Senate Standing Committee on Budget and Fiscal Review

The Senate Budget and Fiscal Review Committee will come to order. We're holding our Committee hearing here in the 1020 O Street Room 1200. If all Members who aren't already here would please come, we'll establish our quorum. Just before I do that, let me say that public comment will be heard after the presentation and discussion.

And I invite members to comment on the budget in general, if they are here at the time, because we did miss one public comment period. We both have caucuses at noon.

And so, in the unlikely event that this goes on for a long time, we will try to cut it off by 11:45 so that we can get to caucuses. But we have a quorum in the room, so let me ask that you please call the roll.

[Roll Call]

Today is our last full budget hearing before our subcommittees start work on Thursday, February 26th. Today is an informational hearing only, and it is going to cover the state's Budget Stabilization Account, also known as the Rainy Day Fund.

And let me just say that when the Vice Chair and I were Vice Chair and Chair in the Assembly almost 20 years ago, there were no reserves. The only reserve we had in the budget was to just cover unanticipated expenses in that budget year.

There was no larger reserve that was designed to deal with the volatility that exists in the state budget. Additionally, and this is just speaking for myself, you always have the option to address volatility by amending the tax structure.

And yet, to amend the tax structure, to do that, it probably means you have to give a tax break to the wealthiest people and increase taxes on people that are lower wage earners and middle-income people. That, politically, is just not viable.

And so, it leaves us with the option of dealing with volatility through the Rainy Day Fund process. And it was established 10 years ago by initiative, and we now have 10 years of experience and we now have volatility that seems to be more pronounced.

And in today's hearing, we will discuss that and discuss the options we might have in putting all the facts on the table and deciding if we have reforms that we would at some point like to make. That is—are the contours of today's hearing. And we will—we have one panel. We will have the panel.

Then we will go to members' questions and comments and then public comments. And before we go to the panel, let me ask the Vice Chair if he has any introductory comments he would like to make.

Yes. Thank you, Mr. Chair. And I remember that time, 20 or so years ago. And let me say that budget reserve policy is one of the truly fascinating, engaging, and interesting topics of the entire budget universe. And you can tell that by the throngs of public that are here in this hearing this morning.

Everybody is fascinated by this subject. I jest a bit, I guess, but the fact of the matter is, I believe that it has been an important issue to me in my entire time dealing with public sector budgets. Senator Laird is right. Changing the tax structure is not going to happen.

But we can change the way we use it so that we effectively do the same thing by monitoring its use, and that's always been my preferred approach to it. And we were in dire straits back in 2009. No reserves and no cash. Even though we passed the budget in February, we ran out of cash that summer.

And I remember the Controller had to actually withhold payments to some folks, which would have been far worse had we not passed that budget. But part of the result of those negotiations was a proposition on the ballot in 2009, I think, that would have revised the reserve policy substantially and very much in line with what the LAO has discussed recently.

And given the way that would have handled the surge that we had in revenues back in '20 and '21, we would be nowhere near in as much trouble today as we are.

So, the reserve policy can truly, truly assist our budget writing woes in very positive ways. Proposition 2 was not enough. What the Governor proposed last year was not enough. And I look forward to the information that we get today and the discussion.

Thank you very much for that riveting speech.

Yes.

And I, for purposes of AI and reuse, love the sentence that Mr. Laird is right. So, we will take that out of context, paste that in a number of places through the year. I appreciate that. So, let me invite our panel to the table.

We have with us, Ann Hollingshead from the Legislative Analyst Office, Carolyn Chu from the Legislative Analyst Office, Lisa Mierczynski from the Department of Finance, Irena Asmundson, who's from—the CEO of Practical Idealism Economics, and Scott Graves, the Budget Director of the California Budget and Policy Center. And we will go in that order, if it's okay.

We'll start with the Legislative Analyst Office. Welcome to the Committee.

Thank you so much, Mr. Chair and Members of the Committee, Ann Hollingshead with the Legislative Analyst Office. I'm going to be speaking to you today from a handout which hopefully you do have a copy of in front of you.

And because this presentation is on the lengthier side, let me give you kind of a high-level roadmap of where we're going today. So, I'm going to start by talking about revenue volatility and what it means for the budget, where it comes from, why it's important.

Then, I'll discuss reserves at a high level and illustrative level, including how reserves can help the state mitigate revenue volatility. Third, I will talk about California's reserve system, including the current paradigm that exists under Proposition 2, as well as a kind of brief overview of the history of California's reserves.

Then, I'll speak about our evaluation of reserves, essentially our answer to the question of how do we know if a reserve policy is working or not, and how does the current reserve policy stack up against that evaluation? And then, finally, I'll conclude with some recommendations that are based on our analysis.

So, with that, I'm going to turn to the first page. So, why are California's revenues volatile? So, first of all, what does volatility mean? Volatility means that in any given year, revenues can grow very quickly, in many cases much faster than the underlying economy or than expenditures in other years that they're going to contract really quickly.

And the key reason for revenue volatility in our state system is the personal income tax, which makes up most of General Fund revenues. Personal income tax is volatile for essentially two key reasons. One, the incomes of high-income earners are more sensitive to changes in the economy and asset prices.

And then second, the state's progressive rate structure essentially concentrates the tax on those high income earners. And the graphic at the top of this page is going to show you essentially why.

So, on the left-hand side, we have components of the personal income tax that are much more stable that, you know, you can see are not so volatile. That includes pension, annuity income, wages income.

And on the right hand side of the graphic, we have types of personal income that are much more volatile, including capital gains, partnership income, dividend interest, and rent.

And high income earners are going to mainly earn income on the right end of the spectrum, whereas low and middle income earners are going to mainly earn income on the left end of the spectrum. And since the state taxes those higher income earners at higher rates, that's essentially doubling down on the already existing underlying volatility.

I do want to, though, draw your attention to the fact that capital gains are not the only source of volatility for the state. And that is just a little bit of foreshadowing for a point that I will make later. Finally, volatility presents two related but nonetheless separate issues. So, one is related to forecast error.

Forecast error just means that it's very difficult for our office, for the Department of Finance to forecast with a great deal of precision what revenues are going to be for the upcoming fiscal year. This is true both on the upside and on the downside. Excuse me.

Where, when revenues are surging, it's very difficult to predict how much they're surging. And when revenues are dropping, it's very difficult to predict how much they're dropping.

And that, of course, makes the budget more difficult to manage and more difficult to enact a budget that is going to be accurately reflecting exactly what the state's income sources are going to be for the upcoming year. A separate issue is downside risk, and that is really going to be the focus of the presentation today.

It is the main issue that is dealt with by budget reserves, and it is what essentially we are going to, as I already said, as we are going to focus on here.

