Episode 23: Conversations with Dan Walters

Welcome to the Workplace, a podcast by Cal Chamber. I'm Cal Chamber President Alan Zarenberg. With me today is Dan Walters of Calmatters. I'm sure many of you are familiar with Dan and his long career in journalism. Dan has been covering California government and Politics for over 50 years and to date has written more than 9,000 columns which have appeared not only in Sacramento papers, but in national publications like the Wall Street Journal. In addition to being a newspaper man, Dan is also the author of several books on California politics and is a frequent guest on national television news shows where he offers commentary on California's political climate. Today we are truly honored to have Dan as a guest on the podcast. Welcome, Dan. Thanks for being here.

You're very welcome.

Recently you wrote a column that caught my eye. We're talking California just closed out the books on the last fiscal year and recorded another extra billion dollars of unanticipated revenue. You talked about some surpluses and people that want to raise taxes in spite of the surpluses. So let's start with the foundation. So Dan, how big is the surplus really in California right now? I know we have a reserve, but is that really the limits to the surplus?

The official Reserve is about $20 billion or will be sometime in this new fiscal year. And then they have just kind of cash in the bank that isn't in the official reserve. There's some of that plus the fact that a lot of these states special funds have substantial reserves as well, which the state can borrow on its own very easily if they get into a big trouble. So you know, a recession would hit the state pretty hard because the nature of California's tax system, it's very reliant on a handful of high income taxpayers. So when the recession hits, the nation gets a cold, we get pneumonia in California and maybe 20, 25 billion dollars a year revenue loss if we get a recession. And so the reserves, as hefty as they are, are probably not quite enough to cover that. But nevertheless, in historic terms, they're very high. The state's revenue seems to be clicking along pretty well. We haven't seen recession on the horizon yet. And as I mentioned in the column, not only an extra billion DOL most recent forecast, but $2 billion over the original forecast from which the 2018-19 budget was predicated. So money's rolling in pretty, pretty darn well.

So if you were going to say didn't he spend some one time money also on amending the STRS contribution, which is the state Teachers Retirement System and the PERS contribution, Public Employee Retirement System produce how much the school districts and local government have to contribute. And that was, you could say that's part of a surplus also, right?

Well, it was the surplus of revenues over ongoing required expenses did allow them to kick in several billion dollars extra into the pension funds to relieve the pressure on school districts and I guess inferentially put that much money back on the table for negotiating contracts with their teachers as well. So it's really probably the beneficiaries of that are more likely teacher contracts than anything else. But yeah, and that's because the money has rolled in more than they really need to spend over and above the, you know, there's this kind of basel spending you have to do. And there's quite a bit of money that's come in over on top of that, several billion dollars at least, and depends on how you count those things. But the state isn't hurting for money at the moment, despite what you hear from a lot of people, that programs are not being financed enough and so on and so forth. And as I pointed out in the column, in addition to which they just closed the books on the property tax rolls on July 1, and we're going to see another, probably around 5 or 6 billion dollars more in property tax revenue for the state as a whole that goes to schools and local governments. Now, the school situation is a little funny. The more property taxes the schools get, that means they get less state aid, kind of. So there's. The schools don't fully benefit from that, but local governments are seeing a very, very nice boost in property tax payments this year thanks to the new assessed valuation that just came out.

So before we come back to under these circumstances, why would anybody think we need to raise taxes? But let's touch on something you talked about. The consequences of a downturn in the economy and a deficit in California. So there is some history on this, isn't there? For those of everybody, the listeners who remember George Dukmajian as governor, wasn't there a return of a rebate of taxpayer dollars when the state went over what was called the GAN limit and then three years later the state was 15 to 30 billion dollars in the hole?

Yeah, it was the GAN required this billion dollar rebate, as I recall, about 35 years ago. And you're right, then the recession hit California around 1990 and it was a severe recession, the worst recession we had seen up until the last recession we saw. Pete Wilson walked in the door in January of 1991 to take over the governorship and found himself facing a very large budget deficit, which has been something of a tradition in California for incoming governors. With most of them, he eventually had to raise taxes to cover that. So he had a surplus that you hand back a few years later, you got in the hole and you've got to raise taxes. The term for that is called volatility. And California's tax system is volatile, and it's probably twice as volatile today as it was 30 years ago because we are more dependent today on the incomes from a very small number of taxpayers. The numbers are personal income taxes make up 70% of the state's general fund revenues. And the top 1% of taxpayers, about 15,000 in a state of 40 million, pay half of those income taxes. So we are totally dependent on how well a handful of high income people are doing in their incomes, which are based largely in the capital markets in capital gains and that sort of thing. So it's a very volatile system. It's become more volatile and it makes planning fiscal matters very, very difficult when you don't know what might be just around the bend because nobody knows when the next recession's going to hit.

