MOORLACH UPDATE — A Seriously Taxing Budget — June 14, 2019

Allow me to wish you a happy Flag Day!

I sit on the Senate Energy, Utilities and Communications Committee as Vice Chair, and the Senate Select Committee on Wildfires (my paraphrase). I also sit on the Senate Budget & Fiscal Review Committee and just concluded serving on the Budget Conference Committee. I not only sit on these important bodies, but I attend the meetings and I review the materials beforehand and come prepared with questions.

With all the activity of meeting the house of origin and budget deadlines, we also squeezed in a SB 901 Commission Report Hearing (my paraphrase). The Commission on Catastrophic Wildfire Cost and Recovery prepared a report last Friday that was presented on Monday afternoon (see the Executive Summary at http://opr.ca.gov/meetings/wildfire-commission/2019-06-07/docs/20190607-Item_7_Wildfire_Commission_Executive_Summary_Discussion_Draft.pdf).

Here is recommendation 4 (page 9):

Absent changes to the strict liability application of inverse condemnation, the legislature should consider establishing a large and broadly sourced Wildfire Victims Fund, to more quickly and equitably socialize wildfire costs, and maintain the heath of the state’s utilities.

What funding levels does this commission have in mind? Well, numbers like $30 billion, $40 billion and $50 billion were tossed around.

Was there anything remotely close to this in the Governor’s proposed budget? Perhaps starting with staff funding and some seed money? No. Not one dollar. If there was something of this nature, I didn’t see it. So, I mentioned it during the Wildfire Committee meeting. Call it my version of “where’s the beef?” The Sacramento Bee picks up the theme in the first piece below.

Personally, I’ve been working on efforts to mitigate the occurrence of wildfires for several years now. I’ll spare you the links, but this year’s effort was derailed by the Democrat leadership, as the Senate Committee on Appropriations put my Senate Bill 584 in suspense, thus killing it for this year (see MOORLACH UPDATE — Undergrounding In Paradise — May 28, 2019). It would have required the Public Utilities Commission “to direct electrical corporations to reallocate credits provided to a jurisdiction under the Rule 20A program for purposes” of undergrounding power lines (see https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200SB584). It’s difficult to see the resolve from the Democrats when they scuttle an easy modification like this.

Politico, in the second piece below, provides its perspective on how difficult it was for the Democrats to raise taxes. With the enthusiasm they had for AB 74 yesterday morning, it sure did not seem like an agonizing vote for the majority party to pile on new taxes now. Like the cell phone tax and cherry-picking income tax conformity to have the middle class pay for a larger earned income tax credit.

Moreover, the Senate Governance and Finance Committee, another committee I serve on as Vice Chair, has not seen the tax conformity legislation that potentially raises more than $1.3 billion in taxes. Democrats plan to approve major tax legislation through a budget trailer bill without any input from a committee and an engaged public. This is outrageous.

Speaking of outrageous, I’m the legislator who asked the proverbial question Sunday evening, “What is the nexus between safe drinking water and cap and trade?” The answer has become fodder for pundits and editorial writers around the state this week. However, it was one way for the Democrats to avoid yet another special, but extremely regressive, tax on Californians.

Ponder this, because recent legislation to perpetuate cap and trade into the future was passed with a 2/3 vote, it’s an open question whether greenhouse gas reduction fund spending even has to be related to the intended programs it was designed for. The Democrats may have started down the slippery slope of using cap and trade tax revenues for anything in the future, seeing it as a new goose that is laying golden eggs to use with impunity.

A portion of my Floor speech yesterday morning closes the second piece, as I reminded my Democratic colleagues that voters soundly rejected a proposed parcel tax for Los Angeles Unified School District. The budget passed along party lines (see MOORLACH UPDATE — $214.8 Billion Budget Approved — June 13, 2019).

What’s the California Legislature doing about wildfires? Not much yet

BY BRYAN ANDERSON


https://www.sacbee.com/news/politics-government/capitol-alert/article231438308.html

When the Camp Fire destroyed the town of Paradise and killed 85 people last year, California legislative leaders vowed to make wildfires their top priority when they returned to work in December 2018.

Senate leader Toni Atkins, D-San Diego, told The Sacramento Bee wildfire issues would be “front and center” because “communities are being devastated,” while Assembly Speaker Anthony Rendon cited the state’s housing crisis and wildfires as the two biggest problems lawmakers would focus on going into the legislative session.

But midway through 2019, California lacks a comprehensive plan to deal with the growing threat. It is still grappling with how to address an estimated $30 billion in liability costs incurred by PG&E in the Camp Fire and wine country fires of 2017.