Okay, so turning to the next page. So, I want to talk at kind of an illustrative level of how reserves work and how they help the state manage its revenue volatility. This graphic is, of course, purely hypothetical. It is not reflective of real data, as you can probably tell. But nonetheless, it's here to illustrate the point.

So, revenues are shown in that purple line. They go up and down, as we've already talked about. That's that revenue volatility. And then, spending on core services, what we think of the state's ongoing service level, the service commitment that has been made to Californians is in the green line.

And because of revenue volatility, you're going to have some years where revenues are surging, and they exceed that spending on core services. And then, you're going to have some years where revenues are contracting and they are, of course, below the level of core services. And revenues—reserves—are exactly what helps you smooth the difference.

It helps you bridge this gap. So, you save them when revenues are surging, and then they're available for when revenues have declined. And they are essentially what allows the state not to disrupt the core service level when revenues have declined. Right? So, that the state can maintain its commitments even when we're in a period of downturn.

So, turning to the next page, I just wanted to give a kind of brief, high level overview of the history of California's revenue reserves because it really is, it is a picture that has certainly changed rather dramatically over time. So, this graphic goes all the way back to the early 1950s until today.

In the purple line, you can see what was called at the time the "year end enacted surplus or deficit," which we would now refer to as a Special Fund for Economic Uncertainties. This is essentially the difference between the year-end projected revenues and expenditures.

It's sort of like the small buffer that's built in at the end of the year. In the early 1950s through the early 60s, the state had something called the Revenue Deficiency Fund. And that was the only reserve that the state had to speak of until the budget stabilization account in the early 2000s.

So, essentially, as you can see, between the 50s, 60s, and 70s, the state had these really significant surpluses and also had built up money in its reserve. But then, starting in the early 80s, the state had almost no reserves to speak of. The only time that changed was with Proposition 2, which was passed in 2014.

And as you can see at the end of the period, the budget stabilization account has built up balances in those red bars accordingly. So, this really did represent a substantial improvement in the state's reserve policy. Turning to the next page. I want to give a bit of a high-level overview of how Proposition 2 works.

The formulas that are in the Constitution are very complicated, so I will not go into a huge amount of detail unless it's in response to questions. But I do want to just draw your attention to essentially two different basic components of the formulas.

And that is the base amount, which is a steady amount that is deposited each year into the BSA and excess capital gains. I'll also mention that Proposition 2 has requirements both for depositing money into reserve, as well as paying down certain eligible debts. I'm going to focus on the BSA side, but happy to get into debts, in response to questions.

So, how these two components work. The base amount, the state very simply sets aside 1.5% of General Fund revenues each year. Half of that goes to reserves and half of that goes to debt and then, in excess capital gains, the idea here is that the state wants to leverage some of that volatility in capital gains revenues that we've already talked about and set aside the peaks in capital gains revenues into reserve.

So, to do that, the state compares total capital gains revenues to a threshold of 8% of General Fund taxes.

And then, the share that is over that is what's considered "excess capital gains." Importantly, and this is also some foreshadowing for later, not all of the excess capital gains are actually deposited into reserve and go to debt.

There is another set of formulas that are also very complicated that determine how much of that share should actually go in. And I won't get into it unless there are questions about it. But the sort of bottom line point is that it's only a share of it.

I also want to just make sure that I mention that in addition to these rules, the BSA has a 10% cap on total constitutional deposits, meaning that constitutional deposits are required under the formulas until the BSA reaches a maximum of 10% of General Fund taxes.

And after that, anything that would go into the reserve is spent on infrastructure instead. That cap is also very important. So, turning to the next page. So, how do we think about how to evaluate California's reserve policy? How do we think about whether or not it's working?

So, I think it's important to first set the stage that we consider a reserve policy to be performing well if it meets the central goal of reserves, that is that it allows the state to maintain core spending even when revenues are declining.

And the time horizon over which we would want to measure this is not going to be years, but going to be decades, because we think it's very important that a reserve withstand the test of time, that it is adequate through multiple economic cycles, and not just one or two.

So, we do know in the future that there are going to be revenue downturns. We do not know how big they are going to be, how frequent they are going to be. But that said, we can use information about history to project or forecast a range of possible outcomes that we see for the future.

And this is very illustratively the point that we're trying to make in the graphic on this page. So, you can imagine there being lots of different scenarios for the future of the state. Right? Some of these scenarios might be more unfavorable, where this state has multiple downturns in revenues, or those downturns are very large.

Some of the scenarios could be much more favorable where the state has very few downturns in revenues, or those downturns are very small. We don't know which one of these the state actually, you know, sort of the future will hold.

But we can make a forecast of what is the total range of the scenarios that we're looking at. And then, we can choose a scenario to benchmark against or to say, let's make sure that the state policy performs well in at least this kind of scenario. So, how do we choose that benchmark?

Well, you might think, well, we should choose the median scenario. But the problem with the median scenario is that then it's going to be successful half the time, and the policy is going to fail half the time. And if we're in the time that it fails, then it looks like the policy that has been enacted is, is not at all what the state intended.

So, instead, we follow the practice of what is done commonly in actuarial markets, in pensions, in insurance, and we pick a scenario that is an unfavorable one, but not the worst possible case. And in this case, we're picking the 90th percentile.

So, if you turn to the next page, essentially what this means is whenever we talk about how we're evaluating the state's reserve policy or how we're evaluating alternatives to the state's reserve policy, what we're talking about is what share of funding shortfalls, what share of those red shaded regions, is the state able to cover in that 90th percentile, in that benchmark scenario, over the course of 50 years?

And so, our analysis found that for the current policy, for essentially what exists under Proposition 2 today, the state would be able to cover about a third or 30% of funding shortfalls over the next 50 years in that benchmark scenario.

That is obviously a significant improvement to 0%, which would be what would be the case if the state had no reserve policy. But at the same time, 30% suggests that some more improvements are warranted. So, turning to the final page, this includes our recommendations for how to improve reserve policy based on this analysis that we've done.

And we have essentially two different recommendations with two options in the second one. So, for the first recommendation, we suggest that the Legislature raise the cap from the current level of 10% of General Fund taxes to 50% by 2055. This is, in fact, the most important of our recommendations.

One of the really surprising parts of our analysis that we had was that, in fact, the only way to improve upon the state's current rules is to raise the cap.

That even if you significantly change the deposit rules but kept the cap at 10%, that that wouldn't cause kind of a significant increase in the state's ability to cover more funding shortfall, and that's because that 10% cap is really limiting. So, we consider this the most important part of our recommendations.

That said, the 50% need not take effect immediately would certainly take time for the state to be able to build up reserves of these magnitude.

So, we would suggest, since this would have to go before voters, that the Legislature ask voters to make a 20% cap effective immediately and then increase that cap by 5% every five years until it reaches 50%.

