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RECENT PODS:

  • SacTown Talks (Gibran Maciel): State Senator Bill Dodd (2020-04-03)
  • Then There's California (Senate Democratic Caucus): State Senator Bill Dodd and CA Dept. of Health Director (Emeritus), Dr. Karen Smith, MD, discuss the medical, statistical and personal impact of life in California during a pandemic, and how following the advice of health care professionals during this time, can save lives. (2020-04-01)
  • Capitol Weekly Podcast (John Howard and Tim Foster): "KabaTalks" with brothers Brian and John Kabatech, who come from opposite political directions (2020-03-31)
  • Gimme Shelter (Matt Levin and Liam Dillon): Coronavirus and the housing crisis (2020-03-30)
  • Look West Podcast (Assembly Democratic Caucus: Life under quarantine in California (2020-03-30)
  • SacTown Talks (Gibran Maciel): Lobbyist John Lovell (2020-03-30) [Youtube]
  • Capitol Weekly Podcast (John Howard and Tim Foster): Carmela Coyle, president of the California Hospital Association to talk about the challenges that hospitals face as they deal with this once-in-a-lifetime pandemic, “an order of potential magnitude that we just haven’t seen before.”

The Nooner for Tuesday, April 7, 2020, presented by SYASL Partners

  • COVID-19 - numbers and beds
  • Budget Blues
  • AD13 (Stockton)
  • Cakeday and new classifieds

I again rely on charts to explain some of the budget items below, so make sure you turn images on if you are reading in email.

Woke up, fell out of bed, dragged a comb across my head...

Actually, I think I need a rake for my hair. I had an already overdue hair cut scheduled the week of March 16 when the stay at home order was issued and it was thus understandably canceled. Based on conversations on social media, I'm not alone in this side effect of the shutdown, although some people can wear long hair much better than my curls turned waves. Fortunately, I don't have to Zoom with anybody.

Congratulations to my dad, who finished a round of radiation for prostate cancer yesterday. I haven't mentioned it explicitly here other than hinting about family members with significant health challenges during this pandemic, but he called me last night in good spirits and it's being talked about on social media, so I can say "Congrats, Dad" here. Aside from being extra tired, he's fared well and continued getting the taxes prepared for his longtime clients from his home office in the mighty AD55/SD29/CA39. "They even gave me a certificate," said Dad. When I told him that Adam Keigwin posted his post-treatment certificate on Facebook, he said "That's a great idea!"

It's a good reminder that while the focus is on COVID-19, life goes on with the challenges and joy that happen during "normal" times.

Well, as CNN's Chris Cuomo says during normal times when he is not broadcasting while fighting the virus from home, "let's get after it." I am heavy on the state and school district budgets today and I may come back at ya this evening after following the news throughout the day.

COVID-19:

  • California cases:16,475 confirmed (+8.1% from yesterday, previous day's change was 9.2%) (SFChron)
  • California hospitalizations confirmed/suspected: 2,509/2,967 (CDPH)
  • California ICU admissions confirmed/suspected: 1,085/575 (CDPH
  • California fatalities: 400 confirmed (+14.3% from yesterday, previous day's change was 9.0%) (SFChron)
  • Note: I'm displaying the previous day's change as that shows the flattening of the curve. 

PEAK COVID: Thanks for the feedback to yesterday's long-form item on the update UW model and the accelerated peak for California that also shows the state well-positioned even if the high-end of the projection band hits. In particular, several of you are in the health field and complimented me on my work. Don't think for a moment that I feared opening every one such email for fear that I screwed something up.

Some folks asked if the updated projections mean that the state is overdoing preparations in light of updated numbers. When I wrote yesterday, I didn't know that Governor Gavin Newsom would be doing his presser from the empty Sleep Train Arena in Sacramento. For those of you who occasionally accusing to be in the governor's lap and writing his talking points, yesterday is clearly evidence that I do not. Newsom did mention during Saturday's presser that something about beds would be talked about on Monday, but during my two nights in bed between then and yesterday morning when I read the model update from UW, I didn't even remember that. I found it in my Saturday notes as I was following yesterday's presser.

At the Sleep Train event, Sacramento Kings lead owner Vivek Ranadive called Newsom "the best governor in America."

