But the governor’s proposed $170.7 billion budget ($122.6 billion general fund) for the 2016-17 fiscal year would lead to repeating that mistake when the next recession hits.

Revenues will plunge $55 billion over three years if an average recession hits next year according to the budget summary. That would result in a $29 billion budget deficit in 2020 based on Brown’s current spending proposal, which includes $4 billion in one-time expenditures. If the Legislature instead spends that $4 billion on new or ongoing programs, the deficit would balloon to $43 billion – larger than occurred during the Great Recession.

Recession Expected

California is in the seventh year of economic expansion. That makes it two years overdue for a recession, which has occurred every five years on average, according to Keely Bosler, chief deputy director of the California Department of Finance.

“While there is significant uncertainty in forecasts, there is one thing that is quite certain: and that is history,” Bosler told the Senate Budget and Fiscal Review Committee Jan. 19. “It’s this boom-and-bust cycle that this budget really aims to avoid going forward.” But she acknowledged that “the budget in the state of California does remain precariously balanced over the long term.”

Her cautionary words were echoed by committee Vice Chairman Sen. Jim Nielsen, R-Tehama.

“We must keep in mind that though times are a little bit better, some parts of our economy have not improved,” he said. “And therefore we must exercise constraint and not get overly ambitious. And that will be what governs our progress in the budget. Let’s not get overly ambitious, and let’s not let government get out of control.”

Examine the Department of Finance 2016 Budget Slides here

But Democratic legislators are eager to spend some of the budget surplus on ongoing social programs, particularly for the developmentally disabled, instead of socking it away in the state’s rainy day fund – despite the likelihood that doing so could once again bust the budget.

“It shouldn’t surprise any of us that a recession is at hand. The question is when, not if,” said committee Chairman Sen. Mark Leno, D-San Francisco. “At the same time, an additional $2 billion set aside in the rainy day fund above and beyond what voters told us they’d like to see in it – that I think will be at least part of the playing field of our debate.

“What is appropriate for continuing payment of debt and for reserves, at the same time recognizing that so many Californians who have been hurt at the time of the recession have not seen much recovery or reinvestment in the programs for which they rely for their quality of life?” Sen. Leno asked.

Rainy Day Fund

Proposition 2, passed in 2014, requires that $2.6 billion in this year’s budget be placed in the rainy day fund. Brown has proposed adding an extra $2 billion to the fund. That would bring the total to $8 billion (with previous funding), equating to two-thirds of the constitutional target of 10 percent of general fund revenues, according to Bosler.

But legislative analyst Mac Taylor warned the committee that, while it’s good to beef up state reserves, the Legislature would be unnecessarily tying its hands by going along with Brown’s extra $2 billion in the rainy day fund, which is known formally as the Budget Stabilization Account.

“We would caution you not to put extra money into the BSA,” Taylor said. “Once you put it in the BSA, it’s governed by the rules in the BSA. You can only take out half the monies, if you have a downturn, in the BSA. You might imagine a situation when you might want to take out more in the first year.”

Also up for grabs by the Legislature for whatever purpose it chooses is $1.1 billion from a tax on managed care organizations, an expenditure that Brown left unspecified, according to Taylor. In addition, he told the lawmakers that they could decide to siphon off some or all of the $2.5 billion Brown has proposed to spend on infrastructure, including $1.5 billion for state facilities.

Infrastructure Spending

“When it comes to one-time spending, the governor has focused on infrastructure,” said Taylor. “We think that’s a very positive thing. But keep in mind you have other one-time things that you can spend on. We have very high-cost pension and health retiree liabilities that are accruing costs at 7½ percent a year. So you may want to make additional payments to help fund those and pay those liabilities off. There’s no right choice.”

If the lawmakers do decide to spend the money on infrastructure, they should exercise more control on how it’s spent, instead of leaving it to the administration, Taylor said.

“You don’t want to lose control,” he said. “I think you’ve already lost way too much authority for capital outlay projects. You have given it to both university systems and the administration. Stop doing that. I think you should be exerting a lot more control over capital outlay projects.”

But Leno was more concerned about providing enough “human infrastructure” to help the state’s neediest residents.

Social Services Budgeting

“What I’m hearing is regarding developmentally disabled services that housing units are being lost, facilities are being closed,” Leno said. “Employees at the community-based organizations that supply services are leaving because the employees can find much better jobs than the $13-$14 per hour that some are being paid after 20, 25 years of service. What happens to that infrastructure?”

Taylor responded that there’s been a large growth in spending on the developmentally disabled due to the large increases in caseload. “But you can have just about every program and area of the budget come and tell you that they need a lot more,” he said.

Spending on regional centers for the developmentally disabled has grown by 24 percent in recent years, according to Bosler. “This is well beyond caseload and inflation,” she said. Contributing to the higher costs is California’s aging population, which requires more services and support, along with the rise in autism.

But Leno wasn’t satisfied, saying that the cuts made to social services during the Great Recession have yet to be fully restored.

“Do we want to suggest that even in these boom times that this is our new normal?” he asked. “Or do we have a goal of getting back to where we were at least in adjusted dollars to the 2008 level at some point? If not now, then the question is when. It certainly won’t happen during the next downturn, and quite likely we will have to make additional cuts. We continue to create a new normal level funding which is ever, ever lower.”

Power Over the Budget

Nielsen called the budgeting process itself into question, asserting that it gives too much power over spending to the governor.

“We’ve abdicated our authority over the budget,” he said. “I believe that we are almost making the Legislature irrelevant. Maybe we go through the exercise and pound our chest and try to think we’re important. And this has been a steady erosion over a long period of time.”

Taylor responded that budgetary authority is hard to get back after being given away. He cited the state’s ballot measures as contributing to the problem.

“Almost every initiative that has increased a tax in the last 20 years has dedicated the funds for particular purposes,” he said. “From a budgeting perspective, that’s just a terrible development. No matter how well meaning or how well purposed they may have been in the first year that that measure was passed, that’s not what budgeting is about. It’s about changing priorities, as you know, and being able to make decisions.”

Legislative budget committees plan to hold numerous hearings in the coming months to gain more insight into and provide input on the budget before the governor’s planned budget revision with updated revenue and expenditure figures in May.

Californians exceeded the state’s 25 percent water conservation mandate in October for the fourth month in a row. That might be good news for a parched state, but it’s also drying up the coffers of many water districts, some of which have raised rates to help make up the loss.

Ratepayers are in essence being punished for obeying the state order to conserve water – something they thought would save them money. That has officials like John Laird, secretary of the California Natural Resources Agency, scrambling to explain.

“In some places people see costs go up, and think they conserved and did a great job, and yet the fixed costs are the same. And it is very confusing,” Laird acknowledged at a Nov. 17 hearing by the Select Committee on Water Consumption and Alternative Resources.

“It flies in the face of the public’s general view that if you pay more you should get more, as opposed to you might have to pay more to get what you get now,” Laird continued. “As opposed to if the system collapses because there’s no investment you might have to pay more to get a lot less. And that is a very hard concept to explain to the rate-paying public in a way that they get it.”

Water and Power Departments’ Budgetary Woes

Los Angelenos have reduced water use by 18 percent, according to the Los Angeles Department of Water and Power, which has resulted in a $110.7 million hit to the agency’s budget. LADWP is now proposing a $57.6 million rate hike to recoup a little over half of its losses.

Other districts that have passed or are considering conservation-related rate hikes include the Contra Costa Water District, the East Bay Municipal Utility District and the San Diego Public Utilities Department, according to Reuters.

“It doesn’t seem intuitive that I’m using less water, but I’m paying more,” said Assemblyman Rich Gordon, D- Menlo Park, who chairs the committee. “How do you explain that to the public?”

Mark Cowin, director of the California Department of Water Resources responded, “I would agree that getting this message across that we’re going to expect ratepayers, and taxpayers for that matter, to pay more to hopefully not lose more than they would have otherwise, it’s a tough message,”

He cited the proposed $15 billion Delta pipelines project, known as the California WaterFix, which is expected to be funded largely through rate hikes.

“Why would we expect water users in southern California, the Bay Area and the Central Valley to pay more to get the same amount of supply they are now?” said Cowin. “Well, we have to make the case that sustainability is worth the price we are asking people to pay for.”

Climate change can actually help state officials make that case to the public, he said.

Messaging to the Public

“I think we have as good an opportunity now as we ever have,” Cowin said. “We’re in this unique opportunity right now where we’re messaging to the public: keep conserving water because we might have a fifth year of drought, plus prepare for a potential Godzilla El Nino flood event. That really is what we are looking at as the new normal for California extremes.”