If the cap is raised, then the state is going to want to deposit more money into reserve in order to dependably reach this higher level sort of consistently over multiple economic cycles.

And for that, we have two options for the Legislature to consider, either of which would help put aside more in those peak revenues, those really significant surges in revenues that we've seen, especially in recent years.

So, the first would be to create a new set of more flexible, robust deposit rules that capture volatility not only in capital gains, but volatility across all types of tax revenues. And as I mentioned earlier, capital gains is, of course, the most volatile source of income, but it's not the only source of volatility.

And moreover, we don't know that it's going to be the exclusive source of volatility going forward. So, we think it's important, as kind of a risk management strategy for this state, to hedge against various kinds of risks with more robust rules.

That said, replacing the rules of—for—proposition 2 kind of in whole cloth may not be feasible.

And so, we've also offered a second option where the Legislature would set aside the entire amount of those excess capital gains that I mentioned earlier to essentially get rid of the very complicated formulas that set aside a portion of them and instead to set aside the entire amount.

This, too, would allow the state to put more money into savings when revenues are peaking significantly. So, those are our recommendations, and I'm happy to take questions at the end of the panel.

Thank you very much. And it was our intention that you do what you just did, which is lay it out in wonky detail, in a way that we can all have a conversation afterwards. Do you have anything you would like to add? Okay, thank you. We will move to the Department of Finance. Welcome to the Committee.

Good morning. Lisa Mierczynski with the Department of Finance. Thank you for having me and also thank you for having this very important discussion. Ann laid out nicely some of the issues that we're facing.

So, last year in the Governor's budget, the Administration proposed two changes to the BSA, one of which is increasing the cap from 10%—or the cap on deposits from 10% to 20%.

And the other was to exclude appropriations or deposits into the reserve and out of the reserve from counting against the SAL appropriation limit. The state appropriation limit and the cap tend to be the two primary reasons that limited our ability to deposit more money back a few years ago when we had large surpluses.

So, we felt tackling these two issues, we're still maintaining the intent of the BSA as it was presented to voters initially, but also just allowing a little bit more flexibility for the Legislature and the Administration to put more reserves aside that we could use for future budgets. So, with that, I would be—welcome any questions or can answer questions later. Thank you.

Thank you very much. Now, we'll move to the CEO of Practical Idealism Economics. Welcome.

Thank you very much to the Committee. My name is Irena Asmundson. I am the Founder and CEO of Practical Idealism Economics, formerly of Finance. I would like to thank the Committee as well for dealing with this very important issue.

If the state of California's health, in terms of our economy, were to be done as a Hollywood movie, this would be at the heart of the drama, I think.

So, as the Chair and the Vice Chair laid out, the reserve policy of California was done because of the deep trauma that the Legislature had to deal with in the last couple of downturns.

Unfortunately, when the reserve policy was set in place, I don't think that some of the structural changes that have happened to the economy were contemplated. So, I'm going to be a little bit depressing. I'm very sorry.

Things that have happened that are probably going to mean that the reserve policy is inadequate are the increasing inequality of the economy has meant that people are much less likely able to self insure.

So, during a downturn, we have an unemployment insurance system, and we want to make sure that people pulling back on their own spending does not further exacerbate a recession, which is a possibility. That is what the unemployment insurance system is set up to do.

California's unemployment insurance system has not been updated in decades and so, people are not going to be able to keep up their spending and structurally, that is going to mean that California's next recession is probably going to be worse.

During the pandemic, the Federal Government spent a lot of money to supplement unemployment insurance and that greatly helped the economy not go into a downturn. It is very unlikely that in the next recession the Federal Government is going to do a similar thing.

That is partially because the current Federal Administration is running very large deficits at a time when they should be paying down debt. They have exacerbated inequality through tax policy, and they have also shown, at least the current Administration, that they are going after their political opponents.

In other words, if they wanted to fool around with California, they would be able to do so through a number of administrative mechanisms. So, for example, in the last recession, California borrowed tens of billions of dollars, about 20 billion, from the Federal Government to pay for our unemployment benefits.

That does not cover all of the extra supplemental benefits of $600 a week that we got from the Federal Government. The Federal Government paid for that entirely. Right now, the unemployment insurance system of California tops out at $450 per week in terms of benefits. That's for the very top earners.

That is $1,800 for four weeks or just under $2,000 per month. That is completely inadequate to keep people from becoming homeless. During the pandemic, we also put in place moratorium on evictions, which helped a lot of people stay in their homes. Again, I don't know how likely that's going to be during the next recession.

So, California has some structural problems that the Legislature is going to be called upon to fix in the next recession and the current reserve system is not going to be large enough to meet those demands. So, that's the depressing part. The encouraging part is that there are things the Legislature and the Governor can do right now.

One is update the unemployment insurance system. The other is to look at structural spending controls and look at the structure of how we are helping the people of California.

The other thing the Federal Government has done has been to completely change how the Affordable Care Act is working and the kinds of money that is available to states there. California has a very large share of people who participated in the ACA—I am among them—also who are covered under Medi-Cal.

I think at the last count it was around a third of the state is covered by Medi-Cal. We do not want people to be losing their health insurance during the next recession. Unfortunately, health costs are still a source of bankruptcies for people. They're still a source of huge financial stress for people.

And it is going to be very difficult for you politically to cut off those or reduce those when people are looking for work. The other structural change that has happened is that many more people now rely on gig work. Gig workers, unfortunately, are not covered by many of the benefit systems.

And so, they are doing gig work because they can't find other jobs that are adequate. They are not making a living wage probably, and they are probably finding it completely impossible to build up the kind of emergency safety nets that they would need to self-insure.

So, those people are also going to be in need during the next recession. You, as the Legislature, are probably going to be under pressure to do something about that. So, again, you can think about structural issues such as updating the unemployment insurer system or expanding the safety net or looking at who is covered under what circumstances.

So, I am very encouraged by the fact that you are thinking about reserves. Please also think about the structural spending side and the other safety net issues at the same time because that is what the reserve system was set up to help you deal with. And I will take questions at the end of the panel. Thank you.

Thank you very much. And now, we'll move to the Budget and Policy Center representative. Welcome.

Yes, thank you, Mr. Chair and Members. Good morning. My name is Scott Graves. I'm the Budget Director at the California Budget and Policy Center. We're a research and analysis nonprofit that uses our budget expertise to advance policies to improve the lives of Californians.

We appreciate the opportunity to join this conversation today around the state's reserve policy with a special focus on the Budget Stabilization Account, or BSA, or Rainy Day Fund. So, over the next couple of minutes, I'm going to focus my remarks on two key concepts, balance and diversification and I'm briefly going to weigh in on the kind of Rainy Day Fund reforms that we think would make good sense.

