Joseph Krist
Publisher
CALIFORNIA BUDGET
The May revision to the Governor’s proposed budget dropped on Friday afternoon. If the budget was filled with good news, it would not have been released during a prime news dump period. So, it should have been a clue that a surprise was in store.
That surprise came in the form of an unanticipated increase in the estimated deficit facing the State. Since the release of the Governor’s Budget in January, monthly revenue shortfalls have continued, which have contributed to the May Revision General Fund revenue estimate shortfall of $8.4 billion (before transfers and adjustments). The additional budget shortfall at the May Revision, after transfers and adjustments, is estimated to be $9.3 billion. The $309 billion revised budget now reflects a $31 billion shortfall, some 10% of state spending. The state has reserves in the Budget Stabilization Account (BSA), which is now approximately $22.3 billion.
The volatility inherent in the State’s tax structure – nearly half of all personal income tax in the state is paid by the top one percent of earners – is at the heart of the problem. Consistent underperformance in personal income tax withholding in the second half of 2022, which tracked to the 19.4-percent decline in the S&P 500 for the year, translated into lower revenue from the small share of taxpayers whose higher incomes can vary substantially with market volatility.
The Internal Revenue Service’s decision (and the state’s subsequent conformity) to delay 2023 tax filing deadlines to October due to the winter storms affects more than 99 percent of California’s tax filers in 55 of the state’s 58 counties. As a result, the May Revision forecasts roughly $42 billion in scheduled tax receipts will be delayed until October 2023. Of this amount, $28.4 billion is personal income tax—the state’s largest source of General Fund revenue—and $13.3 billion is corporation tax. This represents around 23 percent of projected personal income tax and 32 percent of corporation tax revenues for the current fiscal year.
So, what to do? The May Revision reduces an additional $1.1 billion in spending across the 2021-22 through 2023-24 fiscal years. Combined with the Governor’s Budget’s $5.7 billion in reductions and pullbacks and a $57 million adjustment, the May Revision includes total solutions in this category of $6.7 billion. Additional maneuvers include $3.3 billion in shifts of spending commitments from the General Fund to other funds; the withdrawal of $450 million from the Safety Net Reserve; $3.7 billion in revenue and borrowing, which consist primarily of an additional $2.5 billion from the Managed Care Organization tax and $1.2 billion in additional borrowing from special funds. Combined with the Governor’s Budget amount of $1.2 billion, there is a total of $4.9 billion in new revenue or borrowing.
The word “shift” appears all over the proposals. In some cases, shift involves the source of revenues. In others, it represents a shift from current funding to the use of bonds to finance projects which were formerly supported by General Fund spending.
NEW YORK CITY BUDGET AND THE MTA
When the most recent proposed budget from the Mayor was released, the state had not yet adopted its budget. The state budget is an important component of the City’s budget process and those negotiations can produce some unexpected and expensive changes in state funding. Now that the State budget has been adopted, changes to funding ratios create problems for the City.
The Executive Budget did not anticipate additional paratransit costs that became clear with the adoption of the state budget. Starting in July of this year, the city is required to subsidize MTA’s paratransit operating costs at 80 percent—up from 50 percent—after fares and dedicated tax revenues. This increase is limited to 2024 and 2025 and is capped at $165 million in addiƟonal contribuƟons each fiscal year. IBO esƟmates this policy will increase the city’s paratransit subsidy by $163 million in 2024 and $165 million in 2025, for a total of $328 million over the two years—or about 30 percent more than the $1.1 billion the MTA previously projected.
This comes as the MTA has quantified the negative impact of fare evasion. Fare evasion cost the MTA $690 million in 2022. The MTA is on track to lose $1 billion this year due to fare evasion. Critics cite facts like those to point out that the losses are about equal to what the MTA hopes to generate from congestion pricing. It is difficult to generate support for those fees when there are daily examples of fare evasion.
STATE REVENUE SHORTFALLS
In Massachusetts, a report by the Massachusetts Department of Revenue showed April revenue was down 31% year-over-year, with the state collecting $4.78 billion, $2.1 billion less than in April 2022. In its revenue report, the Massachusetts DOR Commissioner highlighted steep dips in short-term capital gains as a major factor in tax declines for April. Nonetheless, the state is expected to move forward with both tax cuts and new spending. most of the key proposals in the governor’s budget proposal, including a $600 child tax credit, new seniors tax credit, renters assistance, a reduction of the estate tax, and a centerpiece short-term capital gains tax cut that would reduce the rate from 12% to 5% over two years.
Illinois revenues sunk in April by $1.8 billion from April 2022 collections. The governor’s budget office in a report to the Legislative Budget Oversight Commission this week cut this year’s revenue projections by $616 million to $50.7 billion after April revenues fell $849 million below the budgeted level while the legislature’s Commission on Government Forecasting and Accountability (COGFA) cut its estimate $728 million to $51.2 billion. COGFA noted that Illinois revenues are still up $132 million from last year but that counts $325 million of one-time federal American Relief Plan Act funding that won’t be available in the coming fiscal year.