A few dozen bills are under consideration, but few have been signed, as lawmakers seek to juggle the interests of ratepayers, utilities and insurance companies.

Experts warn of major consequences if the state doesn’t act quickly to update wildfire liability standards, stabilize homeowner insurance costs, encourage residents to make their homes more fire resistant and create a fund that balances the needs of ratepayers, utility companies and wildfire victims.

Michael Wara, director of Stanford University’s climate and energy policy program, has briefed lawmakers on their options. He said the state could end up owning electric power lines and exposed to liabilities if it doesn’t act soon.

“People are rightfully very angry at the utilities, so you’re working to stabilize these companies that have done wrong. It’s a really difficult political situation to resolve,” Wara said. “In order to not have this situation spin even further out of control, the folks in Sacramento are going to have to spend some political capital on this. This is about solving the problems that are complex and not always a win.”

LEGISLATIVE INACTION

State Sen. Bill Dodd, D-Napa, has been a leading voice on the issue of wildfires in the last couple years. He authored a law last year to make it easier for utilities to pass on liability costs to ratepayers – a measure that left PG&E wanting more. Dodd also introduced a bill this year to create a statewide wildfire warning center that has yet to reach the governor’s desk. He called the pace of addressing the wildfires “frustrating.”

“Why it’s taken maybe a little bit longer is we’re really resolute on trying to make sure that ratepayers and victims don’t get raked over the coals,” Dodd said. “If we were OK with just putting this all on ratepayers, we’d be done by now. We really would. It is critically important that we find a way through this with most of the liability being paid by the shareholders, and not ratepayers.”

PG&E’s decision to file for bankruptcy in January has made it more difficult for California lawmakers to recover damages for victims, said Sen. Jerry Hill, D-San Mateo.

“We’re struggling with the bankruptcy,” he said. “We have been victimized by the system in a lot of ways, and PG&E has continued to take that easy road and not stand up to their liability.”

PG&E spokesman James Noonan said in a statement that the company “remains focused on resolving wildfire victims’ claims fairly and expeditiously.”

Behind the scenes, Newsom is working with lawmakers to get a bill onto his desk by July 12 — the final day before the Legislature takes a month-long summer recess. Newsom outlined this timeline during an April 12 news conference, saying he wanted to “get something big done” before the break.

In response, ratings agencies are pressuring the state to reduce risks for utility companies like Sempra within the next month. In a seven-page report circulated to lawmakers last week, S&P Global warned it would likely downgrade ratings of electric utilities, unless California took steps to reduce companies’ credit risks.

“Unless legislation passes that reduces the credit risks to California’s electric utilities, our current expectation would be to downgrade the utilities at or around July 12,” analyst Gabe Grosberg wrote in the report.

Sen. John Moorlach, R-Costa Mesa, called the July 12 deadline “arbitrary” and criticized the ratings agency for being “aggressive in what they think can be done by a state government.”

Still, he was disappointed by what he saw as a limited focus on wildfires in recent budget negotiations.

“Where’s the seriousness of it all?” Moorlach said. “I know the governor wants to get something done, but I’m not finding it. … The Democrats aren’t showing a real priority to dealing with wildfires.”

NEWSOM’S ROLE

So far, Newsom has created a strike force that outlined three major options for handling utilities’ liability costs.

He issued a March executive order to expedite wildfire prevention efforts. The budget he will soon sign has $127 million for federal air tankers and helicopter replacement and $236 million for wildfire prevention and recovery efforts. It also includes $10 million for Camp Fire recovery and $32 million to support local governments who lost property tax revenue.

“The governor has made expanding the state’s wildfire prevention, safety and mitigation capacity a top priority,” said a statement from Brian Ferguson, a spokesman for Newsom. “The administration is committed to working expeditiously to forge a path toward a safe, reliable and affordable clean energy future.”

Though Newsom has taken some concrete steps, he hasn’t promoted aggressive legislative proposals. Assemblyman Jim Wood, D-Santa Rosa, authored a bill that would’ve established a $1 billion fund for eligible homeowners to retrofit their houses to make them more fireproof.

When Newsom unveiled his revised budget in May, he acknowledged the importance of making homes more fire resistant but questioned how to pay for it. Asked if he anticipated getting something done this year, he punted the issue to top Democratic lawmakers.

“We’ll see what we can do, and I look forward to seeing where the leadership is and what their other priorities are,” Newsom said.

Wood’s proposal was amended last month to remove all of the money.