Cowin continued, “So we have got to be able to message better that global climate change leads to these extremes, [which] means that the typical inexpensive sources of water are a thing of the past. And more expensive options are a part of the future.

“We’ve been lucky for decades or generations that we’ve had relatively inexpensive water throughout California, some more expensive than others. But, moving forward, water is going to be more expensive and we’re going to have to pay for it.”

Increasing Water Use Efficiency

One way to keep costs down is to use water more efficiently. Currently, much of California’s treated wastewater ends up dumped in rivers and streams. California should follow Israel’s model and instead spread that treated effluent on farms and orchards, said Eilon Adar, a professor at Ben-Gurion University of the Negev, via Skype.

“Water is still being used in non-responsible ways,” he said. “You waste water. Cities in the Bay Area, they produce a lot of effluence that cannot be used in the Bay Area. However, if diverted about 150 miles to the south there are places in California that can appreciate this water.”

The state definitely can do more with recycled wastewater, said Peter Gleick, president of the Pacific Institute. Only about 13 percent of California’s wastewater – 600,000 acre-feet – is currently recycled. He believes the state will meet its targets of annually producing 1 million acre-feet of recycled wastewater by 2020 and 2 million acre-feet by 2030.

“That’s an enormous amount of water,” Gleick said. “That’s water that we already have, that we already capture and treat and throw away into the ocean. Let’s put that to use.”

Gleick said he’s also concerned about “massive over-pumping of the groundwater. There’s been this long-term inexorable drop in groundwater. Groundwater is a resource, but we’re over-tapping it. And that’s unsustainable, and we know that that’s a problem.”

He continued, “There’s been enormous progress in capturing water use efficiently and developing local supplies. We are, however, still living beyond our means. We are taking too much water from our rivers and streams and especially in our aquifers. Even in wet years we over-pump our aquifers. That is unsustainable.”

On the plus side, nearly doubling the amount of groundwater pumping has helped the state’s $54 billion agricultural industry weather the drought, according to Jay Lund, director of the Center for Watershed Science at UC Davis. About 70 percent of the lost surface water was made up by groundwater.

As a result, despite four years of drought, state agriculture has lost only about 4 percent in net revenue and about 10,000 jobs, he said.

“It’s amazing to have this drought with this relatively small effect,” Lund said. “We will always have drought in California. It’s like the East Coast having hurricanes.”

He agreed with Cowin that weather extremes like drought have the benefit of reminding the public about the state’s ongoing water needs.

“Droughts bring attention to where water management is not keeping pace,” said Lund. A Dutch engineer told him “in the Netherlands they need to have a threatening flood every generation to remind them that they have water problems. California is a dry place susceptible to floods. It’s useful for us … to see droughts and floods from time to time.”

The committee plans to hold a hearing in December in Los Angeles on desalination and one in January in Sacramento on recycling and reclamation issues.

CalPERS’ proposed Funding Risk Mitigation Policy would slightly lower its expected investment return, also known as the discount rate, in good investment years.

Specifically, it would reduce the discount rate by 0.05 percentage point when the investment return is at least 4 percentage points above the discount rate. Currently the discount rate is 7.5 percent, so the investment rate threshold would be 11.5 percent.

An alternative under consideration would lower the discount rate when investment returns are 2 percentage points above the discount rate.

The problem with the 11.5 percent threshold, according to critics, is that it would result in CalPERS not doing enough to lower its investment risk. In only half of the past 10 years were investment returns above 11.5 percent. Returns were just 6.5 percent last year, and they were 2.4 percent in the first half of this year.

As a result, it could take 25-plus years, perhaps never, for CalPERS to lower its discount rate to 6.5 percent, Eric Stern, a DOF budget analyst told the CalPERS board on Oct. 20. “We do feel that the strategy to lower risk only in exceptionally good years really continues to expose the fund to too much risk over the coming decades,” he said.

Taxpayer Dollars at Stake

Millions of taxpayer dollars are potentially at stake. Investment earnings account for two-thirds of CalPERS’ income. More than 3,000 government employers provide 21 percent of the system’s income. The remaining 12 percent comes from CalPERS’ 1.72 million members, nearly a million of whom are no longer active.

When the expected rate of return on investment is lowered, the difference must be made up by contributions from state and local governments, school districts and current government employees. That would likely result in less funding for other government services and/or the need for tax hikes.

Despite that, in order to be more fiscally responsible, CalPERS should reduce its discount rate to 6.5 percent, according to Stern.

“We are really looking for stability, predictability, some more certainty with our contribution rates,” he said. “Acknowledging that investment returns are likely to be lower at some point in the future and have some significant dips, means that local governments are going to need to start paying more money now to pay for those promised benefits.

“We need to implement these changes now, sooner rather than later, instead of waiting for those future investment returns that we can’t really even count on. It would create more stable rates for governments and allow governments to plan for these higher costs in the future. Instead of delaying the impact and leaving the state and other employers to even higher rate shocks in the future.”

Danger of Recession

A recession, which is due according to some economists, could hit CalPERS’ $292 billion investment portfolio hard. Sixty-three percent of its investments are in growth assets, mostly stocks. These have the potential for good returns such as CalPERS’ 16.2 percent gain in 2013, as well as bad returns like its 27.1 percent loss in 2008. Much of the rest is invested in less risky assets such as bonds and real estate.

Stern acknowledged that the CalPERS board appears set to adopt the proposed policy to reduce risk only in very good investment years. But he asked the board to reconsider and instead phase in a lowering of the discount rate to 6.5 percent over the next five years, regardless of the investment returns during that time.

Richard Costigan, who was chairing the Finance and Administration Committee meeting, acknowledged that the Department of Finance’s concerns are legitimate, given market volatility and the aging of CalPERS’ membership resulting in increased pension payouts.

“At the end of the day, where Finance would like us to go I do think is the right place to go,” he said. “I don’t think we’re going to get there. Long-term the market has done exceptionally well. But when you look at the short term snapshots … our workforce is getting older, we are getting less people.”

But the discussion indicated that it’s unlikely the board will grant Stern’s request. In fact, board member Ron Lind pointed out that the board has never set a 6.5 percent discount rate target.

Mitigating Risk Going Forward

Much of the discussion concerned board member Bill Slaton’s suggestion to lower the threshold trigger to 2 percentage points above the discount rate. That equates to investment returns of at least 9.5 percent, which have been achieved in seven of the last 10 years.

“I have been an advocate for a more, you can use the term ‘aggressive,’ but I would like to say just more structured, small increments that employers could tolerate, but at the same time moving quicker to reducing our risk,” said Slaton.

“I think we face a tremendous amount of risk going forward. We’ve spent the last year and a half talking about that risk, talking about an aging workforce, talking about the ratio difference in active [employees] versus retirees. We’ve obviously spent a lot of time on market volatility. We’ve experienced that recently.”

He continued, “I think [2 percentage points above discount] is a modest enough change. I think it’s not going to have a radical impact over time on employers. But I think it sends a message that the priority here is risk mitigation.”

He was backed by board member Richard Gillihan. “I think we are missing an opportunity in putting off the day of reckoning,” he said. “And it may come back and bite us.”

Also supportive is Dana Hollinger, who said, “I would prefer something with more certainty. Because I think going forward we’re in for some challenging times. My goal has always been to mitigate risk and make sure that these benefits are sustainable.”

Minimizing Damage to Municipalities

But other board members prefer the 4 percent threshold, worried about the financial hit to governments and their employees. “We can’t ignore the fact that over the last several years employers have noticed large rate increases they are still dealing with,” said Lind.

Theresa Taylor is also on board with the 4 percent threshold. “There are public agencies that don’t have the money to move forward on a policy to reduce our risk right now,” she said.

“I agree we need to reduce our risk,” Taylor continued. “I think it’s very important that we are working to reduce the risk. But it’s also important that we don’t hurt taxpayers and municipalities by doing it so that too much is being taken away from the municipalities that are already struggling with their rates increasing.”

J.J. Jelincic may be the hardest line supporter of the status quo, arguing for keeping the discount rate at 7.5 percent in perpetuity. “I understand that we’re under a lot of pressure to reduce our assumed rate of return because people think it’s too high,” he said. “Much of that pressure is coming from people who are opposed to defined benefit plans and people who buy Knight-Ridder newspapers.

“This may be the best idea since sliced bread, but our job is to balance risk. Over the long-term I think 7½ percent is probably doable – this year, next year probably not. But we don’t run the system for this year or next year.”

Slaton countered that it may not be doable, pointing out CalPERS’s retirement plan is only 75 percent funded. “If we had another [market crash] event similar to the event we had in 2008, then we reach a point where we can’t recover,” he said. “It is an asymmetric curve in regard to downside versus upside. The impact of the downside is much more intense and we need to be focused on it.”

