The Golden State’s Record-Breaking Deficit

Every state and municipal budget in America will take a big hit because of the coronavirus lockdowns, but no public purse is in as much trouble as California’s. Its Department of Finance recently estimated that the Golden State could face a $54 billion shortfall in the fiscal year beginning July 1, which surely must be the largest deficit any state has ever accumulated, surpassing the $40 billion hole that nearly swallowed Sacramento in 2008. Still, though Governor Gavin Newsom said last weekend that the staggering deficit was “a direct result of Covid-19,” that’s clearly not true. Critics have long warned that the state’s tax base is volatile, being increasingly reliant on wealthy residents and vulnerable to sharp contraction in the next recession. Combine that with California’s spending spree—including expenditures to fix problems that the state’s own bad policies have worsened—and the swing from prosperity to penury isn’t hard to understand.

It’s no exaggeration to say that California—with its 13.3 percent personal income-tax rate, the highest of any state—is the model of progressive fiscal policy. The state also takes a big tax bite out of capital-gains income, another significant source of revenue. In 2017, Californians reported $142 billion in capital gains, by far the largest amount of any state. Two-thirds of that total came from people making more than $1 million. The top 1 percent of California earners now account for about 23 percent of the state’s adjusted gross income but pay 46 percent of the income tax—nearly $50 billion last year, all of which came from an estimated 15,000 households. Before the coronavirus recession hit, California projected that more than 70 percent of its general fund revenues—or $102 billion—would come from personal income taxes. That’s compared with just 25 percent in the 1960s, when the top rate was about half what it is today.

California’s problem: the income of the rich is highly variable, based heavily on dividends, capital gains, and bonuses, which mostly vanish in recessions. In the 2008–2009 downturn, for instance, California’s income-tax collections declined by $7 billion—from $50 billion to $43 billion—in one year. They’ve come roaring back, especially in the last few years, as the stock market reached new heights. California added new taxes, bumping up the rate for those earning more than $250,000 a year and increasing the state sales tax. Originally passed as temporary measures, these tax increases were extended in 2016 for another 15 years. That helped fill the till even higher during the recovery but means that any future tax increases will come on top of already-high rates.

California officials blame the projected $54 billion shortfall on the coronavirus shutdown, but steep deficits always loomed in the next recession. Last year, the Public Policy Institute of California estimated that, even in a moderate downturn, the state would face revenue shortfalls averaging more than $22 billion a year for the next four years—totaling more than $90 billion. For a severe recession—as we may now be facing—the study projected revenue losses of $170 billion stretching over five years.

Volatility is the enemy of government budgets because states and localities must continue to provide services in a recession, and their cost often rises. California projects, for instance, that its expenses will go up by an unanticipated $7 billion as it must increase spending on services for those hit by the downturn. It expects another $6 billion in costs associated with fighting the virus itself, though Washington may reimburse some of that.

A volatile tax base can also encourage overspending as governments amp up their budgets in good times. That’s certainly what happened in California. The state’s budget has grown by $59 billion since 2014, a compound annual rate of about 6 percent. Some of the added spending has addressed problems that seem to be of the state’s own making—a consequence of bad policies. For instance, in the last budget, the state added $3 billion to address homelessness and housing, in addition to money that municipalities like San Francisco were already spending. But the state’s housing and homeless problems are largely homemade. A Government Accountability Study found that California has the highest costs in the nation for constructing “affordable” housing—up to $750,000 for a single unit. California alone accounts for half of the shortfall in housing construction nationally in the last 20 years. Meantime, homelessness in the state has been increasing at far faster rates than in the rest of the country, as cities like San Francisco have made themselves more welcoming to street living by decriminalizing low-level property crimes and drug offenses and distributing syringes and free meals.