The governor's team, on which I would include Lieutenant Governor Eleni Kounalakis even though they are independent offices working unusually in concert, are still talking mid-May as a peak. That is wise. Hope for the best; prepare for the worst, as they say. Nobody gets criticized for over-preparing, but, well, look to some other governors who dragged their feet early. They have not only political and greater financial problems on their hands, but also a moral one in this Holy Week for much of the world.

For the first time since players slept on the court during games, Sleep Train is being equipped to accommodate up to 450 patients, part of 4,613 additional beds that have been secured within the state to meet a surge in need. The goal is to identify 20,000 such beds by mid-May. Other sites that have already been secured include Seton Medical Center in Daly City (just south of San Francisco), St. Vincent's Hospital in downtown Los Angeles, Fairview Developmental Center in Costa Mesa (520 beds), Porterville Developmental Center (240 beds), San Carlos Hotel (120 beds), and CPMC - Pacific Campus (291 beds).

Many of these are for step-down care where non-COVID+ patients, such as routine following surgeries, can continue to receive care while making room at conventional hospitals.

In many cases, the federal government will be reimbursing the state for the costs of procuring the network of additional capacity.

BUDGET BLUES: As I've written about several times and Governor Newsom has telegraphed on multiple occasions that the state budget world has taken a 180. Yesterday, Assembly Budget Committee, chaired by Phil Ting (D-San Francisco, echoed the governor with a memo that brought many hopes and dreams to a screeching halt.

May Revision

  • expects the Governor's May Revision to become a "workload" budget that reflects 2019-20, or current, service levels
  • "almost all new January 2020 budget proposals" would not be heard by budget subcommittees if they were to meet today
  • the likely only new requests to be considered are COVID-19 related costs, wildfire prevention, and homelessness
  • reductions to existing state programs may need to be considered
  • deliberation on special fund programs, like those receiving Greenhouse Gas Reduction Funds will likely be deferred until after June 15

"August Revision"

  • because of the delay of the personal income tax deadline from April 15 until July 15, a complete picture of revenues will likely not be available until August
  • this will lead to a "second round" of budget deliberations, which will likely include additional spending demands related to the COVID-19 crisis
  • at this time, "sizable ongoing reductions" may be required
  • at this time, subcommittees will "not likely be able to revisit proposals for new investments"

Overall

"[W]e are in better shape to address the expected recession compared to any other point in the State's history...While we may face one or more difficult fiscal years ahead, the prudent decisions we made since the Great Recession will help us avoid the lingering structural budget problems that plagued the State before 2012. We may have some difficult choices in the coming months, but we will be able to return to the stability, optimism, and innovation that characterized the State budget over the last eight years if we remain responsible."

Here is your Assembly Budget Committee summary from January 10 when legislators, advocates, and would-be beneficiaries had twinkles in their eyes. The Legislative Analyst's Office provided an analysis where the $6 billion in new discretionary spending was destined. Here are the big pieces:

  • $1.6 billion for the state's discretionary reserve, the Special Fund for Economic Uncertainties
  • $2.6 billion in one-time spending, including $500 million in infrastructure-related construction and maintenance
  • $1.6 billion in new ongoing spending
  • $50 million in new tax breaks for small businesses
  • $250 million in a supplemental payment to CalPERS, the state's primary retirement system

Poof!

Generally, the one-time spending is attributed to above-projected revenues in the current year (2019-20), which stood at $1.25 billion through February, before the state's economy largely shut down. Of the $1.6 billion in one-time funds, $750 million was proposed for homelessness-related spending. Of course, that current year surplus is almost certainly gone. Of the $1.25 through February, all of it was from above-projection personal income tax revenues. I need not tell you that all of that is likely gone. We won't know state employment numbers for the month of March for another couple of weeks, but with all of the furloughs, layoffs, and postponement of the April tax deadline to July (which is a different fiscal year), we almost certainly have reversed from a current year surplus to a current year deficit.

Ordinarily, we would be just count on the state's discretionary reserve, the Special Fund for Economic Uncertainty (SFEU), which was projected at $3.1 billion in January. However, much of that has already been tapped. The Legislature approved and the governor signed up to $1.1 billion in SB 89 on March, which is being used to secure housing for high-risk and COVID-19+ homeless individuals. That was appropriated out of the General Fund, which comes out of the SFEU. On March 25, the Governor tapped the SFEU for an additional $1.3 billion for response to the pandemic.

