MOORLACH UPDATE — Half Empty Reserve Concerns — June 24, 2019

The Sacramento Bee continues with my concerns about the glass being half empty in the piece below (see MOORLACH UPDATE — Biggest Budget, Biggest Deficit — June 10, 2019).

“I’ve been voting no or abstaining on a lot of spending opportunities,” Sen. John Moorlach, R-Costa Mesa, said. “Some people think the glass is half full, I’m looking at it as half empty, so that will maybe explain my caution on a lot of these spending votes tonight.”

The piece does a good job of sharing the concerns I’ve been expressing this year on the Budget Conference Committee, in the Senate Budget & Fiscal Review Committee and on the Senate Floor. Time will tell whether my prediction is correct or whether it was a lack of confidence in the potential of an ongoing growing economy under our current President. Speaking of predictions, you’ll enjoy the Look Back.

25th Anniversary Look Back

The summer of 1994 would be quiet, except for the O. J. Simpson drama resulting from the brutal murder of OC native Nicole Brown Simpson.

Bill Lobdell, in his regular Daily Pilot "Editor’s Notebook" column of June 25, 1994, had a little fun with his piece, titled "Reinecke will concede vote if and when . . . " Among many other humorous predictions:

Costa Mesa arch-conservative John Moorlach will appear on a Democratic mailer, sharing endorsement space with Dianne Feinstein and Kathleen Brown (Oops! That’s already happened.)

Another one was:

Angels will win the World Series.

(Oops! That actually did happen eight years later!)

But, speaking of Major League Baseball, Bill Lobdell would print my Daily Pilot editorial submission, titled "Far From ‘Scuzzy’ — Candidate says his campaign for treasurer took high road." It’s provided in full. For more on Fred Martin’s barbs, see MOORLACH UPDATE — Biggest Budget, Biggest Deficit — June 10, 2019 and MOORLACH UPDATE — Clean Drinking Water Funding — June 11, 2019.

The piece would even include this photo:

From left: John Moorlach (with his son, Daniel) talks last year with fellow conservatives [U.S.] Rep. Dana Rohrabacher, {OC} Supervisor Tom Riley.

I would like to say thanks to those Daily Pilot readers who voted for me. Probably being the only Costa Mesan to have ever run for a countywide seat, I am appreciative of your encouragement and support.

Running for Orange County treasurer-tax collector was a great experience. While not being a well-known personality, I was happy to obtain nearly four out of every 10 votes cast, with a much better showing in this paper’s readership area.

In fact, I also ended up being the highest vote getter in my other race, that of the Republican Central Committee in the 70th Assembly District, just edging out Newport Beach Councilwoman Evelyn Hart.

My treasurer’s campaign focused on trying to educate the public about Bob Citron’s complex and super-speculative investment approach. It was very difficult to do, but many understood. In a nutshell, his portfolio is a major league gamble that interest rates will continue to go down from their already 30-year lows. What happened during the campaign? The Federal Reserve Board raised rates four times and brought my point close to home.

Since Mr. Citron would not debate me during the campaign, I spent time trying to educate the reporters covering it, even giving them copies of the portfolio, which I finally received a month before the election. Unfortunately, you can lead a reporter to water but you can’t always make them think. This is even more true for those reporters and editorial writers of the liberal persuasion.

The media defended and protected their lone Democrat. Fred Martin’s recent vitriolic statements about my campaign are a good case in point.

I know you shouldn’t get into a pissing contest with a skunk, but Fred’s anti-conservative rhetoric should at least receive a response. Fred stated that I ran a "scuzzy" campaign. I beg to differ. I believe I ran a clean campaign that had a message, dealt with the issues, and questioned the incumbent’s management, while never attacking his character.

Counter Point 1 – Fred claims that I tried to "denigrate incumbent Robert L. Citron because he is a Democrat." Not true. The most difficult task I faced was how to inform the voters that he was a Democrat. Fortunately, Mr. Citron and the press did that heavy lifting for me. Mr. Citron kept referring to my campaign as some type of partisan plot. Give me a break. It is preferred that Republicans challenge Democrats, this made the treasurer’s seat fair game for someone who was qualified and willing to serve his community.