Some of this funding may be the first to be cut. But reducing spending won’t be easy because advocacy groups have locked in much of the expenditures with referenda and legislation. Proposition 98, for instance, guarantees funding for public schools based on the amount spent the previous year, and it requires a two-thirds vote of the legislature to override these constraints. In addition, the enormous pension debts accumulated by the state’s retirement systems have generated growing funding demands—only likely to rise further now. In the last 20 years, the amount that state government has been required to contribute to CalPERS has grown from less than $400 million in 2000 to $15 billion last year. The pension system’s administrators warn that stock market losses could require substantial new contribution increases over the next five years. It’s likely that the state and municipalities will do what they have done in previous recessions—decline to boost these payments—at the cost of increasing the state’s burgeoning pension debt, requiring bigger contributions when the state economy begins to recover.

Under former governor Jerry Brown, the state started accumulating a rainy-day fund, now amounting to $17 billion, but even that cushion won’t last long in California. Officials are counting on more federal aid, but after dishing out nearly $3 trillion already, Republicans in Washington are not in the mood for major new spending to help states solve budget problems that go beyond the virus. That might put pressure on Governor Newsom to reopen the state’s economy faster than originally planned, in hopes of a surge of tax revenues to cut the projected deficit. Barring that, the state may be looking at a repeat of strategies in the previous recessions, when it borrowed heavily to close budget gaps. To do that, however, the state must get permission from taxpayers, and such borrowing is expensive. In 2004, for instance, the state floated $15 billion in bonds to close deficit gaps precipitated by the bursting of the dotcom stock bubble. It cost $19 billion to repay those loans, and the state had to make payments throughout the next recession, and all the way into 2015, before it could close the books on that borrowing.

Earlier this year, when California was flush with revenues and spending liberally, Newsom boasted that his state was “America’s coming attraction.” Let’s hope not.

Steven Malanga is the senior editor of City Journal, the George M. Yeager Fellow at the Manhattan Institute, and the author of Shakedown: The Continuing Conspiracy Against the American Taxpayer.

This article was originally published by City Journal Online.

California’s Coronavirus Relief Program for Unemployed Immigrant Workers

Locked out of state unemployment benefits, hundreds of thousands of out-of-work immigrants are facing additional hurdles to tap into a new California program offering a $500 one-time payment during the COVID-19 pandemic to those without legal status.

Struggling to pay living expenses, immigrant workers are finding jammed phone lines and overwhelmed staff at the nonprofits tasked with distributing the funds as they compete for a dwindling pot of money that state officials acknowledge isn’t enough to help all who need it.

Efforts to rally private contributions to supplement the $75 million in taxpayer money set aside for the program by Gov. Gavin Newsom have so far fallen short of meeting a $50-million goal. …

Click here to read the full article from the L.A. Times.

California’s Single-Day Death Toll Hits New High

California recorded 132 new coronavirus-related fatalities Tuesday — the most in a single day since the pandemic began — as counties across the state continue cementing plans to reopen their economies.

The highest number of deaths previously reported in a single day statewide was 117 in late April. Tuesday’s rise, which comes on a day when data from the previous weekend is typically released, pushed the state’s death toll past 3,400. The number of confirmed cases statewide has climbed to 83,864, according to data compiled by The Times.

While the death count continues to rise, other metrics show significant progress, enough that even some of the most cautious local health officials have agreed to begin slowly reopening businesses and public spaces. …

Click here to read the full article from the L.A. Times.

Stop the Mandates, Give Business Time to Recover

Proponents of a newly-proposed privacy initiative, the so-called California Privacy Rights Act (CPRA), claim to have enough signatures to qualify for the November ballot. The actual number of qualifying signatures may be close, based on my experience with previous initiatives.  

But as someone who has signed a few ballot initiative arguments, I question whether this initiative should move forward at all. In the face of an unprecedented health and economic crisis, should the sponsors pull back their proposal?  

I can think of three good reasons why the sponsors should wait. 

First, we now have record unemployment, business failure, and state and local budget deficits.  Almost every business I know has been touched in some way by the coronavirus, either because of the impact of “shelter in place” orders or because consumer purchasing patterns have changed dramatically. Many business owners have laid off or furloughed employees while some are still trying to operate bare bones operations. And many smaller companies have been forced to close their doors – hoping and praying that they will be able to reopen in the future.