So in retrospect, the governor is carrying on with Jerry Brown's legacy of being prudent here, putting money in a reserve, but also, as I talked about, some of the excess over and above that he put into one time spending so he wouldn't commit to ongoing program.

Yeah, and one time spending or like the pension fund extra boost, I guess you'd say he did something else. He has undertaken some new services like more early childhood education, but he put a cap on it. He said this is good only until a certain point in time, basically at the end of his first term. And so if there is a recession, he doesn't have to go back in and cut this stuff. It kind of cuts itself automatically. And that's another way of kind of steeling yourself for the inevitable recession to come by putting a sunset date on some of these expenses.

So if we have just say a $21 billion rainy day reserve and on top of that some one time expenditures, that could cover a recession. Why in the world would anybody want to raise taxes? And where are they coming from?

Why does anybody want to raise taxes? Well, people who want more, they want to raise taxes. That's basically the public employee unions and advocates for certain programs like early childhood education, which if fully implemented, it would be very, very expensive. People think that the schools need more. Even though we've raised per pupil spending in California by about 50% in recent years. There's no shortage of people out there saying that our services, whether they're social services or education services or health services, are adequate. Everybody has a thing. We could use more money to do xyz. And you put all those things together and they add up to well, even though the California's revenues are doing well, there's not enough money to cover all the XYZs that are out there lurking. And therefore there is a certain drumbeat that goes on for raising taxes. There's a measure, as you know, on the ballot already for 2020 that would change how commercial property is assessed for property taxes. It would remove one of the protections of Proposition 13, the 2% limit annual valuation increases, allow those properties to go up to market value to be taxed. It would raise maybe 10, $11 billion a year potentially. And there's another proposal that's being kicked around by the school people to put another surtax on top of the other surtaxes for those handful of wealthy people at the top of the income stream to raise more money for schools. And there have been various measures kicking around the legislature so far, basically unsuccessfully, to raise taxes on its own without the voter approval.

So you think that, you know, all these people, proponents of additional taxes, think that Governor Newsom is not going to squander the, we'll say, the Jerry Brown legacy, his reserve. And so. And if they're going to have new programs, they're going to have to raise taxes and revenue for those. Is that what's going on here?

I think that's true. I mean, Gavin Newsom's being a little looser than Jerry Brown was. Certainly he's okayed some money for some things that Jerry Brown was kind of not willing to do. Jerry was very, very, very suspicious of baseline spending, increasing baseline spending, making new commitments that you could not get out of easily. And Newsom seems to be a little less conservative in that sense, but still, he has to be concerned about the potential of a downturn in the economy, because we all know what's happened. We saw what happened a decade ago when we had a very severe recession and the state's revenues dropped by about 20% a year. And 20% a year right now would be something like, let me do the arithmetic, $30 billion a year, something like that. And so it's out there. And Jerry kept warning, year after year after year, it's just around the corner, it's going to happen, it's going to happen, it's going to happen. It didn't happen on his watch. But the chances are pretty strong that at some point during Gavin Newsom's gubernatorial career, we are going to have a recession in the state's revenue system is going to take a beating.

And so, first of all, he has inherited quite a bit of reserves and is unique, isn't he, in terms of taking office as a governor, having a surplus rather than a deficit?

Yes, he is. I mean, in recent history, the only other governor I can think of who did not inherit a deficit was Gray Davis. Everybody else has had one. Pete Wilson had a whopper. His predecessor, George McMahon had a whopper from Jerry Brown, by the way. And Gray Davis certainly left one for Arnold Schwarzenegger, and Arnold Schwarzenegger left a huge one for Jerry Brown. So, yeah, there is a kind of a tradition in that. So Gavin Newsom is blessed to not have to begin his governorship by cutting a lot of spending or raising taxes. He knows, I think, that he's blessed and doesn't want to be the guy who presides over some sort of wholesale slaughter on government services. If we get another just to move.

Away from taxes and a little bit of politics. We have a couple other issues that are awaiting attention by our legislature and just like to hear your comments on them. One is the status of workers, whether they're not their employees or independent contractors. And it kind of boggles my mind that this issue has never been addressed by the legislature, only by the courts. The second issue, a little bit, is where California appears to be at the forefront of the nation on data privacy. And how do you see either of these two issues coming to a closure at the end of the session?

