Weekly Report – June 8, 2015

L.A. Coalition Meeting with CA State Controller Betty Yee – Insights on Topics Discussed

State’s Fiscal Health. CA’s budget has moved from an $18 billion deficit in 2011 to a projected $2 billion cash surplus in fiscal 2015-16. The main engine was a 28 percent surge in revenue (personal income tax revenues alone went to $72 billion from $56 billion) from the economic recovery and stock-market boom – and a seven-year “temporary” (and retroactive) tax hike in 2012 that raised the state’s top personal income-tax rate to the nation’s highest, 13.3%. Though CA’s legislative analyst’s office last month warned that even a slight dip in projected annual income growth – i.e., to 3.6% in 2016 and 2017 from 5.1% – could result in multibillion-dollar deficits because of built-in spending increases, particularly in K-12 education. Buoyed by the budget surplus, members of the Democratic party are advancing state earned income tax credit bills and other social spending programs. Though there is an underlining cautionary tale – between 2004-13, CA’s population grew 2.25 million, while the number on assistance programs grew by 2.9 million. Governor Brown wants to pay down debt and add to the state’s rainy-day fund.

State Tax Reform. Tax proposals and tax hikes – all under the label of “tax reform” –  are in play. Proposals include an expansion of the sales and use tax to services, a large tax increase on tobacco consumers, and an extension of Proposition 30. Controller Yee is studying ways in which to spread the base of the personal income tax and extend the sales tax to certain services in the State. A proposal to expand the base of the sales and use tax is being carried by Senator Bob Hertzberg. He wants to eliminate the corporate income tax and reduce personal income tax rates for high-income taxpayers, while imposing a sales tax on services. The other major tax change discussed was the extension of Proposition 30, which was touted in 2012 as a temporary tax needed to get the state through rough fiscal times. The initiative’s sales tax rate increase is scheduled to expire in 2016, and its income tax increase is set to expire in 2018. While some have been advocating for an extension of the measure, the governor and his aides have indicated that the administration expects the tax increases to sunset on schedule. Interesting data point – income-tax collections – which rely heavily on exercised technology-stock options and capital gains taxed as ordinary income – have jumped to two-thirds from just over half of revenue on his watch and so far no one has proposed using the budgetary breathing room to push for a more growth-oriented tax system with a broader base, lower rates, and less reliance on the state’s volatile progressive income tax. Government unions are almost certain to demand an extension of the income-tax hikes in 2018 when Governor Brown is term-limited out of office. On the other hand a well respected political operative has said – if the top-heavy tax system can’t get fixed “with a Democrat in the governor’s office in his fourth term” who has “nothing more to gain, can’t run again – at least for governor – then it will never get done.”

State Pension Reforms. California Public Employees Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) – are short a shocking $225 billion that they’re going to need to pay for the retirements of government workers. An recent Manhattan Institute report found that 25 California municipalities saw their pension costs increase by between 47 percent (Garden Grove) and 537 percent (San Francisco) over the last decade. A decade ago the City of Los Angeles set aside 3-percent of its budget to take care of pensions. Today, the figure is closer to 20-percent. The report also estimated that CalPERS’s bills would increase another 20 percent to 48 percent over the next five years for the largest municipal governments in the pension plan. If the funds miss their investment targets, taxpayers will be on the hook. A few examples to highlight the impacts – in order to deal with the deficit in funding teacher pensions, Governor Brown last year shifted most of the cost to local school districts, which is crowding out teacher hiring, school construction and equipment. And part of the recent deal between Gov. Jerry Brown and UC President Janet Napolitano to prevent university tuition increases was for the state to help cover the university’s pension cost with a three-year infusion of over $400-million. Reforms are being discussed: Former San Jose Mayor Chuck Reed’s is now pushing a statewide pension reform initiative that, if it qualifies for the ballot, poses one simple question: Should voters have a say before state and local officials grant retirement benefits to new public employees? Controller Yee and other State leaders are also open to looking at the pension’s discount rate in the near future.

State Workforce. According to the State Personnel Board, 34 percent, or more than 70,000 state workers, will be eligible to retire in the next five years. Some independent studies have estimated that this number could be much higher, ranging as high as 49 percent, or as many as 100,000 workers. The State Controller highlighted that state government will become “hollowed out” as its best and most experienced workers leave and there is no plan to deal with their absence or build a well-qualified workforce for the future. The Controller asked for our help in recruiting younger and more experienced workers with financial and accounting backgrounds to work for the Controller’s office, the State Franchise Tax Board and the Board of Equalization. The Coalition has offered to facilitate introductions within our network and please let me know if you would like to help.