So, let me take these one at a time, starting with balance. Two things need to be balanced. First, saving for future emergencies and second, meeting the critical needs of Californians.

The Budget Center has long agreed that saving for a rainy day is an important fiscal practice that helps prevent deep cuts to vital public services during budget emergencies.

But building reserves must be balanced with generating and committing the resources needed to both build a California for all and protect Californians from the deep cuts made by HR 1, the Bill signed by President Trump into law last year.

We know that HR 1's cuts are likely to cause millions of Californians to lose health care and access to vital food assistance. We also know that Californians are looking to state leaders to address the many affordability challenges they face, including lack of adequate access to childcare, food assistance, health care, and so much more.

Reforming the Rainy Day Fund shouldn't come at the expense of of addressing these substantial challenges now and in the future. Let me turn now to my second point, diversification. When it comes to solving a budget problem, the BSA, or Rainy Day Fund, clearly is important, but it isn't the only game in town.

State leaders, you, have multiple options for closing budget shortfalls. For example—I'm going to use a word we haven't used yet this morning, for the most part—you can raise revenue, a tool that's been used multiple times going back decades and under current BSA rules, would actually increase state reserves.

The state can also borrow from internal funds, a common practice that's been used multiple times and that the LAO highlights in their excellent report. And let's not forget that the Legislature recently created a new account to better manage revenue surges and avoid self-inflicted budget crises. As a reminder, I always have to look this up.

The name of the new account is the Projected Surplus Temporary Holding Account, long name. This account hasn't been used yet, but the idea is to allow the state to avoid committing revenue that later fails to materialize.

So, while the BSA is a critically important tool for helping the state to close budget shortfalls, it is just one of several tools in the toolbox that state leaders can use to solve or even avoid a budget problem.

So, with these points in mind, we think the reforms that were proposed by Governor Newsom last year strike a good balance. They were described earlier on the panel. I'm not going to redescribe them. I'll just say that if adopted, the Governor's proposal would facilitate greater savings without being overly rigid and hindering spending to meet Californians' essential needs.

The Governor's approach also would make the BSA significantly more effective. And here I'm going to cite the good work of the LAO. Under the Governor's plan, the BSA would cover around half of future funding gaps. That's up from 1/3 under the current rules. This is according to the LAO's analysis.

And keep in mind that this major improvement would result simply from doubling the BSA cap from 10 to 20% of General Fund tax revenues and would not require the state to shift a larger share of annual state revenue into the reserve.

So, in short, the type of reform suggested by the Governor would allow California to save more for a rainy day without taking more resources off the table to meet Californians' critical needs. So, I'm going to sum up my three major points here to close out.

First, we agree that it is crucial to responsibly manage California's revenue ups and downs and set aside funds for a rainy day. We also strongly believe that any BSA reforms must be balanced with meeting Californians' needs, while also recognizing that budget reserves are just one tool in the budget balancing toolbox.

And finally, we think the modest but effective Rainy Day Fund reform proposed by Governor Newsom last year strikes a good balance. Thank you and happy to take questions.

Thank you. I'm going to ask a few sort of level-setting questions. Senator Niello's in line. Let me ask. There's Senator Cabaldon, Senator Grove, Seyarto, Reyes, Durazo.

Oh, okay. Sorry.

All of us.

No, no, no, no. I'm not automatically having all of us do this. Okay. Okay. We have quite a line. I have Niello, Cabaldon, Grossiarto, Reyes, Durazo, Richardson, Weber, Pearson, Smallwood Cuevas. And I will look forward to saying that Senator Durazo is on deck point because she does a fake swing of the bat whenever it happens.

So let me just lead off with a few questions.

And first for Ms. Asmundson, given the fact that, and I should make an observation along the lines of what the vice chair said, we must have had 70 people at one recent hearing testify about potential expenditures and cuts, and yet this hearing will affect our ability to deal with those more than anything else.

And nobody's here, so it's our job to educate people as to how important this is.

And Ms. Asmundson, given the fact that we now have a couple of months revenue forecasts that are above what the governor's revenues were when he shut down the revenues for his proposed budget, how would you recommend, because you called out services on that side, how would you recommend the Legislature consider balancing these two things between funds for program and services as opposed to setting some of those or a lot of those funds aside in reserves?

I am actually not going to comment on that, in terms.

You're not in finance anymore.

Old habits die hard. It very much depends on what the Legislature would like to protect and what they would like to bolster. I come from mostly the revenue side.

And so in times like this, when I am extremely worried about the future forecast and uncertainty, my first instinct is almost always to put it into reserves to preserve your ability to deal with unexpected situations in the future. And doing that in conjunction with also opening up discussions about how to do structural reform.

To do structural reform almost always requires some sort of compromise. And if you have cash to make those compromises a little bit more palatable, that can use short term revenues to solve longer term problems.

And so my personal opinion, which should not be taken as like the opinion of anyone who has previously employed me, would be put it in reserves and start those structural discussions, because those are going to be very difficult. There's a reason why unemployment insurance has not been reformed in decades.

It's because it's difficult to know how to balance taxes on employers and also the level of benefits that would be adequate to help people during recessions.

Does anybody else wish to comment on that before I go to the next question? Yes, the legislative analyst.

I think we might have a related but maybe slightly distinct perspective on this issue. If you think in any single year there is going to be a trade-off between putting money into reserve and spending it on programs. But if you're thinking over a longer period of time, those things are one and the same.

Putting money into reserve is what allows the state to spend money on programs later. And so when we do our analysis, what we're doing is we're saying we're going to take the state's revenue structure as it currently exists as given. The Legislature, of course, has the possibility of expanding revenues and expanding the size of government.

But under the current revenue structure, what is the level of state service that is affordable and that is going to then dictate what your reserve policy should be, because that reserve policy is going to be what allows you to afford that service level.

So I guess we often hear this presented as a trade off, and it is certainly a trade off in any single year. But we also think it's important to shift the framing to understand that reserve are about being able to afford the state services.

Thank you. Anything Budget center.

Yeah, I would just note that affording state services, let's keep in mind, isn't dictated solely by the existing tax system. You, as policymakers, along with the Governor, always have the option to revise that system if you wish, to bring in more revenue in order to use that revenue to support a higher level of services, if you wish.

So I want to make sure that as you all are thinking about reserves, it's not just reserves versus spending, it's how do revenues fit into the mix as well. And I know you all have different opinions about this when the term revenues and tax increases comes up.

But it's really important to keep that in mind rather than letting the conversation strictly be limited by we have a tax system. It's imposed on us somehow. We don't know where it comes from. This is what we're working with.

In fact, you all created the tax system and you all can revise that system as needed to provide the level of services that Californians want and need. Thank you.