From my abacus, even if the January revenues were to materialize, that would drop the SFEU reserve to $700 million assuming no other emergency appropriations were made. That's the "buffer" for lower revenues in the current year. So, add that to the $1.25 billion of above-projected revenue through February and the "available" cash as of the last report would be $1.95 billion, or about 2.2% of projected General Fund revenues for the 2019-20 fiscal year.

The economic impact of COVID-19 on the revenue side of the equation likely started in early March. While the statewide "Stay at Home" order was issued March 19, the Bay Area counties preceded it, and the news of the outbreak was already widespread. The markets started responding significantly on February 24, which accelerated after the oil price/production war began between Russia and Saudi Arabia on March 8. The President's statement of "When you have 15 people, and the 15 within a couple of days is going to be down to close to zero. That’s a pretty good job we’ve done" was on February 26, forty-one days ago.

We almost certainly facing a precipitous drop in personal income tax (68%) and sales tax (21%) revenue, with the percentages reflecting the share of the state's General Fund in 2019-20. These drops will show up for one-third of the state's fiscal year, March-June. Starting with the $1.95 billion, discussed two paragraphs ago, we're likely in the red in the current year my multi-billion dollars. Because of the delay in personal income tax deadline and allowance for small businesses to delay sales tax payments for up to twelve months, we won't know exactly how far we've fallen for several months.

Forecasting 2020-21 revenues is impossible because (1) we don't know when the current crisis will end, how much it will cost the state, and how far revenues will drop and (2) whether, if COVID-19 subsides over the summer, the virus makes a resurgence in the fall. I don't envy the forecasters as, like this coronavirus, the fiscal situation is novel.

That doesn't mean the state's in an immediate fiscal crisis, although in "Budget Year Plus One" as Capitol folk call it (2021-22), we could be looking at significant budget cuts and/or revenue increases. The Legislative Analyst's Office released a report Sunday on the reserves of the state and school districts. The experts write:

As of February 2020, the state has $17.5 billion in reserves. This includes $16.5 billion in the BSA and $900 million in the Safety Net reserves. (This excludes the Prop. 98 reserve , which I'll discuss below.)

...

State Can Access “Amount Needed to Cover Emergency.” In the case of a fiscal emergency, the Legislature may only withdraw the lesser of: (1) the amount needed to maintain General Fund spending at the highest level of the past three enacted budget acts, or (2) 50 percent of the BSA balance. Hypothetically, if resources available for 2019‑20 were expected to be lower than the enacted budget for 2019‑20 by $5 billion, then the Legislature could access that amount from the BSA. If the amount of the budget emergency in 2019‑20 exceeded half of the reserve balance (currently, $7.8 billion) then the Legislature could only access that lower amount. In this situation, however, the state also likely would face a budget emergency for 2020‑21. In that case, the state could—in one budget cycle—use up to half of the BSA balance to address the current-year budget problem and still have the option to use the remaining balance to address the budget problem for 2020‑21 as well.

In short, we could wipe out three-fourths of the Budget Stabilization Account built over several years in the next eighteen months.

Moving on to Proposition 98, the minimum funding guarantee for K-12 schools and community colleges, where I've spent most of my career. Pursuant to Proposition 2, one-time Prop. 98 money was set aside for the funding under the guarantee for a rainy day. I'm guessing I don't need to tell you that it's pouring, or maybe hailing like it was at Nooner Global HQ on Sunday.

The LAO writes:

Compared with the BSA, the rules regarding deposits into the school reserve are more restrictive. Whereas the state has accumulated a significant balance in the BSA over the past several years, the state did not make its first deposit into the school reserve until it enacted the 2019‑20 budget plan. That deposit was $377 million—representing less than 1 percent of state spending on schools in 2019‑20.

Well, crap. But, don't they have money under their couch cushions like the $1.10 in change I found under mine the other day in one of those moments of "I the news today, oh, boy..."?

Sort of. LAO:

How Much in Reserves Do Schools Hold? At the end of the 2018‑19 fiscal year, districts held a total of $12.8 billion in unrestricted reserves. This level represents 17 percent of district spending in that year—enough to cover about two months of expenditures. The data indicate that $6.9 billion of this amount was earmarked for specific uses and $5.9 billion was not earmarked. Some, but not all, of this funding would be available for schools to maintain a higher expenditure level if revenues declined. Many school districts would need to retain a significant portion of the reserves held in cash, for example, to continue to properly manage cash flow. Moreover, drawing upon earmarked reserves could involve foregoing various future projects or activities that districts regard as high priorities.