Patrick McCallum, a veteran lobbyist who lost his home and nearly lost his life to the 2017 Tubbs Fire, now serves as co-president of Up from the Ashes — an advocacy group representing wildfire victims. While he acknowledges that PG&E’s bankruptcy has created some complications, he wants utility companies and lawmakers to act more quickly.

“There are victims suffering now,” McCallum said. “PG&E and Edison need to step up, and the state needs to step up.”

A strong majority of Californians are also concerned. A recent poll from the Public Policy Institute of California found that 78% of residents worry about more expensive electricity bills due to utilities’ responsibilities for wildfire damage costs.

Californians are more divided on Newsom’s handling of the PG&E bankruptcy and utilities’ responsibilities, with 32% of adults approving of his performance on the issue, 30% disapproving and 38% unsure. The margin of error was 3.3 percentage points.

Mark Baldassare, president of PPIC, said the numbers reflect a desire from the public for lawmakers to stabilize utility rates and for the governor to more clearly explain what he’s doing to address the issue.

“The poll suggests it’s a topic which people feel may literally hit home,” Baldassare said. “It’s definitely something that speaks to the fact that the Legislature will need to act on this issue but tread lightly because it could have personal and political consequences. It also shows a lack of communication on the part of the governor at this point.”

WHAT’S NEXT?

Over the next month, lawmakers will seriously consider three recommendations from Newsom’s strike force that address California’s imminent wildfire liability threats.

One action the state could take is creating a “liquidity-only fund.” The fund would offer utilities a way to pay out wildfire damage claims while awaiting a determination from the state’s public utilities commission on cost recovery.

Another option for the state is to adopt a fault-based standard that would shift the risk of property loss to insurance companies and homeowners who are either under-insured or without insurance. But some worry this change would do less to hold utility companies accountable.

Finally, the state could create a catastrophic wildfire fund to spread liability costs more broadly among ratepayers, insurance companies and utilities.

Dodd said “it’s a little too early to tell right now” which, if any, of these options the state will choose.

“We’re getting continued analysis on each,” he added.

Newsom signaled last month that he’s reluctant to lower PG&E’s liability standard. Atkins, Rendon and Newsom wrote in a joint statement that it would instead pursue the liquidity fund option and allow cost recovery for electricity providers that “act responsibly and in the public’s best interest.”

Wara said it’s essential for lawmakers to act quickly.

“Next week, it’ll be go time…,” Wara said. “This month is going to be incredibly important. Ultimately, it’s really hard to have a state function effectively in the 21st century without affordable, reliable electricity. That is in jeopardy for the state right now. Make no mistake: We need to solve this problem or much worse things are going to happen.”

Taxes no slam dunk for California Democrats despite supermajority control

By JEREMY B. WHITE

https://www.politico.com/states/california/story/2019/06/13/taxes-no-slam-dunk-for-california-democrats-despite-supermajority-control-1060687

Six months and one budget into California’s experiment with single-party dominance, legislative Democrats are casting a wary eye at new taxes and fees.

They wield supermajorities in both houses of the Legislature that allow them to pass taxes without Republican input. But if the reflexive expectation from this era of Democratic hegemony was a flurry of new taxes and fees, the reality so far has been more restrained as calls for new revenue sources have been tempered by fear of political fallout.

Legislative Democrats pushed back on Gov. Gavin Newsom’s signature push to fund clean drinking water with a new tax on users, instead coalescing around a proposalto rely on greenhouse gas funds. Newsom’s call to pay for an expanded earned income tax credit by conforming California taxes to federal law also met resistance, as it would increase taxes on some business activities. The latter issue is the biggest remaining barrier to finishing the budget before the fiscal year starts July 1.

Legislators, staffers and political operatives all pointed to a prevailing wariness among legislative Democrats — many of them first-term members who rode a blue wave to claim formerly Republican districts — to compromise their reelection chances by playing into a ready-made narrative of an overreaching supermajority piling on new taxes.

The specter of former state Sen. Josh Newman hangs over the Legislature. A Democrat in a battleground district, Newman was ousted in a recall election after he voted for a gas tax increase pushed by legislative leaders and then-Gov. Jerry Brown. It was the first time in a generation that a sitting legislator had been recalled, and Democrats are not eager to see a repeat.

“You have members who are in districts that are not traditionally Democratic districts. You have some new members representing areas that aren’t quite tax-friendly — those members look at someone like Josh Newman and say, ‘I don’t want that to happen to me,’” said Republican political consultant Matt Rexroad. “It is a reminder that tax increases can be a serious, serious issue for voters in certain parts of the state.”