And then let me ask a question of the lao. Do you believe there was a specific rationale for treating a deposit in the budget stabilization account as an appropriation for the purposes of the state appropriations limit? Or was this just an unintended consequence of two overlapping processes?

No, it was not unintended consequence. If you look at the kind of broader media discourse that happened around the time that both Proposition 13 and Proposition 4, which was what enacted SAL in the 70s, took place, it was Very directly related to.

If you turn to page three and you see that kind of massive spike in what we would call the year end surplus, there was absolutely a response from the greater public and from the media about what was called, quote, unquote, obscene surpluses at the time.

And so the, the SAL's restriction on having deposits count toward appropriations that are subject to the limit was a way of addressing what was seen at the time as a problem. Of course, the state's revenue system, budget picture, tax system are completely different today.

And so for those reasons, we think that there, and we've mentioned in reports on the sal, we think that there are some inconsistencies that are created by having reserve deposits at this point be appropriations subject to the limit. But there was certainly a rationale at. The time that it was passed.

I don't want to get in. I want to appear for the moment to be agnostic on Proposition 13. But when Proposition 13 was enacted, it contributed to the volatility that's happened in the decades since by removing one of the more stable sources of or lowering one of the more stable sources of revenue and contravention to the others.

No, go ahead. When you're reaching for the microphone, take that as an ask to be recognized.

Oh, Carolyn Chu, Legislative Analyst Office. I would offer, and apologies, I wasn't sure if that was a question.

I would offer that, you know, as the Committee knows, in response to Proposition 13, the state, and subsequently Proposition 4, in which the state appropriations limit was created, that the state did become a much more active participant in funding what had prior to Proposition 13 been local responsibilities.

And so to your point, the growth in property tax revenues was certainly sort of muted by the passage of Proposition 13.

But then the confluence of that with increasing the state's role in the provision of local services has created a dynamic in which sort of the state's revenue picture and local government's fiscal capacity are now intertwined in a way that they had not been prior to that time.

Thank you. Anybody else wish to comment before I move to my last question? Is this for you, your opinion?

This is. I am happy that Prop 13 came up because it is the thing that drives all of the revenue volatility. I would like to point out that at the time that Prop 13. I'm so sorry that my phone seems to be going off at the same time that Prop 13 was passed.

It was, as the LAO notes, people were very outraged at the amount of surpluses that was partially as a result of all of the inflation that was happening at the time of the oil crisis shock.

And also at the same time, the Serrano decision, which said that the state was responsible for adequately educating California children, meant that there was going to have to be some local revenues that were redistributed from richer districts to less wealthy districts.

And so there is academic support for the idea that Prop 13 itself was passed for racist impulses. It has completely driven all of the revenue decisions ever since then. And even though Prop 13, I acknowledge, regularly polls at 67% approval, I think that this is an overdue conversation that California should be having. That's my personal opinion. Thank you.

Any other comments before I move on?

Mr. Chair?

Yes.

Just had a question. You said Prop 13 was passed as a and I didn't get the next words.

There is some evidence because things like Prop 13 had been proposed as an initiative before it actually passed in the 70s. There are arguments that have been made that the reason it finally passed was one the outrage of the surpluses.

But also people were unhappy that the idea that their local taxes were going to be redistributed to less wealthy districts. And so there was some racism involved. Thank you.

Then let me move to my final question and address it to the Department of Finance. And that's that the governor's proposed suspending the true up deposit into the budget stabilization account for the 25-26 fiscal year. Would that be a priority for the Administration if there continues to be like, higher than anticipated revenues?

I would have to take that back. That's part of our budget proposal as it stands. And I don't really know where the Governor, the Administration stands with changing it if there is more revenues.

But it was, it is something that is consistent with what we did last year and is part of the emergency declared with from last year. So. But I would have to take that point.

We would like to jointly reflect on that with you over time and discover if that's a place that we might be going. Just given what's happening since the Governor locked down the revenues.

We would be happy to have those conversations.

Okay, thank you. I'm going to go to the list. I'm going to start with Senator Niello and Senator Cabaldon is on deck.

The question of Department of Finance. In your comments you talked about the limitation of reserve deposits, particularly during that high surge of revenues.

But there is still the ability to at discretion make additional deposits to the reserve, as Governor Brown did prior to him departing, which left the budget in much better shape when he left than when he arrived. So perhaps you could Answer that question.

So that was true under Governor Brown. But what happened in 2020, 21, 22, 23 and 24 is we hit the state appropriation limit. And since all appropriations, any reserve, whether they're decrysto discretionary or into the BSA count against the state appropriations limit, we were unable to do so because we hit the cap on the limit.

So we not only hit the cap, but we also hit the limit for state appropriations limit. So any dollar that goes over that limit either needs to go back taxpayers, which we did quite a bit of that, but also or towards like infrastructure spending, et cetera.

Interestingly, that was a very unique time. The appropriations limit limits the growth in spending to population growth and income growth, which I would submit makes absolutely no sense. It means that the demand for public spending is a direct proportion of increasing revenues. And the reality is the exact opposite of that. So we'll probably never experience.

We never experienced that before and we'll probably never experience it again because it was such a unique time of the pandemic and what I call the dollar bills from helicopters coming from Washington D.C. which had a huge on where we were.

So another thing about history, by the way, it is fascinating, but many times it is totally unsettled. And the fundamental reasons for Proposition 13 have been debated ever since Proposition 13 passed. I would suggest that fundamentally the problem with property tax is it's the only assessment on personal resources that is not cash based.

Income tax, sales tax, every other tax is based upon transactions that by definition involve the possession of cash. Property tax doesn't do that. And what was happening in California at the time was increasing property tax rates, particularly for people on fixed incomes that didn't have the cash. They had the property, but they didn't have the cash.

And while there could have been other issues, as you suggested, that might have compounded the desire for the reform of property tax, I would suggest it was fundamentally that people couldn't afford it.

They had property, but they didn't have the cash to go along with the increased value of property that local governments were imposing in the property tax rate. So history is a fascinating thing sometimes, as I said, it's not totally settled, but I have a little bit different view. So a couple of comments.

First of all, the essential role of reserves in the LAO's report, it's so that the state can pay for spending on its core services when revenues drop. I would suggest another way of stating that is to avoid unsustainable spending commitments.

That's the role of reserves and I think it's important the two latter testimonies were calling us to, I think, emphasizing think of the safety net, consider revenues and balance the whatever you're looking at against the needs of today.

Now, I think we can all probably agree on the statement that regardless of the level of tax revenues that are available to us, whether it's limited by a reserve policy or not, there is never enough money to meet all of the demands that people have. There just isn't.

So while those are very good points to maintain safety net to think about the thieves of today, the level of that is in the eye of the beholder.