Against this bleak backdrop, incredibly, the sponsors of the current law, the California Consumer Privacy Act (CCPA), are now proposing a new privacy regulatory regime. Ironically, the previous law has only been in effect since January 1, and the Attorney General’s office is on its third rewrite of the regulations. Business groups large and small are still confused about the language in the regulations, concerned about the scope of the requirements and unable to afford the cost of compliance. But regardless of the problems with the CCPA, the sponsors want to force a new set of business mandates and additional costs.

It is simply the wrong time to propose new mandates and costs on business. Business owners must focus on rehiring employees, restarting their business and a financial plan to get past the first six months, and Governor Gavin Newsom and the legislative leaders are focused on public health, economic recovery, wildfire protection, and homeless and housing programs. But the initiative sponsors seem to be locked into pursuing their initiative and other tone-deaf proposals that will discourage business recovery.  

Second, the initiative creates a new state agency – just what we don’t need in a year when we are facing a $54 billion dollar budget deficit. With a shortage of state revenue for health, education and community assistance programs, this initiative and other proposals will create costly new government agencies. Obviously, those plans should be scrapped to allow government to focus on shoring up and stabilizing essential services. 

The final reason this initiative should not go forward now — or frankly, any time in the future — is that it ties the hands future governors and legislatures. A “perfect” policy, whether by law or by initiative, is impossible to craft. The CPRA contains language that would prevent any legislative modification even if the initiative caused serious, lasting detrimental impacts. No initiative should limit the ability of the current Governor and the Legislature and future leaders to make changes. 

Privacy law, in particular, is a relatively new policy area that is very complex and is changing rapidly due to changes in technology. This type of issue requires the legislature to adjust and improve the laws and regulations over time. In truth, the legislative process may take longer than I prefer, and often changes are less significant than I hope, but the legislative arena offers the opportunity to illustrate what is wrong with a particular policy and as well as a solution to fix it. This initiative destroys that process and sets a dangerous precedent for “freezing” policy without the potential for improvement. 

The Governor, the Legislature, businesses and even privacy proponents share a common goal – an aligned and collaborative effort to protect the health of Californians while employees and employers find a way reopen and serve their customers. Privacy considerations and business success are not mutually exclusive, but now is not the time – and this is not the right initiative – for major changes to consumer privacy policy.

John Kabateck is NFIB State Director in California.

This article was originally published by Fox and Hounds Daily.

UC to freeze salaries; president and chancellors to take 10% pay cut

The University of California will freeze salaries for certain staff employees during the upcoming fiscal year and the school system’s leader and current chancellors will take a voluntary 10% pay cut, President Janet Napolitano said.

In a letter sent to colleagues on Monday, Napolitano said the UC system is suffering from “significant financial impacts” due to the coronavirus pandemic — including an estimated $1.2 billion in losses from mid-March through April. The majority of the losses were at UC Health, which grappled with increased costs related to COVID-19 care and a drop in revenue due to cancelled appointments and surgeries. UC also refunded about $300 million in room and board fees to students who chose to leave campus in the middle of the pandemic.

The salary freeze will apply to non-unionized employees while a freeze on salary scales will apply to non-unionized administrative staff. …

Click here to read the full article from the San Francisco Chronicle.

Unmasking partisanship, and why Trump can still win

How can President Trump hold on to the support of his followers amid a pandemic that has so far killed more than 86,000 Americans and an economic collapse that rivals the Great Depression?

Roughly 1 in 5 people who had jobs in February lost them in March, a new study by Federal Reserve economists found. The last president to preside over job losses like that was Herbert Hoover, who lost reelection in a landslide. Why isn’t Trump already suffering Hoover’s fate?

That’s a question a lot of Democrats ask these days, with a belief among many that Trump has some Svengali-like power over his voters.

That gives the president more credit than he’s due.

The real answer is as plain as the mask on your face — or not on, depending on the partisan tribe to which you belong. …

Click here to read the full article from the L.A. Times.