Costigan agreed to place both the 2 and 4 percent threshold options on the Nov. 17 agenda when the policy comes back for a second reading. The board plans to adopt the policy by the end of the year.

Senate Bill 331, a bill sponsored by government employee unions that is on Gov. Jerry Brown’s desk, is touted as increasing transparency in contracting by certain local governments.

But critics say the bill’s provisions are actually intended to punish agencies that have adopted ordinances increasing transparency in collective bargaining negotiations with employee unions.

Targeting COIN

The bill only applies to counties, cities and special districts that have adopted a Civic Openness in Negotiating ordinance. According to the bill’s Senate legislative analysis, COIN ordinances typically require agencies engaged in labor negotiations to:

• Hire an independent negotiator.
• Obtain an independent analysis of the costs of contract proposals.
• Disclose within 24 hours any offers and counteroffers made during the negotiations.
• Disclose communications that elected officials have with representatives of employee unions.
• Disclose a proposed contract before it’s placed on an agenda for approval.

“The COIN ordinances’ proponents argue that the local requirements are necessary because the secrecy that shields labor contract negotiations results in labor agreements being approved by elected officials without sufficient opportunities for the public scrutiny,” the analyst said.

Versions of the COIN ordinance have been adopted by Orange County, the cities of Costa Mesa, Fullerton and Beverly Hills, and the East Bay Municipal Utility District. Although that’s just five local agencies out of thousands in California, it may be five too many for SB331’s backers.

“The opposite of what its title [Civic Reporting Openness in Negotiations Efficiency Act] implies, SB331 is a cynical piece of legislation designed to punish local agencies that adopt COIN ordinances, or even less stringent ordinances requiring public disclosure of benefit and long-term costs of labor contracts,” said the public law group Renne Sloan Holtzman Sakai LLP on its website. “Under the legislation, agencies that adopt almost any measure promoting a better understanding of their labor costs must accept onerous requirements for all public contracts over $250,000.”

Those requirements force COIN ordinance agencies to apply similar transparency measures to all $250-000-plus contracts.

“The breadth of contracts covered by SB331 is also ridiculously extreme,” Renne Sloan said, “including ‘accounting, financing, hardware and software maintenance, health care, human resources, human services, information technology, telecommunications, janitorial maintenance, legal services, lobbying, marketing, office equipment maintenance, passenger vehicle maintenance property leasing, public relations, public safety, social services, transportation, or waste removal.”

For every $250,000-plus contract – regardless of how mundane or routine – the agency would have to provide a report listing offers, counteroffers, names of those involved and other negotiation details. The report must be filed at least 30 days before each contract is considered by an agency and at least 60 days before the agency votes on it. The agency must consider the contract for at least two meetings before voting.

The only way an agency can avoid the requirements is by suspending, repealing or revoking its COIN ordinance.

The bill’s author Sen. Tony Mendoza, D-Artesia, on the Senate floor Sept. 10, portrayed it as simply a measure to increase governmental accountability and fairness. “I think we are all in favor of transparency,” he said. “Let’s make it equitable and make all contracts in open meetings and have them transparent – not just labor or just business [contracts].”

Encouraging Transparency

The only senator to speak against it was John Moorlach, R-Costa Mesa, who introduced Orange County’s COIN ordinance when he was a supervisor.

“A few days ago the LA Times had an editorial that encouraged municipalities to adopt COIN, civic openness in negotiations,” he said. “So here we are with a few municipalities, cities that have adopted COIN. And now we want to make it very cumbersome for them.

 

“Basically, most negotiations for collective bargaining in counties, cities are done in closed session, closed doors. And then the results are released, and a few days later they are voted on without any input from the public. COIN is just encouraging transparency. And we should not be penalizing it.

 

“We have a lot of funny things that come out of bargaining in closed session. And that’s why a lot of our cities and counties, and even the state, are in pretty poor fiscal shape. And no wonder we keep asking for tax hikes.”

Mendoza’s transparency argument in favor of SB331 was echoed by Jennifer Muir, the-assistant general manager (now general manager) for the Orange County Employees Association, at the July 1 Assembly Local Government Committee hearing.

“There have been a number of efforts in recent years to promote transparency in government, and those efforts are laudable,” she said. “We believe transparency should not be limited to a jurisdiction’s public workforce. And instead should be applied evenly to areas where taxpayer money is being spent.”

Bill Causes Rift in O.C. Sheriff’s Department

The debate on the bill pitted the Orange County sheriff’s 2,800-member rank-and-file against the sheriff’s department management.

Tom Dominguez, president of the Association of Orange County Deputy Sheriffs, said, “SB331 represents a critical step toward assuring transparency in public contracts. Transparency is not truly transparent if it is being selectively directed at a single group or entity. Private sector contracts worth millions of dollars are routinely approved by elected officials with little or no public scrutiny.”

Dominguez continued, “SB331 will give the public a window into how taxpayer money is being spent on private sector contracts. And ensure these precious dollars are being spent serving the public.”

But Don Barnes, an Orange County assistant sheriff representing Sheriff Sandra Hutchens, countered that the bill could put lives at risk.

“While the Sheriff’s Department welcomes transparency, this bill will detrimentally impact those we serve, as well as our employees in providing those services, due to the unnecessary restrictions and costs caused by the mandates of the bill,” he said.

“If SB331 were made law, critical public safety contracts would be delayed. Specialized contracts with the crime lab, often with sole-source vendors due to the specialized nature of the equipment, would be adversely affected by the passage of the bill.”

Another risk, Barnes said, is that the county could be sued if delays in procurement of goods prevent the county from meeting its mandated welfare requirements for county jail inmates.

“While proponents of the legislation point to openness and transparency – a value that we share and a worthy goal – the additional burdens and cost increases associated with SB331 will inevitably and unnecessarily strain staff’s time, burden budgets that are already stretched too thin and result in unintended consequences affecting the delivery of public safety services to the residents and visitors of Orange County,” he said. “This is not an anti-union position; this is a continuity of operations issue that I’m stressing for public safety.”

Orange County COIN Struck Down in Court

Democrats on the committee were not persuaded.

“Having a certain incapacity much like O.C.’s in the past, it’s amazing to me that cities and counties and districts that decide they want to outsource public services because of a claim of reducing costs, somehow want to increase the costs for negotiating with their own employees, while giving an unfair advantage of course to those services that are outsourced by suggesting there’s no need for equal transparency,” said Assemblywoman Lorena Gonzalez, D-San Diego. “Frankly, what’s good for the goose is good for the gander.”

If Brown signs the SB331, it will be the second major transparency setback for Orange County this year. The county’s COIN ordinance was struck down by a Public Employment Relations Board administrative law judge on June 16. The judge ruled that the county, before adopting the ordinance, should have provided “notice and an opportunity for the union to meet and confer over that adoption or its effects.”

Renne Sloan warned that the ruling “may further discourage local agencies from adopting similar measures to make negotiations more transparent and responsive to the public’s interests and welfare.”

A

But opponents say it will have the opposite effect.

Proposition I would forbid the city from issuing permits for 18 months for the demolition, conversion or construction of Mission District housing projects with five or more units. It places a similar ban on certain Mission commercial properties, including wholesalers and auto repair shops – unless the business is replaced with a 100 percent affordable housing project.

The measure’s proponents are concerned that long-time residents can no longer afford to stay in San Francisco as rents and housing prices skyrocket.

Evictions on the Rise

There were 2,120 eviction notices filed in San Francisco from March 2014 through February 2015, according to the latest San Francisco Rent Board Annual Eviction Report. That represents a 67 percent increase from 2010. In 16 percent of the latest evictions, tenants were replaced by building owners or their relatives, up from 9 percent in 2010.

Supervisor Eric Mar, speaking at the June 2 Board of Supervisors meeting in which a moratorium ordinance was debated, said he is concerned that too many minorities are being pushed out of the Mission District.

Seven of the 11 supervisors voted for the moratorium, falling short of the nine votes needed to pass. After the moratorium failed before the board, activists gathered enough signatures to place it on the ballot.

During the debate, Mar warned that if the moratorium is not put into effect, “we will see an ethnically cleansed, racially cleansed Mission District that Latino and Chicano people are pushed out of, low-income families and seniors are pushed out of as well.”

It would be a repeat of the displacement of Filipinos from the city’s Manila Town in the 1970s, he said, and of blacks from the Fillmore District in the 1950s and ‘60s due to urban renewal.

“I call this ethnic cleansing because we know that in the past decades the African American population has been pushed out with unchecked out-migration that’s left us with the lowest number of African Americans of any large city in the country,” said Mar.