MAINE TRANSMISSION
A Maine jury unanimously found that Central Maine Power was entitled to resume construction of the New England Connector transmission line. More importantly, the plaintiffs in the case announced that they would not appeal the verdict. This will allow construction to resume. CMP immediately sued the state to reverse the results, arguing the referendum was unconstitutional for creating a retroactive law nullifying a project that had been lawfully permitted by numerous state and federal government agencies. the Maine Department of Environmental Protection is expected to lift the freeze on construction which was imposed after passage of the referendum halting the project in 2021.
STADIUM NEWS
This week two cities effectively ended the possibility of professional sports franchises staying in their current homes. In one case, a referendum process allowed voters to make the decision directly while in the other the local political structure would not support a project.
Voters in Tempe voted against a proposed development plan centered around a new arena for the NHL Arizona Coyotes. And the vote comes after the City of Phoenix and Sky Harbor Airport raised concerns about the location of the proposed development and threatened additional litigation against the deal. Propositions 301, 302 and 303 — all needed to receive a majority of “yes” votes in order for the Coyotes project to move forward. Each one was losing by a 56% to 44% margin, with the exception of Prop. 303, which was losing 57% to 43%.
There is a real likelihood that the franchise will move given the lack of a permanent place to play. There are already four cities which have been suggested as a future home for the team. Three of those cities have available arenas and the fourth will see one later in connection with an Olympic bid. The Coyotes are not the first NHL team to have arena woes – the NY Islanders eventually landed on their feet with the UBS Arena in Elmont, NY.
The Oakland A’s of MLB announced that they had entered into an agreement to develop a baseball stadium right on the Las Vegas Strip. Part of the transaction would include some $350 million provided by the State of Nevada, subject to legislative approval. It is impossible to overstate the impact that the success of the NHL Vegas Golden Knights has had on the perception of Las Vegas as a viable professional sports city. Concerns about consistent attendance and any worries about issues related to gambling simply have not materialized.
THE MOUSE WARS ESCALATE
Last month the CEO at Disney asked about Florida “Does the state want us to invest more, employ more people, and pay more taxes, or not?” Apparently, Disney believes that the answer for now is no. Following through on that conclusion, Disney announced that it was not going to pursue a planned development within the District which would have transferred 2,000 employees from California (at a state estimate of $120,000 average salaries) and seen an overall $1 billion investment.
There are lots of reasons why Disney would cancel the project. Employees were unhappy with the move and the company is in the midst of a major cost cutting program. Nonetheless, the opportunity to up the ante in Disney’s dispute with the Governor allowed Disney to package the cancellation of the project as being in support of its position.
The situation reflects the toxic matching of ideology and political ambition. It tends to backfire and it occurs on both ends of the political spectrum.
SOLAR AND NET METERING
The effort to reduce the favorable economic impact for customers who install solar panels continues to spread. Net metering – the mechanism for paying for surplus solar generation – has been steadily under attack. Ironically, most of these actions are being undertaken in states where solar would make sense. The primary effort is to reduce the price paid by distribution utilities for solar generated electricity. Such actions have been seen in California, Arizona, Texas, Florida.
North Carolina recently approved new net metering rates which will lower payments to those with solar. The new net-metering rules are scheduled to take effect July 1. A settlement negotiated last year by three North Carolina solar installers and included in the utilities commission’s May order will allow existing residential solar owners to continue to be credited for excess electricity at the current standard rate for up to 15 years.
Under new rules approved by the utilities commission March 23, customers will be credited more during times of peak demand — such as early morning in winter and evening in the heat of summer — and less when loads are lower. Overall, it is expected to lower payments to residential solar customers.
In addition, the insurance industry in Florida is cancelling homeowners insurance policies for many who have installed solar. It is estimated that half of the state’s home insurance carriers are making the move. Add that to the already existing issue of declining coverage as the result of hurricanes and it will put even more pressure on government backed insurance plans.
HYDROPOWER
It is estimated that 45% of the U.S. hydro fleet has licenses that expire by 2035. Bipartisan hydropower permitting reform legislation introduced last week in the U.S. Senate would establish a two-year permitting process to install turbines on non-powered dams and a three-year procedure for pumped storage projects unconnected to waterways. The sponsors and co-sponsors are from four states with significant hydro resources and the partisan split is even.
According to the Energy Information Administration, the United States has 1,029 FERC-licensed facilities with about 80 GW of hydroelectric capacity and about 22 GW of pumped storage capacity. Last year, hydropower accounted for about 6.2% of total U.S. utility-scale generation and almost 29% of utility-scale renewable generation. The bill, The Community and Hydropower Improvement Act, S.1521, seeks to cut years off of the relicensing process.
It is the pumped storage issue which is most intriguing. The process has recently gained lots of attention even though pumped storage has been utilized for years. Municipal investors have long been familiar with pumped storage projects. About 35 GW of potential additional pumped storage capacity is available in the U.S. FERC is reviewing three pumped storage license applications in California, Washington and Wyoming totaling nearly 2,672 MW.
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