The L.A. Coalition’s Sub-Committee on Water

The Los Angeles Coalition for the Economy & Jobs (Marc Nathanson – Chairman – Falcon Water Free Technologies) and the Pisces Foundation (Bob Fisher – Chairman of the Board – Gap) hosted a candid and off-the-record lunch discussion on one of the most important issues facing California – water. The goal of the discussion was to open a dialogue between business leaders in Southern and Northern California to explore how to bring the voice and experience of the business community to help advance solutions to this challenge. Lester Snow, former California Natural Resources Secretary and current Director of the California Water Foundation, provided insights on the challenges and the opportunities created by the drought, and the dialogue that ensued started to lay out a sound pathway to transform CA’s outdated water management by promoting integration and innovation. Interesting fact – California farmers produce more than a third of the nation’s vegetables and two-thirds of its fruits and nuts. Other highlights:

Participants discussed the Governor’s Bay Delta Conservation Plan which would benefit two out of three Californians and 4 million acres of the state’s farmland ($42.6B AG industry) if completed. A major earthquake or storm pose the greatest dangers to the Delta, potentially causing levee failures and flooding of as many as 20 islands at once and jeopardizing water supplies. After years of studies and numerous proposals, it looks as if the Governor will make a decision by year’s end to move forward with his plan to restore tens of thousands of acres of delta habitat and install two 30-mile pipelines as an alternative way to deliver water from the delta. Once that decision is made it will drive a lot of the policy on the statewide Water Action Plan. The Delta provides fresh water to L.A. that we need to hold back rising salinity levels in our region’s storage basins and also to help treat wastewater and for recycling efforts. And discussed the need for more policies that leverage public funding with private investment in water treatment, storage and supply infrastructure. Investment in water treatment, banking and other activities is happening but the pace needs to be accelerated to meet our state’s growing needs.

The disconnect between promoting conservation efforts and implementing them: The developer of the Korean Air building in downtown wanted to put a greywater treatment system in their being built 73 story tower in downtown L.A. to treat used water on site – the tower will have 1,000 hotel rooms, but state law, enforced by the city of L.A. required them to put in tanks in that captured rainwater on site. It rains on average 3 inches in L.A. a year. The owner was willing to pay the $2 million additional dollars for the greywater treatment system, but the City told them no deal.

L.A. Coalition’s and the Mayor’s Operations Innovation Team

The Coalition’s public/private partnership with the L.A. Mayor’s office continues to move forward and two key milestones where reached last week. The team secured a $1 million grant for the Mayor’s Fund for L.A. to fund the building out of the Team and the Team’s new director – Mark Anthony Thomas – was selected. Mark brings 14 years of successful management and entrepreneurial leadership for publishing, corporate, and public sector organizations. He most recently served as the City’s inaugural Fuse Corps Executive Fellow and Senior Advisor-Livability for the City Administrative Officer. During his 12-month appointment, he engaged the City’s executive leadership, departments, and the public to develop a new approach to eliminating blight and improving livability in the City’s neighborhoods. The recommendations were unanimously adopted by the City Council and served as the framework for the Mayor’s Executive Directive #8. In 2008, as the Deputy Director for the Center for an Urban Future—a New York-based economic and innovation think tank—he developed the business model to re-launch its magazine, City Limits, as a start-up news media. Appointed Publisher and Executive Director, he led the establishment of City Limits’ new organization and governance structure, expanded City Limits’ content across digital platforms, acquired the Bronx News Network, and launched collaborations with New York’s leading civic institutions and foundations, and e-commerce companies. City Limits was honored in 2011 and 2012 by the Society of Professional Journalists for producing the nation’s top local investigative reporting and recognized, via proclamation, by Mayor Michael Bloomberg for being “a model for New York and the rest of the nation.” Mark has held previous posts with Israel’s Ben-Gurion University of the Negev’s Medical School for International Health leading public relations and Georgia-Pacific Corporation, managing a portfolio of economic, philanthropic and environmental initiatives. He has served on board and task force appointments to strengthen local media, philanthropy, and entrepreneurial ecosystems and has delivered lectures and performances across the nation as a published author. He earned an MBA from the Massachusetts Institute of Technology as a Sloan Fellow in Innovation and Global Leadership, an MPA in Advanced Finance and Management from Columbia University, and a Bachelor of Business from the University of Georgia—which recognized him as one of its Top 40 alumni under 40.

The L.A. Coalition has committed to raise $250,000 for this initiative and we have raised $115,000 to date. Please let me know if you would like a full briefing on this topic and/or would like to provide financial support.