“We are facing the same cleansing with Latinos and Chicanos, and we have to learn from those mistakes. This is about saving the Mission District, saving San Francisco and saving the heart and soul of our city.”

‘Shooting ourselves in the foot’

But the supervisors who voted against the moratorium argued that it would actually result in the opposite of its intended effect by further limiting housing supply and driving up prices. The city would forego certain fees on new development that boost affordable housing.

“Whether or not we like it, market-rate housing right now in San Francisco is directly tied to the production of affordable housing,” said Supervisor Mark Farrell. “By stopping market-rate construction, the facts are that you are directly taking away from one of the primary resources the city has, over $100 million in the next few years, to create affordable housing in our city.

“We are literally going to be shooting ourselves in the foot.”

Farrell blames the city’s regulatory policies for causing the housing crisis.

“It’s the consequences of the policies that we have had for decades here in San Francisco,” he said. “From my perspective, it’s simply not building enough housing to deal with the crisis that we have in front of us today. This crisis didn’t start just a few weeks ago; our housing crisis started quite a while ago.”

The city’s population was 852,469 last year – a 5.9 percent increase since 2010. During the same period the number of housing units increased at less than half that rate, 2.5 percent, according to census data. The Mission District has added about 100 units annually in that time.

The Mission, which is a short bus or BART ride from jobs in the financial district and Giants games at AT&T Park, is known for its ethnic restaurants and lively music and arts scene.

It’s “arguably the area to watch,” according to the San Francisco Association of Realtors, and “one of San Francisco’s most promising, up-and-coming areas to invest in real estate.”

Housing Prices Exploding

As with all of San Francisco, housing prices and rents have exploded in the Mission District in recent years. The median price of a Mission District home was $1.3 million as of March 31. That’s nearly double the $700,111 median price five years ago, according to a legislative analyst’s report.

The average rent for a two-bedroom apartment in the Mission District is $4,500 per month, according to Supervisor David Campos, whose district includes the Mission.

The median household income in the Mission District is $60,156, according to the realtors association. If that household were living in an average two-bedroom apartment in the Mission, it would have just over $6,000 for all other expenses, including food, utilities and health care, over the course of a year.

“Middle and working class people, the very people who have made the Mission what it is today, are having a hard time staying in this community,” Campos said. “They can no longer afford to live here. Housing is no longer affordable to the very people who made the community the unique and wonderful place that it is.

“People are terrified – terrified that the culture and the diversity of this neighborhood will be lost forever.”

The board room, the hallway outside the chambers and an overflow room were packed with Mission residents and anti-displacement activists, who frequently disrupted the meeting with applause, hissing and chanting. The public comments portion of the meeting lasted seven hours.

Initiative on the Ballot

Proposition I states that the moratorium could be extended an extra year with a majority vote of the supervisors. It also requires development of a plan to ensure that at least half of new housing in the Mission is affordable for low, moderate and middle-income households. As part of that plan, Campos has said he would want the city to increase fees on developers and target for affordable housing the remaining 13 sites in the Mission where buildings with 40 or more units can be built.

Developers of housing projects with 10 or more units are required to reserve 12 percent of their units for affordable housing or pay in-lieu fees for the city to build affordable housing projects. There are currently 1,574 units slated to be built in the Mission District, according to AnMarie Rodgers, a senior policy advisor in the San Francisco Planning Department. If built, those projects would bring the equivalent of 189 new affordable housing units to the market, or $2 million in fees.

In addition to providing affordable housing, the fees on new development also help pay for other city projects. The moratorium would eliminate nearly $125 million in funding slated for improvements in Mission area rapid transit, an aquatic center, park, playgrounds and a recreation center, according to Rodgers.

Several measures are underway to increase affordable housing in San Francisco.

Affordable Housing Measures

Last year voters passed Proposition K, which makes it city policy to help construct or rehabilitate at least 30,000 homes by 2020.

More than half must be affordable for middle-class households, or 120-150 percent of the area median income. The median income is $61,160 for a family of four.

At least a third must be affordable for low-income households, or 50-80 percent of median, and moderate-income, 80-120 percent of median.

Proposition A, a $310 million affordable housing bond measure, is on this November’s ballot.

Mayor Ed Lee is working to recapture $500 million of the city’s dissolved redevelopment funds. That would increase the affordable housing budget to $1.6 billion over the next six years, according to Olson Lee, director of the Mayor’s Office of Housing and Community Development.

The mayor’s staff is also looking at administrative measures to speed up approval of affordable housing projects. The administration is considering incentives such as allowing higher density or taller buildings in exchange for more affordable units.

Proposition I appears to have a good chance to pass if a poll taken in February is accurate. It showed 65 percent support for a ballot measure halting new project approvals in the Mission District for one year, according to the San Francisco Examiner. Only 26 percent were opposed.

How Much is Owed?

The FTB is trying to figure out exactly how much money is owed to about 24,000 individual tax filers and 3,000 businesses still eligible for refunds, and what it will cost the agency to process those claims, FTB Filing Division Chief Anne Miller told the board at its July 21 meeting:

These two interest calculations may impact a limited number of individuals and business entities that meet a set of specific and rare criteria. The criteria are centered primarily around overpayments being transferred or refunded from one particular tax year followed by an additional tax assessment on that same tax year. As a result, our systems may have overcharged interest.

Due to the complexity of the calculations, it’s been quite a challenge for us to determine the fiscal impacts. We estimate that if work was to be done manually on each of these individual accounts, it could take three hours per account. We have enlisted the help of our experts in the Economics and Statistical Research Bureau to help us with these calculations because they are so complex.

About 1,000 of the individual taxpayers are owed for more than one year, placing the total adjustments around 28,000. That equates to 40 FTB staffers working for a year to do the calculations, based on three hours per adjustment if an automated solution isn’t found.

“[W]e believe the adjustments could range from a very minor amount (a few dollars) to thousands of dollars for each account,” said the FTB in its Aug. 3 Tax News. The total amount owed could be in the millions of dollars, according to the California Taxpayers Association, which brought the problem to the attention of FTB management in March.

“CalTax is aware of millions of dollars in miscalculated interest based on what a limited number of taxpayers have told us,” said Gina Rodriquez, CalTax vice president for state tax policy. She continued:

In one case, the FTB overcharged interest by $1 million, and in another case $2 million.

In some of the cases that were reported to us, taxpayers asked the FTB to adjust the interest before their cases went final, i.e., before the taxpayer’s protest, appeal or settlement went final. Taxpayers who had already paid and subsequently discovered the error had to file refund claims to get the interest back if they already paid their assessments. In all cases reported to us, the FTB made the adjustment for the interest miscalculation without any argument, as they knew their calculations were wrong.

When I met with FTB management in the spring to discuss this issue, the FTB acknowledged that their computer system cannot properly calculate interest for taxpayers that fall into the two affected categories.

Origins of Miscalculation

The main category of miscalculation, potentially affecting 26,000 taxpayers, dates back to a lawsuit that May Department Stores Company won in 1996 against the United States for miscalculation of interest on the company’s tax underpayments a decade earlier. The IRS issued a notice in 1997 acquiescing to the court decision.

The complexity of the situation is evident on an FTB web page, which explains that you may be owed a refund under the May Department Stores ruling if:

• You filed an amended return for additional tax or received a deficiency assessment after the original return was filed for the same tax year, and
• On the original return, you elected an overpayment transfer to the subsequent year’s estimate tax, and
• On the subsequent year, the required first quarter estimate payment was less than the requested overpayment transfer amount. The maximum amount of the adjustment is one year of interest on the additional tax or deficiency amount.

The other miscalculation category, known as “corporation interest netting,” may affect about 1,000 businesses that have made a previous refund or payment transfer, then filed a subsequent deficiency or amended return for additional tax with interest for the same tax year.

Thus far fewer of those overcharged are aware that they are owed money. “We’ve received three written requests for interest adjustments as well as a few visits to our website,” Miller told the board. “But our contact center has not reported any phone calls on this issue.”

Time Running Out

The clock is ticking on taxpayers who want to receive refunds. The statute of limitations runs out four years from the date the return was filed if it was filed within the extension period, or one year from the date a payment was made.

FTB plans to avoid this situation in the future. “In order to better serve taxpayers who may qualify for the interest computation adjustments, we have trained our staff to proactively identify cases that meet this criteria as well as put procedures in place to ensure that cases that do meet the criteria proactively receive proper treatment,” said Miller.

FTB Chairwoman Betty Yee, who is also the state controller, was appreciative of Miller’s work. “Thank you for really responding with such a strong focus on just initially identifying the universe [of affected taxpayers], which I know was quite complex,” said Yee. “And now to try to put a fiscal impact around what’s been identified. We look forward to getting that information in September.”