But...

Reserve Levels Vary Widely by District. While district reserves average 17 percent of school spending statewide, significant variation exists at the district level. Figure 1 shows the variation in reserves as a share of expenditures. As the figure shows, the median district holds reserves equal to 22 percent of expenditures. At the lower end, about one-quarter of districts hold reserves equating to less than 14 percent of their expenditures. These districts likely would need to reduce spending quickly if their revenue were to decline. (Many districts, however, might find it difficult to reduce expenditures in a short time frame given their fixed costs and statutory requirements related to staff layoffs and the number of instructional days they must offer.) At the upper end, about one-quarter of districts hold reserves exceeding 35 percent of their expenditures. In these districts, the larger budget cushion could mitigate potential revenue reductions.

Note that unrestricted reserves do not necessarily include liabilities such as retiree health benefits or increases in pension contributions that may be forthcoming from CalSTRS and CalPERS if the funds' investment returns lag over a sustained period of time.

And, it is the big school districts, some of which just went through strikes and otherwise contentious labor negotiations (incl. Sac City) that have the smallest margins:

School district reserves by size

Okay...deep breath.

Here are the LAO's "key takeaways":

  • State Reserves at Historic Level, but Likely Lower Than Discussed in January.
    Given economic decline due to the COVID-19 emergency, state revenues will be lower than estimated in January. Moreover, economic and budget conditions have evolved rapidly in recent weeks and are likely to continue to do so. Consequently, at this point, the most useful reference point for the state’s reserve level is the amount the state currently is holding in its reserve accounts—$17.5 billion. Compared to prior recessions, the state enters this period of economic uncertainty with significant reserves. That said, in the past, we have found that a budget problem associated with a typical recession could significantly exceed this sum. As such, the Legislature will want to consider carefully how to deploy these resources once more is known about the state revenue effects of this emergency.
  • Local School District Reserves Could Provide Short-Term Buffer, but State-Level School Reserve Minimal.
    Local school district reserves could provide many school districts with time to prepare for declines in revenues. Districts with larger reserves likely will have time to adjust their spending gradually, whereas districts with smaller reserves are likely to face difficult decisions more quickly. Regardless of their exact reserve level, however, few districts have enough to maintain current service levels for an extended period if revenues were to decline significantly. Moreover, the balance in the state-level school reserve is very small compared with the revenue declines schools might face. All of these factors suggest that state and school leaders should be very cautious as they prepare for the upcoming year.

Many of us have been here before and I've been through several rounds of budget cuts. Some readers including some of my former legislator friends and readers remember it all too well. However, we haven't been more prepared in my 25 years here. Even after Prop. 13 in 1978, the state was flush with cash (one of the propelling factors of the ballot measure) and had to step up to save locals.

The bigger issue for legislators and Governor Newsom over the next couple of years than belt-tightening and cutting in Sacramento will likely be the solvency of many local governments and school districts. That's a lot more complicated than coming up with inter-fund borrowing, deferrals, delayed pay, and other gimmicks of balancing the state budget that we did in the 1990s and through the first decade of the 2000s.

It may only be noon, but it's not too early to eat ice cream during a state of emergency.

<cue final chord>

AD13 (Stockton): Last night, I sent to ATCpro the final primary results in this close race. Yes, even in this surreal world, we still have elections going on.

BALLOT UPDATE: With the deadline to count ballots extended to 4/24, there are 67,748 ballots remaining among eight counties.

  • Ballots counted: 9,647,349
  • Ballots counted are up +12.9% from 8,548,301 in 2016
  • Turnout in 2016: 8,548,301 of 19,023,417 registered 15 days out (44.94%)
  • Turnout so far in 2020: 9,647,349 of 20,660,465 registered 15 days out (46.69%)  

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CAKEDAY: Happy birthday to Sam Chung, Edwin Lombard, and Iris Obregon!

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AD17: East SF

Member: David Chiu (D)
Term limit: 2026

Voter registration as of October 1, 2019:
Democrat: 60.7%,  Republican: 5.1%,  No Party Preference: 29.9%

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