Did Ballot Harvesting Impact March 3 Bond and Tax Proposals?

Next day returns on the special election for California’s 25th congressional district indicate that a Republican, Mike Garcia, is holding a 56 percent to 44 percent lead over Democrat Christy Smith. That looks awfully good for Garcia. And while in this case Garcia’s lead does look insurmountable, in California, early returns don’t always equal final results.

According to California’s current elections code, mailed in ballots are counted as long as they are postmarked by election day, and arrive up to three days later. In practice, this translates into final results in close elections being delayed for several weeks.

California’s election code also permits so-called “ballot harvesting,” which is alleged to swing the results of close elections. And unless, at the very least, both candidates and parties have equally effective voter harvesting operations, why wouldn’t it?

The process works this way: A campaign operative canvasses a neighborhood in the days prior to an election. Armed with a cell phone app that identifies which households have voters that are registered with the candidate’s party, they only knock on those doors.

“Hello, have you voted? No? You have not? Well do you have your ballot? Why don’t you fill it in and I’ll take it and submit it for you?” Or, if the person has already filled out their ballot, but haven’t gotten around to mailing it, “here, let me take that and get it mailed for you.”

Depending on who you ask, ballot harvesting in California was a major factor in flipping seven congressional seats from Democrat to Republican in November 2018. One thing is certain; in that election the GOP had almost no ballot harvesting operation, whereas the Democrats had thousands of paid operatives knocking on the door of every Democratic household in every battleground district.

Did Ballot Harvesting Affect the Outcome of Tax and Bond Proposals?

Plenty of controversy has been generated by the new statewide mandate to send mail-in ballots to every voter in California, along with ballot harvesting. But the focus has been on how this impacts elections to U.S. Congress or the State Legislature. Less evaluated but also impacted are votes on state and local tax and bond proposals. As part of every election, without fail, hundreds of localities put proposals in front of voters. And every election, several billion in new taxes and borrowing are at stake.

Historically, for several election cycles up to and including November 2018, California’s voters have overwhelmingly approved new local taxes and bonds. Typically over 70 percent of local tax proposals and over 90 percent of local bond proposals are approved by voters. But something happened in the primary election of March 3, 2020. Voters decided they’d had enough.

By tabulating data compiled by CalTax on local tax and bond proposals immediately after the March 3 election, the following preliminary voting results were reported:

This is a stunning result. Instead of 70 percent of local tax increases passing, only 31 percent of them were showing, so far, as approved. Instead of 90 percent of local bond proposals passing, 42 percent were showing as approved. But then what happened?

The next chart shows final results, which California’s dazzlingly efficient voting bureaucracy was able to deliver on April 21, only 49 days later. So what was the impact of late voting? How was the final outcome affected by the efforts of paid political operatives to knock on the doors of every Democrat and harvest the ballots they’d received in the mail?

As can be seen, for whatever reason, late vote counts did make a difference. The number of approved new taxes jumped from 42 percent to 44 percent. The number of approved bonds jumped from 31 percent to 36 percent. Don’t laugh. That’s another $171 million in additional annual taxes, and an additional $1.1 billion in new borrowing.

It’s worth wondering exactly how the percentages changed. For example, next day results showed 39 bonds passing, and final results showed 44 of them passing. But that’s a net number. What really happened?

The analysis performed to answer that question (an Excel file) can be downloaded here. It shows every tax and bond measure that appeared on a local ballot in California on March 3, comparing next day results to final results. In reality, eight bond measures that were losing a day after the election ended up passing, and two bond measures that were passing in the next day results ended up losing. With respect to the local tax measures, it was a bit closer: five tax measures flipped from fail to pass, and three flipped from pass to fail.

What Does It All Mean?

New York Times journalist, Jennifer Medina, citing tracking data in California, reported that “roughly 56% of voters 65 and older returned a mail ballot. Just 19% of those younger than 35 did so.” Medina was reporting data from the May 12 special election in California, but it’s interesting to wonder if it holds true for the state at large.