In her capacity as state controller, Yee directed the FTB on April 8 to review the interest miscalculations. “These rulings deal with complex interest calculations that affect very few taxpayers. However, these taxpayers are entitled to receive refunds of allowed overpaid interest,” Yee said. “As chair of the FTB, I work to ensure the rights of taxpayers are protected.”

FTB Board Member Jerome Horton said, “I want to thank the department for being proactive on this and engaging. It’s very important. As always we have stepped up and done so.”

Miller is scheduled to provide an update at the board’s next meeting on Sept. 22.

“AB339 is designed to ensure consumer access to vital medications,” said the bill’s author, Assemblyman Rich Gordon, D-Menlo Park, on the Assembly floor June 3. “Californians with cancer, HIV/AIDS, hepatitis, multiple sclerosis, epilepsy, lupus and other serious and chronic conditions, need high-cost, specialty drugs. Today, consumers with these serious health conditions can be asked to pay as much as $6,600 for a month’s prescription for a single drug. AB339 limits what a consumer pays to $275 per 30-day prescription.”

The updated version of the bill reduces that to a $250 copay limit for a 30-day supply, with the exception of those with bronze insurance plans who would be liable to pay up to $500 for a 30-day drug supply.

“The California Health Benefits Review Program, which analyzed AB339, found that there’s a preponderance of evidence from studies that persons who face higher cost sharing for prescription drugs are less likely to maintain meaningful levels of adherence than persons who face lower cost sharing,” said Gordon. “And poor adherence to prescription drug therapy for chronic conditions is associated with higher rates of hospitalization and emergency department visits.”

Actual Effect of Cost Sharing

The actual effect of cost sharing may be more nuanced, according to the legislative analysis prepared for the Senate Health Committee’s July 15 hearing: “[T]here is some evidence that the effect of cost sharing may differ depending on the specific disease and specific specialty drug. There is a preponderance of evidence that cost sharing has stronger effects on use of health care services by low-income persons compared to high-income persons. However, this was not observed in a recent well-done observational study from Massachusetts.”

Gordon responded to the concern that his bill would increase insurance premiums by pointing out that CHBRP “found that premium increases are estimated to be only 0.3 percent for enrollees with group insurance and 0.7 percent for enrollees with individual market policies. As demonstrated by this data, the benefits of this bill increasing medication adherence far outweigh any negatives. Join me in supporting these important consumer protections, which ensure that Californians are better able to afford their prescription drugs and that drug benefit designs are not discriminatory.”

He was in fact joined by most of the Democrats in the Assembly where the bill passed, 48-30, with no other discussion. It also passed along party lines in the Senate Health Committee, 7-2, after witnesses testified to its pros and cons.

Advocacy Organizations Tout Effectiveness of Medicinal Improvements

“This is a bill about basic consumer protections,” said Sawait Seyoum, representing the advocacy organization Health Access California. “A recent study found that the average consumer has about $2,300 in liquid assets in their checking or savings account. Today we expect the average constituent to pay over half of what they have in their account for a single prescription in the first month.

Touting the effectiveness of medicinal improvements was Anne Donnelly, representing Project Inform, which advocates for those with HIV and hepatitis C.

“Over the years since we started working on HIV, people with HIV have started moving from a life expectancy of about 43 days to a normal life span, and we have ended the transmission of HIV from HIV-infected moms to their babies,” she said. “And that’s in large part due to the effectiveness of HIV drugs. Now we have an HIV drug that when used appropriately can stop new infections.

“So the hope of ending this epidemic really depends in large part on these drugs being accessible and affordable to Californians living with and at risk for HIV. We need AB339 to ensure that everybody with a serious health condition or at risk for one, not just people living with HIV but including people living with HIV, have access to the drugs they need at a price they can afford.”

Opposition to Bill Focused on Increased Premiums

But the bill might actually have the opposite effect, according to Nick Louizos, representing the California Association of Health Plans.

“Our opposition to this bill is fairly simple,” he said. “Legislatively designing health benefits increases premiums. We can legislatively create the best benefit packages in the world, but if no one can afford them, that’s pretty useless from our perspective. This has been demonstrated time and time again. The independent analysis of the introduced version of this bill does show premium increases of close to $400 million on individuals and employers.”

That analysis, which was done before the bill’s scope was reduced to include only prescription drugs providing essential health benefits, estimated it would result in a $162 million increase in employer-funded premiums in the private insurance market and a $216 million premium increase by individual purchasers.

But there may be big costs associated with the current version of the bill. The analysis states that it may include “unknown, potentially significant fiscal impact on the private health insurance market. By requiring coverage of single-tablet regimens and extended release prescription drugs, carriers lose negotiating power, leading to unknown higher drug costs.”

Louizos said that the state health benefit exchange, Covered California, has estimated “that over a three-year period, prices could increase by 3 percent. And that’s a pretty significant percentage from our perspective, considering all the cost drivers in the health care system.”

John Caldwell, representing Pharmaceutical Care Management Association, is also opposed:

“[It} appears to require the brand pharmaceuticals that have been on the market the longest, and thus most often prescribed, would get favored status,” he said. “In some cases this would be the most expensive, in some cases it may not be. So we don’t see the reasoning behind that. We think it’s just going to require redoing the [cost] tiers on an annual basis based on what is the most popular drug.

 

“Another issue: AB339 essentially forces coverage of more expensive brand HIV pharmaceuticals that are in single-tablet form when less expensive brands or generics in multi-tablet form are available. As the Assembly Appropriations Committee analysis noted, the burden of proof to refuse coverage of these drugs, according to the bill’s provisions, appears very high, essentially meaning they would have to be covered. This provision would completely eliminate any incentive for the manufacturers to negotiate on plan formularies.”

Further Discussion Encouraged

The only committee comment came from the chairman, Sen. Ed Hernandez, D-West Covina:

“I agree that there are conditions that need to be dealt with, especially very expensive ones. I believe that we need to make sure that the consumer doesn’t have to go bankrupt.

 

“But there’s something that I think we really need to really have a discussion. There’s an underlying problem, and it still deals with overall controlling costs to the health care system – and that’s the increasing cost of prescription medications. At the end of the day what’s going to happen is that you’re going to have lower payments to the consumer, but yet if you have escalating drug costs, guess what, all of those costs are going to be passed onto the consumer in the form of premium increases throughout the entire system.”

AB339 will next be considered by the Senate Appropriations Committee.

It was only a year and a half ago that Assembly Bill 10 was signed into law. It raised California’s minimum wage from $8 an hour to $9 in July 2014 with another increase to $10 scheduled to take effect in January 2016.

SB3 would supersede that bill, increasing the minimum wage from the current $9 to $11 in January 2016 with another $2 bump to $13 in July 2017. Thereafter the minimum wage would increase with inflation.

Leno lays out argument for higher minimum wage

The bill’s author, Sen. Mark Leno, D-San Francisco, and its supporters spent more than an hour telling the committee that the wage hike is needed to lift California’s minimum wage workers out of poverty. They assured that doing so would not hurt businesses and would benefit California’s economy and the state budget.

State Sen. Mark Leno

“Wages are growing at the very slowest rate relative to corporate profits in the history of our country,” said Leno. “The median wage has been stagnant over the last 30 years. Sixty-five percent of workers are working paycheck to paycheck. Millions of Californians impacted by our minimum wage are living in poverty, and will continue to live in poverty even when we get to our incremental success under AB10 to $10 an hour next year.

“And they all by definition qualify for public assistance. That means that the taxpayer is subsidizing the private employer’s responsibility for his or her workers’ basic human needs: housing, food and medical care.”

A $13 minimum wage equates to about $26,000 per year, he said, which is above the federal poverty level of $24,250 for a family of four.

Leno argued that businesses will benefit from increased consumer spending. “When workers have more dollars in their pockets to spend on their daily needs, there’s an increase in demand for goods and services,” he said. “That’s when employers have to hire more employees to meet that demand. And that’s what economists call a virtuous upwards cycle.

“Currently, though, we’re in a stagnation, if not a vicious cycle downward, where we’ve put such constraints on the middle class that it’s shrinking and shrinking, putting more people into poverty.”

Higher wages will also benefit businesses by reducing turnover, attracting higher-skilled workers and increasing employee satisfaction, which leads to better customer service, said Leno.

Effect on unemployment rates and income inequality?

California’s experience with raising the minimum wage last July has shown that it doesn’t hurt employment, he said. The state’s unemployment rate, which was 7.4 percent in July 2014 when the minimum wage increased $1, dropped to 6.5 percent in March.

