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July 15, 2020

CA Government Affairs: The California 2020 – 2021 State Budget

By Matthew Allen and Gail Delihant

The COVID-19 pandemic has uprooted all aspects of our daily lives, personal and economic. Stay at home orders have caused significant business closures, price disruptions, and an historic increase in the unemployment rate that, at the time of this writing, hovers over 16%. Not surprisingly, this has led to a drastic turnaround in the 2020-2021 state budget from a $5.6 billion projected surplus in January to a forecasted $54 billion deficit. Questions swirled throughout the spring about what difficult decisions the state would make to close the budget deficit and limit the economic fallout from the pandemic. As the economy worsened, anticipation grew that this budget would be a game-changer and would provide some needed balance on state policies that have continued to make businesses in California less competitive than their counterparts in other states and countries. Unfortunately, that does not appear to be the case.

The Legislature and Governor Newsom finalized the details of the budget after an extraordinarily truncated negotiation process that frankly lacked transparency and includes new policies that should have been vetted through the normal policy committees. This cumbersome process combined with technical difficulties that didn’t allow for adequate public input and restricted contact with legislative members and staff posed significant barriers during this budget cycle. While some difficult decisions were made, the biggest challenges are being kicked down the road for discussion in future budget years.

The 2020 – 2021 budget will have General Fund expenditures of $133.9 billion and state reserves of $11.4 billion. Some of the greatest cuts will be in funding to the University of California and California State University systems, which will lose almost half a billion in funding. K-12 education will dodge “cuts” by delaying some of their payments so that they can be included in the next budget. Many state employees will also be receiving a near 10% pay cut. Many of these cuts would be restored if the federal government approves the $14 billion assistance that California has asked for.

Western Growers and other stakeholders are extremely disappointed that the budget includes what amounts to a tax increase of $4.4 billion. This results from the suspension of the use of net operating loss deductions for businesses with incomes higher than $1 million. This suspension will remain in effect for the 2020, 2021, and 2022 taxable years. Many of the business tax credits that are used to help offset tax liability will also be capped. Additionally, we joined a large number of opponents in an effort to stop a politically motivated bill imposing a mandatory 12-week leave of absence on any employer with one or more employees from being passed as a budget trailer bill instead of moving this highly controversial bill through the committee process.

The budget also includes a significant policy change that expands the State Water Resources Control Board’s authority to curtail the recent federal regulations related to the Clean Water Act Section 401 certification. On June 1, 2020, the federal Environmental Protection Agency issued a rule that tightens the timeline and scope for states and tribes to certify that projects meet water-quality requirements under Section 401 of the Clean Water Act. That decision helped meet the Trump administration’s goal of streamlining permitting processes and reducing the regulatory requirements that make energy infrastructure projects so expensive. However, this budget agreement to expand the State Water Resources Control Board’s authority represents another state-led assault on federal environmental rulings and could likely result in further litigation.

Western Growers and other stakeholders also opposed a proposal that would have re-opened the recently amended Cap and Trade Program at the California Resources Board. Re-opening that regulation would likely lead to further costs to companies that are required to purchase emissions allowances and higher costs for all Californians on fuel and other transportation expenses. Fortunately, that proposal was removed from the budget. It is almost guaranteed that this discussion will continue at the regulatory level within the California Environmental Protection Agency. However, there will not be a legislative mandate that changes to the program must be made.

As mentioned earlier, this budget has proceeded through a whirlwind approach as the state attempts to gauge the revenues that will be coming in through July. The greatest concerns for our industry are that really necessary structural changes to spending were not made, taxes were increased, and reductions in state spending are either being tied to a federal “bailout” or are being pushed into future budget years. This may very well meet the requirements of passing a balanced budget but it largely fails to recognize the enormity of the challenges that face our state and the resolve that is needed to stabilize and heal our economy.