Most of the analysis published in mainstream media, including the New York Times and the Washington Post, claim vote-by-mail does not help either party. Mainstream media also promotes a consensus that vote-by-mail does not increase the risk of fraud, as this typical analysis from NPR helpfully attests. But the NPR report also reinforces the argument that older voters tend to be far more likely than young voters to submit mail-in ballots.

With two elections already behind us in California in 2020, a few observations may be useful. First, voter sentiment has changed significantly. The level of support for new taxes and bonds has nearly inverted, a shift far too big to dismiss as a blip. With the pandemic shutdown having crashed public sector tax revenue, this should be a worrisome development for anyone who wants more taxes and more borrowing. Will the pandemic crisis exacerbate voter disillusion with new tax proposals, or offer them a new motivation to approve new taxes?

The other observation that might come out of these 2020 California elections is that vote-by-mail, notwithstanding possible concerns about fraud, may actually help Republicans. Voter harvesting, on the other hand, will harm Republicans. They will be harmed because it is unlikely that in California, where Democrats have far more money to spend (public sector unions, left wing billionaires), the GOP cannot hope to match the Democrat voter harvesting operation. And even if they do, come November, they will knock on GOP households that are far more likely to have already mailed in their ballots, whereas the Democrat households will be more likely to still be holding on to theirs.

This article originally appeared in the California Globe.

Judge orders Los Angeles to move thousands of homeless during coronavirus crisis

The city and county of Los Angeles must find shelter for thousands of homeless people who are living near freeways, a federal judge ordered Friday, saying their health is at risk from pollution, earthquakes and the novel coronavirus.

U.S. District Judge David O. Carter issued a preliminary injunction requiring relocation of an estimated 6,000 to 7,000 people camping near freeway ramps and under overpasses and bridges. He gave officials one week — until May 22 — to come up with a plan for providing humane housing.

“Without adequate access to shelter, hygiene products and sanitation facilities, individuals experiencing homelessness face a greater risk of contracting the novel coronavirus, and an outbreak in the homeless community would threaten the general public as well,“ Carter wrote. …

Click here to read the full article from the L.A. Times.

Newsom eases guidelines for California to reopen

Acknowledging that more California communities are in a position to slowly reopen businesses, Gov. Gavin Newsom on Monday loosened rules linking coronavirus infection rates to allowed activities — a change that could release most parts of the state from the tightest restrictions of his stay-at-home order.

“We recognize the conditions across the state are unique and distinctive depending where you are,” Newsom said. “The bottom line is people can go at their own pace and we are empowering our local health directors and county officials that understand their local communities and conditions better than any of us.”

The decision by Newsom comes less than two weeks after his administration first began transferring more decision-making power to local public health officials and was prompted, he said, by additional data suggesting steady rates of hospitalizations and COVID-19 patients treated in intensive care units as well as increased testing and more protective gear for healthcare workers. …

Click here to read the full article by the L.A. Times.

Will The Coronavirus Pandemic Lead To Tax Increases?

In January, Gov. Gavin Newsom presented a proposed budget for fiscal year 2020-2021 which envisioned a several billion dollar increase in spending for existing programs as well as a host of new programs. But that was before COVID-19 arrived at our shores.

In over the course of just three weeks in March, it became obvious that the original budget plan would have to be scrapped because of the most rapid economic downturn America has ever seen.

So it was with great interest that all those who follow California politics were watching last Thursday as Newsom released the “May Revise” of the budget. To no one’s surprise, the huge dive in state revenues forced the governor to slash $19 billion from January’s initial plan.

According to the governor’s Department of Finance, the budget deficit is $54 billion. But this figure may be overstated in order to present to the public the worst possible case. The non-partisan Legislative Analyst projected the deficit to be as low as $18 billion with a worst case scenario of $31 billion.

The question is whether the budget shortfall will lead to a demand for tax increases. Taxpayers can also take some comfort that there are no immediate plans for broad-based tax increases. The governor proposed two tax hikes, a suspension of a business deduction for what are known as “net operating losses” and a tax on vaping products.

To read the entire column, please click here.