“I’m not stating that there’s causation here,” said Leno. “But there is minimally correlation and proof positive this is not a job killer bill. These numbers become even more impressive when considering them on a national scale. California jobs added in January accounted for 28 percent, almost a third of all jobs created in the United States of America were created here in California – though we represent only 12 percent of the population and we just increased our minimum wage.”

The bill’s coauthor, Sen. Connie Leyva, D-Chino, who said she has spent the last 20 years in the labor movement, said the minimum wage hike is needed to reduce income inequality.

“Right now the income gap is enormous,” she said. “It’s the biggest it’s ever been. CEO pay is at an all-time high while workers are falling further and further behind. And while we certainly respect our CEOs and we love to see companies do well and be successful, sometimes they forget that the people who show up and do the work day in and day out are the ones that are making them successful and are the ones that are making them the profits that they have.”

Teenagers no longer make up most of the minimum wage workforce, she said. Today 88 percent are 20 years or older and 55 percent are women. And most are part-time, averaging 28 hours a week.

“You don’t even have enough money for your rent, let alone eat, pay your utilities and drive your car to work,” said Leyva. “We really can’t have it both ways. We can’t keep people working in poverty and then be unhappy that they are using the social safety net. So either we make sure people can earn a living and support themselves and their families, or we’re going to continue to put more money into the social safety net.”

Effects on CA businesses

UC Berkeley economics professor Michael Reich told the committee that more than a third of all California workers will get a pay raise under SB3, but businesses will be able to absorb the increased labor costs.

“We find that the most affected industries are going to be restaurants, hotel and retail,” he said. “And that businesses will mainly adjust to these increases by reducing turnover costs. Workers won’t quit as often, they’ll stay longer, they’ll be more productive. This will save employees recruitment and retention costs, which would themselves absorb the savings of about 15 percent of the increased payroll.

“The rest of the cost that businesses face will be primarily absorbed, we think, through price increases, small price increases, about half of 1 percent overall, based on our Los Angeles study.”

Although higher prices tend to result in decreased spending, that will be offset by the increased dollars in workers’ wallets. The net effect, based on preliminary calculations, is that California’s gross domestic product would increase by about one-tenth of 1 percent, said Reich.

Similarly, although the state budget will take a $2 billion hit over two years due to paying higher wages for social service workers, that will be more than offset by reduced state Medi-Cal payments, he said. The health care costs for those workers would instead be borne by the federal government’s Medicaid coverage through the Affordable Care Act. And the federal costs will be offset by reduced food stamp payments.

“So when you add up the increased cost of the salaries, the lower expenses for Medi-Cal and increase in income and sales tax revenue … then the state budget would realize net gains of about $2.1 billion in 2016 and 17 under SB3,” said Reich. “When I mentioned this at a private meeting with Gov. Brown he said, yeah, he’d like a free billion dollars too.

“So in summary, the minimum wage will help people whose standard of living has been declining and can’t meet expenses on their own. It will have modest effects on businesses, which I think will be absorbed mainly through turnover reductions and through increased prices. It will have a very small effect on the California economy, certainly not a negative effect. It won’t harm the economy. And it will have very large positive effects on the state’s budget.”

Sen. Stone argues against wage hike

But the lone Republican on the committee, Sen. Jeff Stone, R-Temecula, does not believe it. He cited the Congressional Budget Office’s estimate that raising the federal minimum wage by nearly $3 would cost 500,000 jobs. Despite that, Stone supports raising the federal minimum wage to $10.10 because it would be applied equally throughout the country.

State Sen. Jeff Stone

But California’s $13 minimum wage would “further make us more business unfriendly,” he said. “We rank at the bottom of the list. According to Chief Executive’s annual report of CEOs, California is dead last. This certainly is not going to create an asset for business.

“I appreciate the data that you’ve given about the increase in employment numbers. But one thing those numbers don’t reflect is that there have been thousands of people that have already left the state. There are businesses in droves that have already left the state, have gone to Texas, South Carolina, Nevada, Arizona. They’re gone. There are people that are stuck here in the state of California because they may not be able to afford to leave the state and are jumping at any opportunity to have a job.”

Stone said that the best way to lift people out of poverty is to provide them with the education to get better jobs. “I believe that by increasing the minimum wage – and this is where we’ll just agree to disagree – is that we’re going to be hurting those that we most prolifically want to help,” he said.

“Straw that breaks the back of CA businesses”

He warned that raising the minimum wage could be the straw that breaks the back of California businesses on top of expenses such as sick leave, taxes, worker’s compensation, Obamacare and unemployment insurance.

“If you combine all of this and now you have this higher minimum wage, I personally believe that we are pushing the state to a threshold of a catastrophe,” Stone said. “We have governors from other states now that have already grabbed the low-hanging fruit. Those are the large businesses that are leaving; businesses like Toyota, businesses like Sherwin Williams Paints. They are taking thousands of jobs with them. And now they are coming in and going after the small business man and taking the small businesses out of state.

“And with FedEx and UPS, people can ship with Amazon.com, you don’t have to have a brick-and-mortar facility to have these jobs in the state any more. And we cannot rely on the beautiful climate and the beautiful mountains and our beautiful oceans to keep people here. People have to eat, people want to have opportunities.

“And there is going to come a time – and I don’t want to see it happen – that we are just going to basically price ourselves out of business in the state of California and become nothing more than a welfare state. I believe we can do better.”

A daunting challenge

Stone was backed by several business representatives, including Jon Ross, representing the California Restaurant Association. He said that no study has analyzed the business impact of a nearly 63 percent minimum wage hike over three years.

“There is no model out there of actual experience that will tell you what the impacts will be,” said Ross. “And to us, that’s a heck of an experiment. Trying to impose that kind of a cost impact on a restaurant model where two-thirds of your costs are labor costs, to see those go up by 63 percent over that short period of time is daunting.

“The assumption is that this will be borne by price increases. But our operators, especially the small ones who are local, know that they can’t raise prices at that rate that fast. Small increases over time is the way prior minimum wage increases have been dealt with. But those have been increases in the 25, 50 cent range, and the biggest one ever in 2010 going up $2 over an 18-month period.

“So what is being suggested here is fundamentally different than anything that has been tried in this state before or tried anywhere else. And our guys are very, very daunted by the challenge that this would pose.”

Ross said that the reason teenagers are no longer predominant in minimum wage jobs is that they have been priced out of entry level employment. Six of the top 10 areas in the country with the highest rates of teen underemployment are in California, he said.

The concern about minimum wage workers living in poverty may be overstated, he said, when considering those who are receiving tips, which can raise their pay on average to $20-$25 an hour.

“One of the things that’s sort of crude about the minimum wage as applied in the typical restaurant environment is that it doesn’t take account of those disparities in the house [between tipped and non-tipped employees],” he said.

SB3 is scheduled to be considered by the Senate Appropriations Committee on April 20.

Senate Bill 350 mandates that the state meet three clean-energy goals by 2030:

• Fifty percent reduction in gasoline and diesel fuel used in vehicles.
• Fifty percent of electricity generated from renewable resources (an increase from the current 33 percent mandate by 2020).
• Doubling of the energy efficiency of existing buildings.

The bill does not specify how those mandates will be achieved. It leaves the details and the authority to implement and enforce them to the California Air Resources Board, the California Energy Commission and the California Public Utilities Commission.

Jobs created and economy boosted?

The bill’s author, Senate President Pro Tem Kevin de León, D-Los Angeles, told the Senate Energy, Utilities, and Communications Committee at an April 7 hearing that the legislation will “make sure California keeps leading and building the new economy of tomorrow. SB350 puts in place standards that will spur innovation and power and a sustainable future for the Golden State.

“Clean energy jobs are growing across California. Our state leads the nation in solar employment with nearly 55,000 solar jobs and counting. The world’s largest solar array is under construction right now in Antelope Valley down in Kern County. We are second only to Texas in wind energy capacity, and have the nation’s largest wind energy facility at the Alta Wind Energy Center at the Tehachapi Pass.

“We need to pursue policies that build on this economic growth by strengthening incentives for energy efficiency and clean energy technologies. These standards send a strong market signal to California businesses and leave no doubt the direction we are heading in. These policies will drive innovation here, bring investments here, bring jobs here and bring revenue here to this state of California.”

De León said that experience with implementation of AB32, the California Global Warming Solutions Act of 2006, shows that increased energy regulation can help the economy.

“Skeptics said back in the day it would destroy our economy, it would slow down economic growth, that it was naïve and in fact unrealistic to set such targets,” he said. “Well, yet here we are today well on our way to meeting those targets with an economy that is stronger than ever.