It hasn’t exclusively been a matter of legislative caution. Lawmakers wanted to go further than Newsom on expanding Medi-Cal to undocumented immigrants, pushed for more generous health insurance subsidies and backed a fee on phone bills to pay for a 911 system revamp.

Newsom himself has demonstrated he’s keenly aware of the political peril in overzealous budgeting, emphasizing a message of caution and warning against too much ongoing spending. He told POLITICO that legislators have been on board.

“I have got to give the Legislature a lot of credit. Their parameters were similar to mine: we’re going to hold the line. We get it. A lot of these folks lived through the last recession,” Newsom said, adding that “we’re proving a different governing paradigm. It used to be ‘tax and spend liberal.’ It no longer is.”

But the governor did want to tax water customers and spend the proceeds on cleaning up contaminated drinking water systems, framing the issue as a moral imperative. The result was perhaps the most prominent source of early friction between the governor’s office and Legislature.

While Assembly leadership embraced the governor’s proposal, a moderate Assembly Democrat floated an alternate idea to eliminate a tax deduction for gamblers.It became clear early on that the Senate would struggle to musterthe votes, and in the end the Senate’s proposal to use money from California’s cap-and-trade fund rather than tax users prevailed — a decision that drew criticism from legislative Democrats who complained of misusing the climate fund.

“This body’s very mindful about fee increases and tax increases,” Senate President Pro Tem Toni Atkins said on the Senate floor. “It’s why we approached the water issue in the way that we did.”

Newsom has said he was ultimately agnostic about how to pay for clean water, but the outcome illuminated the dynamics in the Legislature. Several members are in the first months of new terms after winning formerly Republican seats or defeating more-liberal Democrats in intraparty contests.

Assemblyman Jim Cooper (D-Elk Grove), a moderate Democrat, said “some members are a little skittish” about raising taxes despite a surplus, saying fears about inflicting additional harm on low-income people extend beyond the water tax.

“I think there are quite a few — not to single out any one tax in particular,” he said. “People are leery about raising taxes because some people are still struggling. They never recovered from the economic meltdown.”

Assembly Democrats further demonstrated their resistanceto new tax measures when Newsom’s chief of staff Ann O’Leary attended a closed-door caucus meeting and promoted the governor’s plan to fortify a state earned income tax credit by aligning California’s tax code with federal changes, which could generate billions in new revenue.

Democrats balked, according to multiple attendees, voicing concerns that ranged from not wanting to deliver Trump a victory to questioning the tax pursuit when California enjoys a surplus. A common denominator, lawmakers said, was frustration at the governor’s office pushing vulnerable legislators into a tax vote.

“The optics aren’t good,” a moderate Assembly member told POLITICO after the meeting, asking to remain anonymous to discuss a closed-door meeting.

Even as the main budget bill passed easily on Thursday, legislators were still negotiating with Newsom’s office over the conformity issue. The fact that Democrats pushed back on conformity — an idea that has Republican support and that doesn’t produce the type of campaign sound bites as a water or gas tax — speaks to lingering nervousness about tax issues in general, said Democratic political consultant Andrew Acosta.

“I haven’t seen that direct connection where this has the same oomph as the gas tax did, especially in these swing districts,” Acosta said. “It’s not like the Howard Jarvis [Taxpayers Association] folks are going crazy beating up on people over tax conformity.”

Beyond the budget talks, Sacramento has repeatedly demonstrated the long odds facing tax proposals even with two-thirds majorities in both houses.

Perennial proposals to tax sugary drinks and impose an oil severance tax withered, as did bills to impose an excise tax on gun purchases and increase a fee on tire purchases.

A proposed constitutional amendment that would have lowered the threshold for voter-approved school parcel taxes stalled. Weeks after a state senator shelved the bill, voters underscored the political arduousnessof such levies by decisively rejecting a proposed Los Angeles parcel tax despite heavy support from school officials and Mayor Eric Garcetti.

“We’re just adding more taxes,” Republican state Sen. John Moorlach (R-Costa Mesa) warned on the Senate floor on Thursday, citing the phone surcharge, the health insurance penalty and a bump in income taxes from “cherry-picking tax conformity opportunities” to fund tax credits.

“And yet just earlier this month the residents of a district with more than 4 million residents, the LA Unified School District, voted down Measure EE, saying ‘we don’t want another tax if you’re not managing your money properly,’” he said.

Mackenzie Mays and Angela Hart contributed to this report.

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