The politics of the question of whether employees are contractors or employee payroll employees, the politics are in reverse. Usually you have somebody trying to legislate one way and the opposition comes up. But in this case, the Supreme Court has already ruled a very tight rule that would force perhaps millions of contract employees to either be terminated or become regular payroll employees. So the die is already cast. If the legislature does nothing, then that ruling takes effect on all particular cases. You're going to have a whole spate of lawsuits and there's going to be quite a spectacle. So the real question is not whether it's going to happen, but who it's going to happen to. And that's where the legislature gets involved. And question is how many professions or fields of endeavor will be exempted from the Dynamex ruling that the Supreme Court laid down. And so far, the Democratic leadership of the legislature doesn't appear to be wanting to let a lot of people off of that. There have been some exceptions written into the pending legislation for some obvious things like real estate, sales people and that sort of thing. But the ruling and the case was aimed at the so called gig economy, the new aspect of the economy in which you have a lot of people working as contractors without payroll status, most famously the Uber drivers and the Lyft drivers. In fact, the case that Dynamex involved involved a package delivery service and their drivers. It did.

But those facts in that case occurred before the first iPhone was even introduced into our economy. So isn't it incumbent upon our legislature to update and look at these things?

Well, it is incumbent upon them to look at these things and they probably should have been looking at them a long time ago, but they didn't. And therefore the courts did act. And now you have potentially millions of people whose status is going to have to be revised in some way and maybe lose their jobs. We don't know. So there it is. And the legislature has only a few more weeks to go. And if they don't do anything, that court decision will simply take effect. Or if they would pass the bill as now written where it makes very few exceptions to that ruling, then all hell will probably break loose, to tell you the truth. And a lot of people are going to find wake up on these days and find out that they either have to become employees or go away and it's going to be a very difficult transition. Yes, somebody should have been thinking about this a long time ago and somebody should have been doing it judiciously. Well, this is not judicious. This is kind of hurry up legislation and nobody knows where it's going to finally come out. But at the moment it does not look like the Democratic leadership is. We're very tied in with the unions obviously, because the unions are very much interested in having as many people as payroll workers as they possibly can. Doesn't look like that they're going to be willing to give many exemptions to this thing.

So one final issue and just to get your take on the politics of data privacy where California seems to be at the forefront of the world and nation here in Europe they adopted rules called GDPR a year ago. They spent four years developing those rules. Here in California we adopted a data privacy law last year in four days. What are the politics here of trying to clean that up and should California do this by themselves?

Well, I think you can make an argument that California shouldn't be doing this by itself. That you should have probably a nationwide standard on this issue because all of that businesses don't stop at the state line after all. But once again, legislation, as with the Dynamex thing, is being driven by outside pressures. And in this case it was a ballot measure, as you know, that was going to be placed on the ballot. And the privacy legislation that was passed was a kind of to try to head off the ballot measure. And so you have that, as with the Supreme Court decision in Dynamex, you have this kind of outside thing. If you don't act, then the outside influence takes effect potentially then you have another ballot measure and it's a sticky wicket. But I think what you apply is correct. This is not something that should be probably done state by state by state because the. I don't know how you do it state by state. It's kind of like the other controversy that's going on these days about mileage requirements on cars. Can California have its own mileage requirements and everybody else have a different standard? And maybe this should be nationwide. And it's a pain in the butt if you have to have. Every state has its own standards on mileage and it's kind of a pain in the butt if everybody has their own standards on privacy. I think people are very interested in having their data secure. I am, and I'm sure you are and anybody else. You don't want that out there floating around that people for identity theft and whatnot. But I just don't know that having a state law on that particular subject. The state can do a lot of things legitimately. But I don't know, having a state law on privacy in the absence of a federal law might be more one of those other things. It just gets kind of super confusing.

The Internet doesn't stop at the state law.

Nothing stops at the state law.

And I think you're absolutely right. People want to protect their privacy and their data, but they also at the same time want to be able to find Mexican restaurants near me. They want their loyalty programs and they want to take advantage of the data that somebody puts together and helps them with.

It's a trade off, isn't it? It's a trade off between convenience and. And how much privacy are you willing to give up for convenience? And how much convenience are you willing to give up for privacy? Who knows? I mean that's almost as individual's fingerprints. So it makes it very difficult to have a one size fits law that.

Well, I'd love to have you come back Dan, and talk a little bit about this, because I think the two things we talked about here are how the legislature keeps up with changing technology, both in the workplace and in people's lives. And it's changing every day, and we are not as quick to act as technology is.

Yeah, in fact, we have evidence. And the fact that the state's own technology is so far behind the scene, like the DMV and whatnot. No, it doesn't keep up with technology at all, even in its own realm.

Well, thank you so much, Dan for joining us. And thanks to all our listeners for joining us at the Workplace. Please comment, share and subscribe to Cal chambers podcast@calchamber.com.