“In just 10 years we’ve increased our electricity generation from renewable sources nearly 25 percent, put almost 150,000 electric vehicles on the road and reduced the smog-forming emissions of our cars and trucks by 90 percent. This is not just sound energy and climate policy, it is a smart economic policy.  Let’s continue to lead the world, colleagues. Let’s continue to take the bold action, despite the fear of failure.”

Steyer backs de Leon

De León was backed by Tom Steyer, an environmental activist who donated $2.5 million to the campaign that defeated Proposition 23 in 2010. That proposition sought to suspend AB32’s regulations until California’s unemployment rate dropped below 5.5 percent. Although the national unemployment rate has dipped to that level, California has lagged behind. The state’s rate was 6.8 percent in February.

Tom Steyer

“SB350 focuses on several of the most important and fossil-fuel-intensive areas of our economy: transportation, electricity generation and energy used in buildings,” Steyer told the committee. “By directly engaging with our biggest emission sources, we can get the best bang for our buck in reductions.

“For too long the oil companies that make billions in profits from California consumers have claimed that sustainability is not compatible with a strong economy. Far from being a job killer, California’s climate policy has put thousands of people into good-paying jobs. According to a recent report from Advanced Energy Economy, there were 430,000 clean energy jobs in California during 2014, a figure that’s projected to increase by 17 percent this year to 500,000 clean energy jobs.

“We have led the nation in solar capacity and electric vehicle sales. We have gained billions of dollars of investment in wind and solar power and created hundreds of thousands of clean energy jobs. Energy efficiency upgrades have created hundreds of thousands more.

“We don’t have to choose between our environment and our economy. California, as the seventh largest economy in the world, can be more than part of the solution – we can lead. But to do so we have to be on a completely different cost curve. One that is inevitably going down, thanks to innovation research, rather than one that is driven inevitably up due to issues of scarcity around fossil fuels. SB350 is a critical step in this direction and a clean aspect of maintaining our global leadership.”

Steyer said that much of the $60 billion that Californians spent on gasoline and diesel fuel in 2014 can be replaced with low-carbon alternatives such as electricity, renewable natural gas and biofuels. Californians have purchased more than 100,000 electric vehicles, he said, and touted that 18 pumps in the Central Valley are selling renewable diesel fuel made from waste oil.

A win-win

He also discussed the requirement to double the energy efficiency of existing buildings. “The cheapest and most environmentally friendly way to cut energy costs is, of course, to use less energy,” said Steyer. “Our state’s commitment to energy efficiency has led to the third lowest per capita energy consumption rate in the nation. Electricity use per person in California has remained flat for 40 years, while consumption in the rest of the country has increased by 50 percent.”

Steyer is confident that the clean-energy goals will be a win-win for both the state’s environment and its economy.

“I have spent most of my life as an investor,” he said. “And I can say for certain that investors look for consistent long-term signals to know that their capital will yield returns. SB350 demonstrates our firm commitment to clean technology, and sends a clear signal to markets that long-term investment in sustainability will be rewarded. California can unlock the potential of our businesses by committing to long-term goals and by building a market that rewards innovation.

“In conclusion, I know these goals are challenging, but we have to do it. Overcoming these kinds of challenges is what leadership is all about. California is at a crossroads yet again. We can choose to continue moving forward and leading the world on creating a cleaner, more sustainable future for our children, or we can give up our leadership role. I’m confident that we will make the right choice.”

Business leaders see devastating economic impact

But business leaders are just as confident that the energy mandates will hurt the state’s economy. The Western States Petroleum Association is particularly concerned about the requirement to cut in half gasoline and diesel use by 2030.

“In the absence of available and affordable alternatives, we believe such a step would have a drastic and devastating impact on California’s economy, businesses, and families statewide,” said WSPA President Catherine Reheis-Boyd in a press release. “SB 350 would give the California Air Resources Board vast new authority to develop those mandates with providing clear policy or regulatory direction.”

The California Chamber of Commerce has dubbed the bill a “job killer.” It issued a statement urging legislators to oppose the legislation, saying that it sets an “arbitrary and unrealistic reduction of petroleum use, increase in the current Renewables Portfolio Standard and increase in building energy efficiency without regard to the impact on individuals, jobs and the economy.

“SB 350 provides a blank check delegation of authority to CARB, and in doing so, gives no consideration to the cost or job loss associated with this yet-to-be-determined regulation.

“Most of California’s businesses and families rely on petroleum for day-to-day transportation needs. SB350 could compromise the availability of transportation fuels. The California Energy Commission reported in its 2014 Integrated Energy Policy Report that 92 percent of all transportation fuels in California are made up of petroleum.

“Businesses rely on petroleum to transport goods and people, and it is unclear how the arbitrary goal in SB350 will be met. Will there be a 50 percent straight reduction in the production of petroleum in the state? Will we have to ration petroleum to achieve the 50 percent reduction? At what cost?

“In addition to the 50 percent reduction in petroleum use, SB350 seeks to increase the current Renewable Portfolio Standard from 33 percent to 50 percent as well as increase energy efficiency in buildings to 50 percent. Both these policies will significantly increase costs to ratepayers.

“California’s energy price per kilowatt hour is among the highest in the nation and the state’s energy efficiency standards are among the strongest. Mandating upgrades to meet increased energy efficiency standards while increasing the cost of energy will make California businesses less competitive.”

Legislators voice concerns

The three Republicans on the committee voted against the bill, which passed 8-3 with all of the Democrats supporting it.

Sen. Anthony Cannella, R-Ceres, said he’s concerned that California will actually have a surplus of energy, nearly 14,000 megawatts of over-generation, by 2024. He cited a recent op-ed coauthored by CPUC President Michael Picker that warned that “when there is more electricity being generated than places to store or export it, it must be turned off or it threatens reliability of the grid.”

Cannella, who said his district has a very high poverty rate, is also skeptical that the promise of electric vehicles will be fulfilled.

“Look, I would like to drive an electric car,” he said. “I can’t afford it; most of the people in my district can’t afford it. But regardless of that, I’m concerned about the ag industry, the trucking industry and rural communities that have to drive. And, really, I just don’t think electric vehicles will be sufficient for tractors or trucks. And so, setting a 50 percent reduction without excluding those industries, I think you’re going to create a lot of problems.”

Sen. Mike Morrell, R-Inland Empire, questioned Steyer’s optimism about the economic benefits of increased energy regulation.

“You made positive comments about creating jobs in the future,” said Morrell. “But we have the Chamber of Commerce, the Manufacturers Association, the National Federation of Independent Business, among many others who have had decades of a proven track record of creating jobs, millions of jobs. These organizations with millions employed under them, with proven decades of a track record, say this is a job killer.”

Green jobs vs. oil and gas jobs

Steyer responded that the clean-energy sector of the California economy is “growing at a very large clip… . This kind of policy is the kind of thing that will make that growth much faster and more important. We’ll be the first down the cost curve in this industry worldwide. And the rest of the world has to follow us. We will build gigantic business out of this. So I strongly believe this is good for California employment.”

Sen. Jean Fuller, R-Bakersfield, isn’t buying that argument. She said that one of the counties in her district produces most of the gas, oil, solar and wind energy in the state. “It’s been very hard for us to put ourselves in that position,” she said. “As you can imagine, that’s not an easy marriage among all of those groups. But we are very pleased with that.

“But the worry that I have is that as we ramp up one – the solar and wind – we gain a few jobs, but it’s mostly like one person per solar field. And you know how large solar fields are. And usually it’s a very low-level job; it really doesn’t require a lot of expertise. The oil and gas industry is very, very much more labor intensive. There’s a lot more jobs. They are much higher expertise. Most of our small families have been there for many, many years.

“And when we ramp down that industry, you really hurt our county. You really displace workers. And you really don’t leave us a way to replace that kind of infrastructure. So the inland area, who have willingly served as the energy production for the rest of the state, will be hurt massively. And I doubt that we will ever recover.”

Helping or hurting minorities?

One Democrat on the committee, Sen. Ricardo Lara, D-Bell Gardens, also expressed concern that the state’s poorest residents, particularly Hispanics, are not enjoying the benefits of the clean-energy economy.

“Because what we see, and what we have continued to see, is that the people that are making themselves rich out of these technologies don’t look like you and I,” Lara said to de León. “And don’t come from the economic experiences and backgrounds that we share. And so, if we want to make this as successful as possible, we have to ensure that everybody reaps the benefits. Not only in terms of job creation. Because you know us people of color, all we want is a job.

“But now it’s time for us to ensure that if we’re going to create this and mainstream this, that we not only get a job out of this, that we also get economic prosperity. And that the folks are going to be able to make money off this, it’s diversified and enjoyed throughout the entire economic strata of our state. And that we don’t continue to widen the gap between the rich and the poor.”