And given that there is no level of revenue that would meet all potential demands, it still remains that, particularly given the volatility of our revenue sources, that there has to be a way to establish a sustainable level of funding so that we don't spend spikes in funding and then have to pull the rug out of programs that we established at a particular time because we had the money and everybody wanted those programs.

That's the purpose of reserves, to put a small G Governor on the spending of very high revenues. Speaking in the automotive sense, I used this the other day. So I think it's important to realize that.

And it's good that you raise the issue of revenue because certainly that is part of solving a current budget problem and there are some proposals. I suspect that there aren't the votes to go in that direction, but I think it's certainly, certainly we have to consider that that could be part of it.

So the, I want to make sure that I get the other points that I had gotten here. The with regard to our existing reserve policy, the LAO talked about Proposition 2 having a complicated set of rules. There's two problems with Proposition 2. Number one, as we're seeing today, it is inadequate. Number two is exactly that complication.

I have always believed that the best way to limit spending is the simple way you establish a moving average of revenues over a 56 year period. And when revenues exceed that average, those all go into the reserve.

And when revenues drop below that average, you can automatically use the reserves and that maintains steady spending by putting a, as I said, small G Governor on the ability to spend revenues.

And the challenge with that is when we have really high revenues like 20 and 21, and that moving average sinks a significant amount of money into the reserves. People who want to either enhance programs or establish new worthy programs are going to be very frustrated with it.

But when we come back to a time like today, they're going to be happy that we did that delayed gratification, whatever seems to me that is far more simple and I think would be far more effective in the longer term.

And that proposition that I referred to in 2009 or 10, whenever it was, was essentially that it didn't pass but would have made today's challenge significantly easier.

Thank you very much. Appreciate your comments and questions. We'll move to Senator Cabaldon and Senator Grove is on deck. And if she's not back in time, Senator Seyarto is next. Senator Cabaldon.

Thank you, Mr. Chair. And I want to really applaud the whole, whole panel. I took the chance to read a few other similar reports in other states. And the LAO report from last year that is the subject of the slides today is far and away the best in the country at applying this methodology and also making it reasonably understandable.

A subject that's fundamentally not comprehensible, done a really excellent job. And then to test it against the actuarial scenarios I haven't seen before last year. And it's a really important contribution. And I want to agree almost in all points with my colleague from Fair Oaks in Sacramento County, the vice chair of the Committee on the fundamentals here.

I first sat with the Assembly Budget Subcommitee when I was 22, which was three recessions ago. And so I've seen this movie play out before. And how seductive or how intoxicating the upside revenue being on top of the purple line, how it feels and how it feels like there's so much more need to be met.

And particularly in the last decade where even though the civic discourse around the Capitol and my district has been sort of like the job, the Legislature is to do a really great job of figuring out what do people need and what do they deserve and then how do we fund that, which is a radically different conception of what the job of state government is relative to state government's entire history or every other state government in America.

They don't start with that supposition. They're more of here's our resources. What share of those needs and what we deserve can we meet? Which is essentially what a nonprofit does, a small business or family sitting around the table.

This has uniquely been a place where we felt our role in society was to keep finding more needs and then meeting them. So I think the challenge that the vice chair has raised is a real one for us. And that political dynamic is so powerful.

And also the political resistance to revenue measures, especially during downturns, makes sort of a but you can raise taxes later whenever there's a downturn. That's not a real strategy. Honestly, it's not. I've lived through a bunch of these. No one is prepared to do that at any sort of scale during the downturns.

And even if they did, when you get back on top of the upside curve of the line, then you have a state appropriations limit problem. So the notion that we can just continue to spend and then we'll just raise revenues when we have a quote unquote emergency isn't a real strategy and we have to face that directly.

I also don't like the rainy day fund name. It makes sense to me as a person from this part of the state because it rains all the time, as everybody knows. But I feel like rainy day fun means something different to people from LA and San Diego where it doesn't rain that much.

So like, oh my God, once in a while it will happen. Rainy day fund meme. It's like we have to be ready for next Thursday, like it's going to rain all the time. And so conceiving this as an emergency fund is really, I mean, I think that's one of the most important contributions of the LAO report.

This is a periodic shift. It's going to keep happening and we have to budget for that as a normal part of the benefit that we get by having a progressive tax structure that puts most of the burden on the wealthiest, as it should, maybe it should be doing even more.

But that policy means that we have to accept that level of volatility. So I, and I really appreciate also LAOs pointing out the obscene surplus that led to that was a significant contributor to Prop 13. Also Serrano.

But I guess I would take a slightly different view, which is that Serrano essentially meant that the effectiveness of local tax increases to support education went down to zero because the state was, except for the few basic aid districts, the state was going to backfill it.

So but that said, and also to disagree with the vice chair, I was only a small child when Prop 13 passed, but I don't recall anybody having these kind of tax policy discussions at the time. So trying to impute a whole bunch of meaning to what the voters were thinking.

But it was clear even to a six year old that there was that the state had a lot of resources. And so building up, building those up through just revenue solutions, every downturn is going to.

Will lead inevitably at some point to a public backlash of the scale of Prop 13 that we're still having to live with today. And so we cannot simply. That's not a long term strategy.

I do have a question, though, and that is around LAO, you kind of briefly have touched on the infrastructure piece and I want to explore that with you.

And then Ms. Asmundson, who I just want to point out as a Member of a very important family in my own district and the former mayor of Davis, two mayors of Davis's family, which is on the countercyclical side, because what I absolutely loved about your presentation, Ms. Asmundson, is that the state is most needed in the downturns.

So it's not just about how do we hold on for dear life when the downturn inevitably comes next Thursday, metaphorically, but it is that we will be even more needed because our people will be hurting much more and also the hurting of our people will intensify and have a feedback effect and make the downturn even worse.

That means we have to be as healthy as possible in those moments. So to those points, so you mentioned infrastructure.

And so I'm curious with respect to the reserve and also the GAN limit issue, whether we can be more expansive and are thinking about infrastructure being equally allowed as refunds or reserve deposits and what the implications of that are.

I've been thinking about this a lot because bond financing and I'm carrying one of the major bonds this year, so I'm a big believer in it.

But bond financing makes is more sensible when you have steady revenues and you're going to borrow against it over time when you have radically volatile incomes, it may make more sense or may make sense also to be doing some pay as you go.

Infrastructure financing when you have $50 billion more revenue than you thought you were going to have, maybe that's, maybe it's better to spend some of that than it is to issue a bond against that longer time, including the downturns. So I'm curious if you can go a little bit more into the infrastructure side of the equation.

How we might think about that issue in terms of that's also part of our reserves in some sense in terms of the state's capital.

And then second, similarly, but we've never dealt this with this before is can we imagine making more countercyclical investments within the state appropriations limit, for example, at a downturn or even at the higher level, say we were bumping up against the state appropriations limit.

