MOORLACH UPDATE — First Budget Presentation — January 11, 2019

Gov. Gavin Newsom’s first budget presentation was a sight to behold. It provided him with the bully pulpit to outline his areas of concern and where his priorities will be. It was very detailed and, for a few reporters, very lengthy. I enjoyed it.

The overall view is that our new Governor is concerned about the economy and unfunded liabilities, which I share, but also willing to project that he will have an additional $21 billion to spend, which seems inconsistent with what the current fiscal trends are telling me. This executive summary seems to be a common theme in the two pieces below.

Remember, the January 10 budget proposal is the only bill the state constitution mandates the legislature to consider. It’s a first shot announcing the governor’s priorities and will likely go through significant changes. Most reaction comes from a very high-level view of the concepts and it’s going to be the committee process where everything is fleshed out.

The Governor decided to anticipate as many objections as he could and front loaded the negotiations by including pieces from previous legislative sessions, something that the previous Governor was want to do. I find that to be a more genuine and honest approach, but we’ll have to see how it holds. The real test will be in the May Revision. I will actively review the details and provide regular accounting for what our state’s priorities should be. Until then, I think that discreet commentary is in order.

The San Francisco Chronicle provides its perspectives in the first piece, which shares my cautionary view of what lies ahead. Remember, California does not control international or national economic cycles. So, if the Chinese decide to purchase fewer Apple iPhones, we feel it here in the Golden State.

Politico takes a very deep dive into the entire budget and is a great read if you, too, like detail and getting into the weeds. It is the second piece below.

The Governor is echoing many of my policy priorities and legislative themes from the last few years which have major budget implications, like maintaining the Rainy Day Fund, addressing unfunded pension and retiree medical liabilities, appreciating the fiscal distress impacting California’s school districts, and even establishing and funding accounts for students in preparation for college (which sounds like my SB 1344 proposal from last year —

It was great to hear him addressing homelessness and mental illness, something I offered to work with him on

(see MOORLACH UPDATE — Working With the Governor-Elect — November 8, 2018). He even mentioned CEQA reforms to expedite the construction of homeless shelters. Thank you, Governor.

His speech made me reminisce about many of my legislative attempts and how they fit into his budget narrative. Here’s a few that I will suggest he review:

* Senate Bill 1248 (2016) – California Environmental Quality Act, Litigation Disclosure

* Senate Bill 32 (2017) – California Public Employees’ Pension Reform Act of 2018 (PEPRA II)

* Senate Bill 454 (2017) – Retiree Medical Costs

* Senate Bill 590 (2017) – School Reserve Cap Repeal

* Senate Bill 671 (2017) – Advanced Pension Payments

* Senate Bill 681 (2017) – Local Pension Control

* Senate Bill 656 (2018) – Judicial Retirement System

* Senate Bill 1031 (2018) – Cost of Living Adjustments Freeze

* Senate Bill 1032 (2018) – Eliminate the Terminated Agency Pool

* Senate Bill 1033 (2018) – Pension Reciprocity

* Senate Bill 1344 & Senate Constitutional Amendment 16 (2018) – Education Savings Account Act of 2020

* Senate Bill 1433 (2018) – Restrict the Deferred Retirement Option Program

As I once again sit on the Senate Budget and Fiscal Review Committee, this year serving on Sub 5, Public Safety, versus Sub 1, Education, I’ll enjoy the process of debating the components of the budget over the next five months. The Governor’s May Budget Revision may bring many of his proposals down to reality as current economic trends become clearer. Other than that, it was an amazing first week of the new Session and it promises to be a fun adventure.

Gov. Gavin Newsom’s budget: More money for education, Navigation Centers

Joe Garofoli and John Wildermuth

Gov. Gavin Newsom proposed a $209 billion state budget Thursday, a 4 percent increase over the previous year that includes more spending for education and Navigation Center homeless shelters and an increase in California’s rainy-day reserve.

Newsom proposed a record $80.7 billion for K-12 education and money for a second year of free community college for full-time students. His fiscal 2019-20 budget also includes money for an expansion of preschool education and $750 million to fund more all-day kindergarten programs.

Newsom would pay for some of his new initiatives with an anticipated $21.6 billion surplus, $6.5 billion more than what the nonpartisan Legislative Analyst’s Office projected in November. The governor said the more optimistic numbers were based on updated statistics.

On housing, Newsom proposed $500 million in state aid to cities to open Navigation Centers like those pioneered by San Francisco, where homeless people have access to programs such as drug and mental health counseling and job searches. He proposed waiving environmental requirements for building such shelters, much as cities do for stadium projects.

He also said he would withhold transportation funding from communities that do not achieve their local housing-creation goals.

“Everyone has to step up,” Newsom said. “If they don’t, don’t ask us for more money.”

Newsom also called on the business community to help solve the state’s housing crunch. He said he has been having a “quiet conversation” with Silicon Valley leaders to “step up and match our contribution.”

