fork over whatever they paid last year as an estimate on current earnings and then make up the difference later, explains Garosi.

 “The puzzle we were talking about is that stock prices are up big over last year, but estimated payments aren’t,” he said. “This suggests that a lot of people are paying what they paid last year, even though they expect to eventually have more liability in 2017 than in 2016.”

One reason to do that: You expect to pay a lower tax rate next April.

It’s still too early to say whether that’s exactly what’s going on. The state’s high earners may be holding off on cashing out for a variety of reasons. More detailed information—about which types of taxes are being paid by which groups, and when—won’t be available until at least 2018.

“Even if we did have complete data on capital gains income, we couldn’t be certain how much the level of gains was affected by expectations of federal tax changes,” said state Finance Department spokesperson H.D. Palmer.

But what’s clear is that the stock market is soaring, and estimated payments are not, a trend that “would support the notion” that deferral is taking place, he said.

This wouldn’t be the first time this year that the premonition of lower taxes has been blamed for throwing a wrench into California finances. When it comes to taxes, expectations can be just as important as reality.

In the weeks after the election, the market for California municipal bonds—which are tax-exempt and fund most local development projects—took a dip. Some investment experts saw this as a sign that—with possible tax cuts on the horizon— the appeal of low-return but tax-free investments had worn thin. Prices have since come back up, but may dive back down if Congress gets serious about tax reform.

Similarly, affordable-housing developers across the state began complaining earlier this year that they were having a harder time raising cash from investors. These projects often are supported by the state’s Low Income Housing Tax Credit program, which allows banks and other big investors that put money into below-market housing projects to write off a portion of their tax bill.

But the election had a profound effect on the state housing market, said Matt Schwartz, president of the California Housing Partnership Corporation, a state-created nonprofit that provides financial and policy consulting on affordable-housing issues. He said in deals the corporation helped oversee or advise, within a few weeks of the election, prices dropped by more than 25 cents per dollar of credit. Investors indicated a diminished appetite for tax-saving investments.

Those prices have since come back up, but only slightly. He said offers are still 10 to 15 percent below the pre-election high. 

“We know of at least $10 million (worth of projects) where local governments pretty much had a gun put to their head and were told that they had to step up, or hundreds of homes ready to start construction would just fall apart,” he said. “Every one of those lost percentage points is huge in terms of how many fewer affordable rental homes will get produced.”

But investors can only make the argument that tax reform is on the way for so long. Nearly seven months into the current term, Congress has been short on major legislative accomplishments—a fact highlighted by its failure to repeal the Affordable Care Act. Rewriting the tax code, or just cutting top rates, can’t be done overnight.

As for the state’s finances, the future may be bright. If, in fact, high earners have been holding back on the hope of a friendlier tax code, the good news for the state is that these taxpayers can’t kick the can forever. “As high-income tax filers eventually take gains from investments and businesses and make delayed tax payments, these eventually would show up in state revenue collections,” wrote the Legislative Analyst’s Office.

No matter what happens in Washington D.C., the state of California could see a big payday next April.

Ben Christopher is a contributing writer at CALmatters.org, a nonprofit, nonpartisan media venture explaining California policies and politics.

Published in Politics