And right now we can do refunds or make other rebates, essentially, we can make some infrastructure investments. Maybe you'll talk to us a little bit about that.

But could we imagine a change to that limit that would also allow us to make investments in countercyclical things, including the kinds of changes to the unemployment, things that cost a lot of money, but that will be necessary for the inevitable downturn as well. Have we thought about that?

Note that part of the equation kind of strengthening the resilience of the state and of the people of California when we're at the up and we're hitting that limit so that we're better prepared when we're at the down.

Yeah, I might offer a couple of thoughts because this is certainly something that our office has thought about, and it's a complicated point, but nonetheless, you know, certainly agree a very important one. The Legislature has a good amount of flexibility to define what infrastructure spending is under both Proposition 2 and SAL. They are very similar definitions.

In both cases, I would have to, you know, kind of think about whether they're exactly the same, but actually, I guess they are not. But in the case of Proposition 2, when the state has hit that infrastructure requirement in the past, the money has mainly been used to offset bond debt service.

And essentially what that means is that it has been used as General Fund spending. It's essentially supplanting existing General Fund spending and in the case of the sal, to some extent, infrastructure spending. When we're at that peak and we've spent a lot more on infrastructure, to some extent that's supplanting General Fund spending.

And in some cases it is new spending that we would consider kind of supplemental. In both cases, though, to address your point about using the infrastructure requirement to improve resiliency of the budget, we have suggested in the past that the state could put the money in an infrastructure fund as opposed to for direct expenditures on infrastructure.

We think this is almost certainly allowable under Proposition 2, likely allowable under SAL as well, and that that would allow the state to.

Essentially, it's like a reserve, but a reserve that would be pegged only for infrastructure, and it's a way of improving the budget resiliency during the upswings that allow for the state to use some of that money in a productive way during the downswings.

It is, of course, though, admittedly, a workaround to the existing requirements, and a cleaner and better way that we've also suggested in the past would be to make deposits excludable from SAL themselves.

Yeah, that makes sense. And the challenge with workarounds is that they tend to be voluntary. And maybe I'm taking up the chair's offer to jointly reflect on the suspension of the true up money.

If we can't if we need to suspend the BSA payments in a year when we have 43, 50 plus billion dollars worth of unanticipated revenue, it's just, it's a very clear marker or signal of what our system doesn't really is incapable of voluntarily doing these things. So we do need the constitutional mechanisms to accomplish that.

Then my last question, Mr. Chair, is on. I think Ms. Asmundson, you were talking about inequality being a major driver of some of this. I'm curious if you can talk to us. So the Vice Chair described how the state appropriations limit works, which is a function of population and economic growth.

But economic growth is measured by per capita personal income. oversimplifying. But that personal income figure is not in a small way influenced by the ultra-wealthy.

And so I'm curious that for the state appropriations limit dimension of this, if we didn't have the ultra wealthy, the state appropriations limit would be dramatically lower as we think about the right because it's their ridiculous wealth that is driving at least the larger amount of the growth and limit.

If we only had the rest of us, the limit would be flatter over time. So have we thought about how we might make the limit itself less dependent on inequality essentially to allow us to be able to meet the service needs of the people of California? That's it. Mr. Chair, thanks. Just letting him know.

Go ahead.

Very quickly because I know lots of other people have questions. So I have not looked into what it would mean to change the definition of per capita income for the SAL.

I would like to point out, having lived through the experience of increasing the minimum wage and seeing the Legislature take that on as a legislative matter rather than as a state constitutional amendment, I'm very aware that there's unintended consequences all the time.

So if, if there was political appetite to do something about the SAL limit, I would maybe suggest that it gets repealed entirely with the commitment to take it on as a legislative matter because that gives the state much more flexibility. So that's one, two in terms of setting aside extra money for infrastructure.

That has the additional benefit of allowing for the state to take advantage of cheaper prices during downturns. So the state can't.

If they have that money set aside to do infrastructure, they can both help stimulate the economy and add to jobs, but also do it at a cheaper price than if they were doing it when they had to compete with the private sector.

There's this whole thing about crowding out and the government doesn't want to be too big because then it crowds out private investment but during downturns, the state or the government is not crowding anyone out and, in fact, is adding to the benefit for the economy.

So that is a great idea to sort of allow for this extra firepower, to have the state spend more during downturns.

Complete your questions. Thank you very much. We're going to move to Senator Grove and Senator Seyarto, who's on deck?

Thank you. Thank you, Mr. Chair. 350 companies left California in the last five years. We have put policies in place that, for instance, we shifted state policies from prison budgets. And I realize that we're talking about reserves, but we shifted state policies or state expenses from policies that pass.

That shift, like AB 109, where we shift state resources, like prisons closing. That's estimated to save what, $166 million a year? It's total of 3.4 billion so far. Based on numbers that are available online for everyone. 350 companies have left, including Oracle Valero just last year.

We've created Cap and Invest and Cap and Trade, or both the same. Just a name change. We have a company that just gave a war notice. 350 employees are losing their job. They're shutting down the facility because they got a $48 million bill from CARB, which is not you guys.

And I'm very offended that your solution is to raise taxes on businesses. Every single dollar, every single dollar that is collected by the state of California is from a business. If you go all the way back to the originating piece.

A business pays property taxes on the property they own, employment, taxes, fees, different policies that create additional taxes on them. And I have some of my colleagues in an argument last year were like, well, I pay taxes out of my paycheck. Well, it originates from an employer who pays taxes to the State Fund.

And they go, oh, well, we get money on the stock market, too. But you wouldn't have the money to if it wasn't from an employer paying taxes, whether they paid their employees and their employees paid taxes.

I have one individual that I just had a conversation with when I stepped out, because I got a call and he called like three times. They're moving. They're leaving the state of California. So it was just ironic that it happened right at this time. I said, what do you pay for taxes?

And he goes, well, last year I paid $18 million. How many of us does it take to make up that one guy? And he's leaving because of PAGA. He's done. He's written his last check. He's done. He's not going to unionize. PAGA was a Bill that says, and all those PAGA things go away.

If you join a union, it's just union extortion. That's how the policies are written. But they're done. So he's done. And that was a conversation I just stepped out and had. So to say that you're just going to raise taxes on employers. And by the way, the EDD payments are 100% employer funded. They don't contribute.

No one contributes to that. And we are, I think, in 2000. And he blamed it on President Trump. That was interesting too. But in 2008, President Trump was a talk show host or a talk show, I don't know, television show person and a business mogul.

He didn't have anything to do with the $32 billion that was overdrafted on that particular thing that it took employers 10 years from 2008 to 2018 to pay off. Let's think about that for just a second.

When you look at adjusting the EDD pie, employers had to, like for instance, a small business like I have had to pay $125,000 a year for the previous four years. Like four years ago in the 2008 part. We can't go back and bill our clients.