Even as he proposed a 4 percent overall budget increase, Newsom invoked former Gov. Jerry Brown’s warning to sock away money for an expected economic downturn. Newsom’s budget calls for putting $1.8 billion into the state’s rainy-day fund, which would increase it to a total of $15.3 billion. Newsom said he plans to increase the fund to $19.4 billion by fiscal 2022-23.

Newsom’s budget also includes $4.8 billion to pay down some of the state’s unfunded retirement liabilities and $4 billion to pay off all the state’s budget debts and deferrals. California still has $256 billion in unfunded retirement benefits for state employees.

“We are preparing for uncertain times,” Newsom said. His budget assumes a 3.2 percent growth in the state’s economy, compared with 5 percent projections in past years.

State Sen. John Moorlach, R-Costa Mesa (Orange County), called Newsom’s growth projections “a little bit optimistic, based on current trends.” He’d prefer to bank on zero growth.

“When the market turns, it doesn’t give you a couple years’ notice, it turns on a dime,” Moorlach said. “You could lose your rainy-day fund within a matter of months.”

Budget hawks like Moorlach and GOP Assemblyman Jay Obernolte of Big Bear Lake (San Bernardino County), vice chair of the Budget Committee, applauded Newsom’s suggestion to use the state’s surplus to pay down debts. But Obernolte cautioned that “we must remember that creating new programs that would only have to be cut in a recession would be foolish.”

Newsom said “90 percent” of his proposals are policy ideas that the Legislature already supports. Assembly Budget Committee Chair Phil Ting, D-San Francisco, said that “I don’t know if that’s completely true, but on the big issues we absolutely agree. … We all want universal health care, we want universal preschool, we want full-day kindergarten.”

One big-ticket item was conspicuously absent. Although Newsom said this week that he wanted to expand state-paid family leave to six months for parents of newborn children, his budget did not include funding for it. He said he would create a task force to study the idea.

The budget Newsom unveiled Thursday is just the first step in a months-long process, a starting point for negotiations with the Legislature. The governor will provide a revised budget proposal in May, which will include spending and revenue from the next few months. The Legislature then must approve the budget in June.

In what may be his most popular proposal, Newsom said the Department of Motor Vehicles should start accepting credit card payments. Newsom joked that he couldn’t believe that a governor would be making news with that statement in 2019.

“That,” Newsom said, “is in the you-can’t-make-this-up department.”

Newsom earned a reputation for wonkishness long before he was sworn in as governor — as San Francisco mayor, he famously delivered a seven-hour State of the City presentation on YouTube — and that enthusiasm for eye-glazing detail was fully evident Thursday.

Ten minutes into his 105-minute presentation and question-and-answer session, Newsom enthusiastically touted the money he was proposing for a “longitudinal data system” to track student progress.

“Wait till next year,” he said. “You’ll have to listen for four hours. I love this stuff.”

Joe Garofoli and John Wildermuth are San Francisco Chronicle staff writers. Email: jgarofoli, jwildermuth Twitter: @joegarofoli @jfwildermuth

Newsom seeks changes across government in first budget


Enjoying the tailwinds of a massive surplus and large Democratic supermajorities in both houses, Gov. Gavin Newsom is using his first budget proposal to put his policy stamp on nearly every sector of California government.

The Democratic governor described Thursday — in detail, for nearly two hours — how he would use his $209 billion spending plan to shape California’s future, focusing heavily on early childhood, housing and health care.

While Newsom used some of his estimated $21.4 billion surplus to lay the groundwork for future program expansion, he also directed much of it to pay off debts and reverse borrowing gimmicks from as far back as the Gov. Arnold Schwarzenegger era during the worst of the recession, taking a page from famously frugal Gov. Jerry Brown’s playbook.

“The message we are advancing here is discipline, building a strong foundation on which everything else can be built,” he said at the Secretary of State’s auditorium, a bigger venue needed to accommodate the greater number of reporters and state officials on hand to watch Newsom’s first budget presentation.

The notes of discipline in Newsom’s proposal won him plaudits from even some Republicans. But a key question, perhaps, is whether Newsom’s nascent administration will have the bandwidth to execute on the vast array of proposals he’s put on the table — a list that seemed to grow as his Thursday budget briefing went on and the new governor offered to provide jobless benefits to furloughed federal workers.

“It’s always challenging when you have a two-year campaign, you need to be talking about a lot of things. … You’re talking to a lot of constituency groups, you’re trying to be very aspirational,’’ said Assemblyman Phil Ting (D-San Francisco), who chairs the Assembly Budget Committee, one of the panels that will now prepare to dig into the fiscal blueprint. He added that “for some of the heavier lifts, it’s really up to see how much he and his team are willing to push it.”

Newsom, a father of four, drafted his spending plan with a clear focus on more money for programs focused on young children. He devoted the opening policy section of his budget summary to early childhood, likely the first time a governor has done so.

He proposed nearly $2 billion in spending on kindergarten and child care facilities, as well as home visits and parental aid. But he also called for a $500 earned income tax credit bonus for families with children younger than 6, paid family leave up to six months and additional Cal Grant aid for parents attending college.