De León responded that minorities – or as he termed them, “individuals who look like California” – will be prime beneficiaries of the building retrofit jobs spawned by his bill. “I appreciate and understand your concerns,” he said. “I know as a person, as a legislator who represents the 24^th Senate District and as a pro tem and as a person of color, I know that I’m doing my part to proactively make sure that this is an inclusive economy.”

De León applauded the bill’s approval in a press release: “The committee was presented with a clear choice: help usher California into a new era of cleaner air and a cleaner economy or stay stuck in a poisonous fossil fuel economy. I’m grateful the committee made the right choice.”

SB350 will next be heard by the Senate Environmental Quality Committee later this month.

Assemblywoman Lorena Gonzalez, D-San Diego, author of Assembly Bill 67, argued that it’s simply a matter of economic justice for workers and their families.

“The act seeks to guarantee that employees are fairly and justly compensated for undue hardships associated with working during time that is commonly spent with family on Thanksgiving and Christmas,” she said. “This past November and December millions of Americans sacrificed time with their family on these federally recognized holidays to work for retailers and food outlets like Walmart, Staples, Gap, Starbucks and much more.

“In many cases working shifts that creep into this family time has become mandatory, with threats of being fired if you even take a sick day, which forces workers to make an unfair choice between their economic livelihood and their family. … This is not an exchange for time spent with the family. But there is compensation for having to miss something that’s special. That’s why today as we see more and more stores, more and more retails outlets, more and more restaurants opening up on these days, we want to ensure that the workers that are forced to work on those day are compensated fairly.”

Several women testified about the hardships of working in retail. Julie Fisher works at Macy’s, which she said used to open at midnight on Thanksgiving, then opened at 8 p.m. and now opens at 4 p.m. “It’s an exhausting event,” she said. “And then you turn around and the next day is the Black Friday after Thanksgiving or the day after Christmas.”

Said a woman who has worked for Walmart for four years during which time she said she’s been on strike seven times, “People who work for Walmart, we are the working poor. We need as much help as we possibly can get.”

Constitution

Gonzalez has a law degree and is the first female minority CEO for the San Diego and Imperial Counties Labor Council, AFL-CIO. Her testimony included the disparagement of free-market capitalism and chiding the California Chamber of Commerce for opposing the bill on constitutional grounds.

Chamber representative Jennifer Barrera, who also has a law degree, told the committee, “We believe this is a violation of the First Amendment for a lot of business owners who do not recognize Christmas as a holiday, much less as a family holiday, where they will be mandated to either shut down their business or pay their employees double compensation.”

Barrera said that although Thanksgiving and Christmas are government-recognized holidays, private businesses are not required also to recognize those days as holidays. She also pointed out that the trend in state legislation has been toward secularizing religious-based holidays such as the once prevalent “blue laws” that forced businesses to close on Sundays.

“In 2004 New York struck down their blue law as unconstitutional,” she said. “And I quote, ‘In view of the acknowledgment that Sabbath laws are founded in religious beliefs, it’s time to declare all such laws unconstitutional. The substitution of secular concerns, such as protecting mom and pop from being overworked for their earlier concern that the religious nature of the day be observed, does not make the statute in question less reprehensible.’

“Similarly, here it is unconstitutional for the state to be dictating what day is a family day for business owners to recognize and either shut down or pay their employees double compensation.”

However, the 2004 New York case was decided by “a lower-court judge in Brooklyn,” the New York Times reported. So it would have little precedential value in California.

Special holidays

Barrera also cited a 2007 Vanderbilt Law Review article she said concludes the U.S. Supreme Court would deem blue laws to be unconstitutional if they were challenged in court. Those laws amount to state government “dictating to private-sector employers that you have to recognize a special holiday as a family day as aside from any other holiday that the state either recognizes or the federal government recognizes,” she said.

In addition to the constitutional question, she said the Chamber is opposed to AB67 because it:

• Places brick-and-mortar stores at a competitive disadvantage against online retailers that are not required to provide double pay.
• Includes non-hourly, salaried employees, which forces employers to provide double pay for the entire day even if an employee only worked an hour.
• Creates “another litigation opportunity against our employers in California.”

‘War on Christmas’

Gonzalez prefaced her response to the constitutionality argument with a slap at the Chamber.

“I didn’t know that there was in fact, as the other side will often say, that there was a war on Christmas,” she said. “The difference is that it’s being waged by the Chamber of Commerce. So I want to very seriously take on what I think are their ludicrous claims that this in any way violates the First Amendment by way of the Establishment Clause.

“In its letter the Chamber quotes convenient lines from cases, yet ignores the Supreme Court’s generally relied upon test of the Establishment Clause first articulated in Lemon v. Kurtzman. The application of the three-prong test from Lemon clearly shows that this law would not violate the Establishment Clause, as the legislation has the secular purpose of promoting the family and increasing pay.

“In no way does it advance or inhibit religion. Unless the Chamber is arguing that it’s a religious principle to force people to work for minimum pay on every day of the year. I don’t think that’s a religious principle. And finally, this in no way is an excessive entanglement of church and state.”

Gonzalez also cited the County of Allegheny v. the ACLU, in which the Supreme Court struck down a crèche display but upheld a menorah display at a county courthouse. She quoted Justice Sandra Day O’Connor’s ruling that “as observed in this nation Christmas has a secular as well as religious dimension… [A]nd the celebration of Thanksgiving as a public holiday, despite its religious origins, is now generally understood as a celebration of patriotic values rather than particularly religious beliefs.”

Gonzalez concluded her response by admonishing the Chamber.

“I think there is no case law that suggests this would be violating our First Amendment rights,” she said. “I hope in the future the Chamber will limit its opposition to the merits of the bill, instead of attempting to elicit support based on erroneous readings of the law and misguided arguments about the separation of church and state.

“Or if they prefer to continue down that line of opposition, perhaps they should concede that we pay double time on every single federal holiday. I wouldn’t be opposed to that amendment if they would like to suggest it.”

Response

At that point Barrera asked committee Chairman Roger Hernandez, D-West Covina, “May I respond to those comments since they were directed right at the Chamber of Commerce?”

Hernandez said, “I’m going to defer to my colleagues on that one since I have not given that opportunity on any other bill.”

One of his colleagues, Assemblyman Jim Patterson, R-Fresno, who had the floor and was in the midst of questioning Gonzalez, asked that Barrera be allowed to respond. “There is a request by the Chamber to clarify this,” he said. “I think that’s a reasonable request, and I would like the prerogative of asking the Chamber to respond.”

But Hernandez shot him down, saying, “I’m not going to give you that opportunity at this time.”

Earlier questioning by Assemblyman Matthew Harper, R-Huntington Beach, focused on how the legislation might hurt California businesses. “My understanding is Chief Executive Magazine rated California as the 50th in rank in terms of being able to do business,” he said. “Do you think this would help or hurt our ranking in terms of our employers’ ability to do business in the state of California?”

Gonzalez responded, “I think there was a study that just said in fact we were the best place to do business. So, quite frankly, when you talk about doing business, we want to make sure that our middle and working class folks have expendable income and can actually spend the money in our small business and retail establishments. And this actually helps that.”

Gonzalez discussed her negative view of free-market capitalism when Harper pointed out that many businesses already pay extra for working on holidays as well as provide amenities such as holiday meals for employees.

“They just recognize under the free market that you really need to make sure people are compensated enough to show up,” he said. “Is your thinking that the free market doesn’t meet the ability for employers and employees to make that decision already?”

Reasonable wage

Gonzalez said, “Quite frankly, I don’t think we operate in a free market. If we want to take the NFL as an example, it’s a highly subsidized, so-called nonprofit where the owners are making millions of dollars. And I think they can pay their employees a reasonable wage. And we, unfortunately, have to require what that is.

“If left to its own devices in the free market, we would still have slavery, child labor … and no minimum wage. So no, I think we have very different ideological beliefs about how employers should be dealt with.”

Gonzalez elicited laughter in the chamber when, after Harper finished his questioning and Hernandez called on Patterson, she said with a smile, “Just keep it coming.”

Patterson asked whether her bill might create a slippery slope in which every religious group demands double pay for working on its holidays.

“It may or may not become an issue, Gonzalez said. “But I think we’ve picked the two most compelling holidays and times when traditionally as a country we have slowed down and spent time with our families. Whether or not we celebrate any religious tradition is irrelevant. … So I’m personally less concerned with the rest of the holidays. But I’m also not concerned if somebody in the future wanted to address premium pay for those holidays for hourly employees as well.”

The committee voted 5-2 to approve AB67. It will next be considered by the Assembly Appropriations Committee.