Counter Point 2 – "Spending . . . Republican dollars to get (my) name and mug shot in a ‘Democratic Voter Guide.’" Here Fred really shows his double standards. Liberals can, but if conservatives do, then watch out. Mr. Citron purchased space on Republican slate mailers. He caused me to negotiate harder to get on the few that I did. I’m sure Fred is ignorant about the economics of politics, but I did need to reach Democrats, too.

Counter Point 3 – "One Moorlach supporter went so far as to endanger Orange County’s unblemished credit record by repeatedly contacting New York bond-rating services and financial media, trying to get them to investigate Citron."

Again, Fred should have done a little more research here. This supporter was a third candidate in this race. He is a reputable Newport Beach investor who is a major player in the financial market, a highly quoted expert on corporate bankruptcy, and the chairman of a large publicly held corporation. He eventually did not file to run against Citron, but he knew what risks were being taken and wanted Citron replaced for the sake of his community and County.

Counter Point 4 – Fred asserts that I tried to "terrify the citizens by alleging that Citron’s complex investment strategies are going to lose all the county’s money." I never states or implied that all of the money would be lost. I did say that his portfolio was down $1.2 billion ($1,000 per registered voter); a conservative estimate. I requested the county’s market values, but Citron refused to give them. I stuck to Citron’s performance, Citron skirted the issues.

Citron has borrowed $14 billion to invest ($5,600 per county resident) with $8 billion of it borrowed and invested near the top of the bond market. He invested $5.5 billion in derivatives. He incurred over $300 million in collateral calls during the campaign, which translates into a major loss in equity. Many counties would like to have $300 million to invest, let alone lose.

My message was simple: higher returns equal higher risks. Without belaboring the point, time will tell whether I was correct or whether it was a bum rap.

Mr. Citron finally had a challenger after 23 years and it was good for the system, Citron, and the public. Unfortunately, Fred, it was Citron who ran a scuzzy campaign based on obfuscating the true risks he has taken.

Many voters understood the truth. That is why I obtained a good portion of the vote for the first time out of the chute. I’m not embarrassed nor do I fell that I compromised my standards. It’s unfortunate that grumpy Fred can only look at it through his anti-conservative Republican glasses. I’ll see you down the road, my friend. Perhaps I’ll do something to earn and be honored by your biased ink again.

Getting ready for recession,

California’s $215 billion budget

fills reserves. But is it enough?

BY ADAM ASHTON

https://www.sacbee.com/news/politics-government/capitol-alert/article231768688.html

Stung by severe cuts to services in the Great Recession, California lawmakers are riding the state’s booming economy to put more money than ever into savings accounts meant to soften the hurt of the next downturn.

They just don’t know if it’s enough.

Altogether, the budget Gov. Gavin Newsom will sign this week aims to build up reserves to more than $19 billion in four separate savings accounts by next year.

One account, the so-called rainy day fund with $16.5 billion, can only be tapped in a recession. Another unlocks funding for social services. One more piles up $400 million for education, and the last one is projected to hold $1.4 billion for emergencies and natural disasters.

It’s an unprecedented sum for a state that’s famous for its boom-and-bust budgets.

“We’ve never taken action to be prepared before,” said Sen. Holly Mitchell, D-Los Angeles, chairwoman of the Senate’s Budget Committee. “We’ve only managed by expanding and cutting, cutting and expanding. This is the first time we’ve had something considered a safety net reserve.”

Mitchell a dozen years ago led one of the largest nonprofit agencies in the state, which delivered assistance to low-income families. She had to take out loans to keep checks moving to families every time the Legislature failed to pass a budget on time.

To her, the reserves represent an effort to end the cycle of welfare cuts and IOUS that characterized the years of chronic deficits and prolonged budget battles. In 2009, the state faced a $42 billion deficit. This year, it’s projecting a surplus greater than $21 billion.

“We have worked for years to get to this,” Senate President Pro Tem Toni Atkins, D-San Diego, said last week.

But others argue the Democratic governor and Legislature could do more to guard against the reductions they may have to make in a recession.

The nonpartisan Public Policy Institute of California last month issued a report suggesting the state had adequate reserves for a mild recession, but could see revenue fall by to $185 billion over five years in a severe downturn. The Legislative Analyst’s Office also has consistently made a case for more savings this year.

“By building even more reserves than it already has, the Legislature could mitigate the need for program cuts, tax increases, or spending deferrals when the next recession strikes,” Legislative Analyst Gabriel Petek wrote in April.