Newsom proposed a fund for safe drinking water — a problem plaguing low-income, rural communities in California. He called for major incentives designed to spur housing construction in California. He proposed several measures that attempt to expand health coverage to the remaining 7 percent of Californians who are uninsured, including subsidies for upper-middle-class residents and Medi-Cal for undocumented immigrants between ages 19 and 25.

Newsom starts with perhaps the biggest fiscal advantage enjoyed by any California governor in recent history — a rainy-day reserve projected to grow to $15.3 billion and a surplus he now estimates at $21.4 billion — more than $6 billion higher than the Legislative Analyst’s Office forecast in November. The Department of Finance said that’s largely due to more revenues and fewer expenses than predicted in the current fiscal year, as well as unforeseen Medi-Cal savings. The LAO will now review the Newsom budget.

Newsom touted his unprecedented $13.6 billion to pay down pension liabilities, debt and accounting gimmicks from years ago, which his plan calls “building budgetary resiliency.” The governor has proposed $3 billion to pay down CalPERS pension liabilities for public employees and $3 billion to relieve school districts of CalSTRS payments.

The Department of Finance says that his budget only adds $2.9 billion in permanent budget growth. That’s just under the $3 billion level that the Analyst’s Office suggested would be prudent to get through a moderate recession unscathed.

“None of us are naïve,’’ and California may soon be “overdue for a correction” in the booming economy, Newsom warned.

While his plan doesn’t bake in massive program expansions now, it would require billions more in ongoing spending down the road to carry out his grand vision. That list was topped by proposals to establish full-day kindergarten across the state and provide public preschool for all low-income 4-year-olds.

He said he laid out a strategy to accomplish these goals in three or more years, “but we’re going to be sober and honest about how much we can do.”

Likewise, Newsom opted to use some of the surplus to modernize the state’s analog 911 emergency call system and create pilot projects to establish savings accounts for young children. Both would eventually require hundreds of millions of dollars — and possibly new taxes in the case of the 911 overhaul.

California Budget and Policy Center Executive Director Chris Hoene said Newsom made a savvy move by focusing on finite commitments that could clear the way for sustained changes as the new governor’s tenure unfolds.

“It’s not as if all of his promises are going to be delivered in year one,” Hoene said, noting that offering more early childhood services, for example, means building the “capacity to serve more children.”

“Before you have universal kindergarten for 4-year-olds, you need to invest in the facilities and the staff and the infrastructure,” Hoene said. “There’s a trend of committing one time investments while the budget is in good shape, while doing some stage-setting for future investments.”

Newsom’s first budget generally received favorable reviews from lawmakers, even from some Republicans.

“He’s got his eyes wide open and I appreciate that,” said state Sen. John Moorlach (R-Costa Mesa). “So, I want to encourage him with his big plans, but he’s got to be able to hit the reverse gear. It would be a disservice to build an infrastructure for Pre-K and then have those buildings empty because we had to eliminate that program.”

In the weeks after Newsom’s election, some veteran budget experts speculated that he might use his January budget as a placeholder to buy time to develop the initiatives he promoted on the campaign trail. But he instead used the rollout to map out his agenda.

Unlike Brown, who generally waited for lawmakers to propose spending plans before reacting to them, the former San Francisco mayor and lieutenant governor cast himself as an unusually proactive chief executive.

The stark differences weren’t lost on some legislators, who — while lauding Newsom’s enthusiasm and energy — also said there may be a reality check ahead now that he’s no longer a candidate.

Assemblyman Ting noted that “one of Gov. Brown’s strengths was having a really narrow list of things to work on, and get done. And because of that, he was able to get them done.”

At times, Newsom sprinkled his presentation with remarks that seemed to indicate he was trying to outdo Brown, who won his biggest praise for putting the state budget on a stable path after deep recessionary cuts that started a decade ago.

Newsom said his budget added less to permanent spending growth than any of Brown’s spending plans did. He said his budget is “structurally balanced over the next four years. And forgive me, this is not an indictment, and please don’t consider it as such, but that has not always been the case with presentations by governors — even recently.”

Later, he observed that Brown didn’t pursue tax reform, but that he would because the state’s revenues are too volatile. Newsom suggested that California isn’t doing enough to capture revenues from the modern service economy.

The governor’s least dramatic budget section, perhaps, was the largest: K-12 schools. While previous governors regularly enjoyed making a splash with big classroom initiatives, Newsom focused more on under-the-hood work that will probably win more plaudits from district accountants than from parents.

Start with the $3 billion payment to CalSTRS, which will help more districts balance their increasingly shaky budgets, though it won’t necessarily reduce class sizes or result in new arts and science programs. District leaders have been clamoring for help paying their pension obligations, said veteran schools lobbyist Kevin Gordon.

Another popular piece among the green eyeshade crowd: reversing controversial formula changes signed by Brown that limited growth in the education budget, Gordon said. And Newsom’s $576 million in additional special education funding will be appreciated by district leaders who have seen costs balloon for students with disabilities.

“Gavin went after the hottest button issues the education community has been screaming about the last five years and pushed every one of them in a positive direction,” Gordon said.

Jeremy B. White and Alexander Nieves contributed to this report.


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