California and the U.S. as a whole now are in one of the longest-ever periods of economic growth. Newsom and lawmakers say they know a recession is on the horizon. Here’s a look at what keeps California budget hawks up at night, and what comforts them.

THE GLASS IS HALF EMPTY

VOLATILE REVENUE

When California’s wealthiest residents catch a cold, the state’s budget gets the flu.

California collects 70 percent of its general fund revenue from personal income tax, and almost half of that money comes from the state’s wealthiest 1 percent of households, according to the Public Policy Institute of California report.

The ratio leads California tax collections to swing dramatically in recessions because wealthy taxpayers are less likely to cash in big bonuses or capital gains in down economies.

California has taken a number of steps to moderate its tax volatility since the Great Recession, but its fundamental reliance on the wealthiest households persists.

LOCAL GOVERNMENT WARNING SIGNS

While state leaders in Sacramento sock away a surplus, school districts and local governments around California are raising taxes and trimming their budgets.

Sacramento County, for instance, approved a budget this month with $43 million in cuts. School districts from Sacramento to Paso Robles are reporting financial trouble, too.

In general, schools and local governments are reporting tight margins because of the rising cost of funding their employees’ pensions and benefits. Newsom’s budget offers schools some help by making supplemental payments toward their pension debts at the California State Teachers’ Retirement System, but Republicans say the financial distress is a sign that more severe cuts will come.

“Here we are in a time of plenty, and I don’t see any money other than the amount flowing to CalSTRS to help out local school districts. I don’t see anything going to help cities or counties. They’re going to be hit really hard,” said Sen. John Moorlach, R-Costa Mesa.

UNKNOWN UNKNOWNS

Despite the surplus, some California state leaders talk about the economy in terms of looming austerity.

Devastating wildfire seasons can wipe out savings in a heartbeat, for instance. Newsom is proposing a $24 billion plan to prepare for the kinds of catastrophe that wiped out Paradise and parts of Santa Rosa over the past two years.

Meanwhile, changes in the way people work can alter how they pay taxes. The gig economy and robotics could lead to fewer Californians paying payroll taxes.

Those changes are hard to predict, and they could lead to serious consequences in a downturn.

In a recession, “it will all converge in terms of challenges we have,” State Controller Betty Yee said. “The best thing we can do now is just keep building up these reserves.”

THE GLASS IS HALF FULL

BIG SAVINGS

The rainy day fund and other state savings accounts are designed to cushion cuts in a recession, and lawmakers plan to use them when the time comes.

NEW REVENUE

Since the Great Recession, California voters and lawmakers adopted a number of new taxes that will keep money flowing to the state in a downturn. They include:

· Proposition 55, the voter-approved tax on households with incomes greater than $250,000 that expires in 2030.

· The gas tax, a 2017 law that aims to raise about $52 billion for transportation projects over a decade.

· Cannabis taxes are coming in below initial projections, but they’re still on track to raise hundreds of millions of dollars for programs every year.

· And, California now demands that out-of-state online retailers collect state and local taxes on behalf of their Golden State customers. That wasn’t the case a decade ago.

SUNSETTING PROGRAMS

Some parts of Newsom’s budget avoid ongoing commitments by committing to only temporary funding.

One example is a measure that eliminates sales tax on diapers and tampons for just two years. The short window lets lawmakers decide whether they want to continue the tax breaks and services if the economy changes.

The Legislative Analyst’s Office last month projected that Newsom’s budget included $1.8 billion in spending that would “sunset within a couple of years.”

LESS DEBT

Newsom and the Legislature celebrated paying off the “wall of debt” the state accumulated during the recession. Former Gov. Jerry Brown chipped away at the $33 billion in liabilities during his terms, and the new budget puts away the last of those short-term debts.

To be sure, California still owes tens of billions of dollars that it doesn’t have on hand for pensions and other debts, but clearing Great Recession debts heartened lawmakers who were in the Capitol when they last made serious cuts.

“If you look at the new revenue, 82 percent of this surplus money either goes to a reserve account of which there are a number, pays down (debt) or pre-pays pensions,” Senate Majority Leader Bob Hertzberg, D-Los Angeles, said last week. “It evidences a level of responsibility of where we’re focused.”

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