We can't go back and generate that revenue and put it into our budget to cover those costs. And then that bill increases every year into all the way up until the time that the total bill of the $32 billion is paid off. And now we're estimating $55 billion.

And they're saying that a huge portion of that was fraud. There was and I had a list of stuff that I looked up on the Internet. Somebody got an EDD employee, got fined, got put in 66 months in prison for taking $866 million out of the system under fraud.

There was like 20 top cases that was on the site I just looked at. But yet the solution is to tax employers more. A reality, the United States government has negative $17 trillion in tax deposits. China has $173 trillion in tax assets. In the positive.

We are in a situation where we have played the shell game way too long. We've moved stuff from the state level to the county's levels, putting counties in jeopardy. We're taxing employers to the point that they are going out of state. You're talking about Prop 13 that's being elevated when we have property tax issues.

We have to have real solutions. And taxing employers and just falling back on that is not going to make this state better. There are huge issues that we have to face. When you look at the benefits and the fraud that took place in these benefits.

When you look at housing programs, we spent a ton of money on housing. It didn't make a dent. In the process and then you have all this exposure going on where the one guy running a housing program bought his a girlfriend a Burmese bag. I don't know what a Burmese bag would. I had to look at it.

Google it right there. It's $174,000 for a Burmese bag. Somebody running a housing program has the ability to do that. We have serious spending issues with no oversight. And to keep letting revenues go out of this building without having some type of oversight on it and to fall back on just taxing employers.

These employers and these high wealth individuals that have created wealth, they have the ability to leave this state at a moment's notice. Do they want to? I don't think so. It's one of the most beautiful states in the United States of America. One of the most beautiful places in the country.

But they can't do it anymore with everything going on. I got a warrant notice for 324 employees that are losing their job. Now these are high wage jobs. These are equipment operators. And you know what they're going to do? They're just going to.

We'll get our soda ash that produces glass and plastic and borates in the state of California. We produce that mineral here. But it's going to go to China. They've already said that. So to say that you're going to tax us more as employers. I'm speaking from a small business that I've had for 30 years.

Sometimes in spite of this state is absurd. I look at the revenue. I think Valero laid off 328 people. I could be wrong. I think it's. I think it's 328 people. They were high wage dollar jobs. Those people paid taxes that went into our income tax to fund the state of California.

It was paid for by a business. The sales tax, the things that they would buy that would generate sales tax. It's a ripple effect of lost revenues in all areas. And to think that you can just revamp the unemployment insurance or increase cost for employers is completely absurd. And I'm actually very offended by it.

And we should have someone that's on the opposite side of the way. You think that money just grows on trees.

No offense, to counter offset that because there are people out there way smarter than me that can give you all the data of the money that we have lost because employers have left this state and it's the state of California policies that continue to increase that exodus. Again, deeply offended, Mr. Chair today. Thank you.

For the record, she was deeply offended with a smile. So we'll go on to the person who turned a new leaf and is thanking people. Senator Seyarto.

Thank you, I want to start off by thanking everybody for being here and creating a more robust discussion than I was anticipating, because we started getting into areas about Administration and then Prop 13 and some of these other things when I was hoping that we were really going to be focused on this issue of how do we create a more robust way of offsetting.

In other words, how do we create a better reserve system for California?

Now, one of the issues, as I was reading through here, and somebody did bring up the emergency word, my question for anybody who cares to answer it, do we have a difference between an emergency fund, an emergency reserve, and the reserve that we have now, the stabilization fund?

Is there a difference or is it all kind of combined into one concept?

By emergency, do you mean for, like, natural disasters and those kinds of emergencies?

I mean when a bridge falls down and they have to rebuild the bay Bridge for 6.5 billion, dollars, that kind of emergency.

In the past, our office has suggested that the Legislature establish a separate reserve account because they are very distinct kinds of risks. Right.

The revenue downturn risk that we've been talking about today is a distinct risk from there being an earthquake or there being a flood and that causing infrastructure damage that the state needs to step into to pay for. Of course, the calculation for those kinds of issues is somewhat different.

The expenditures associated with emergencies, the pandemic notwithstanding, although maybe somewhat inclusive, the expenditures associated with these tend to be much, much lower actually than revenue losses, because in revenue losses terms, we're often talking about tens of billions, $100 billion. Emergencies can, of course, cost the state in the billions of dollars, but it's a different order of magnitude.

Nonetheless, our office has recommended in the past having separate reserve accounts for these issues just to have, you know, some peace of mind that the state is prepared for both of these things happening simultaneously.

So, and I agree that that's something that we should be looking at is having an actual emergency fund, because over the years, we had the Loma Prieta earthquake that happened in 1989, and what resulted from that was a bridge that had to be rebuilt for six and a half billion dollars.

The I880 that had to be un-pancaked and rebuilt at a cost of 1.1 billion. But that was over a span of time. The Bay bridge took till 2014 to finally get it done.

Down in Southern California, we had several bridges fall down and we had one bridge that needed to be replaced because a tanker exploded underneath the bridge and they took it down.

Amazingly enough, they were able to replace both the I10 bridge and the i60 bridge in less than three months and at a cost of about 40 million for one and 30 for the other.

Those are the types of incidents that we should have an emergency fund that sets aside just to be able to absorb those type of things. When we have these massive brush fires and our agency CAL FIRE goes out and we have to expend a bunch of money on.

On overtime and reserves, well, what happens now is we do it, we absorb that, but then we spend the next two years trying to sue whatever we. Whoever we can find that we can try to pin the cause of the disaster on. So I think it's really important that that fund be established separate from that.

Is what this revenue stabilization fund. My concern with having really high revenue stabilization funds is it discourages the practice of actually being really conservative. When you're looking at your revenue streams and it's kind of like a boat or two sides where you have water sloshing back and forth. Yeah, you want to catch that.

But if you build it higher, people are likely to put more water in. So you have higher sloshes going back and forth.

I think that's a bad practice because I think we've already landed in this spot where we are today because we like to spend money and we like to spend a lot more money than we actually bring in.

And then we talk about what we're actually bringing in and who's actually paying that, that part of it, you know, the income tax earners. Now, there was a suggestion that we could just raise taxes on everybody.

So when you raise taxes on the people that actually pay the taxes, you're talking about taking them from 50% of what they earn in some kind of tax going to 60%. And those 60%, that difference is that many more people moving out. We have made California really unaffordable. And what we're losing, and I think.

I don't know whether people have their eye on the ball. We are losing our future talent because those kids are not setting up shop here. They are raising their families in other states. And some of those kids have higher and high incomes. They've been educated, they're attorneys, their doctors, or whatever they are.

They're making a half a million dollars a year. And guess where they're paying taxes? Not in California anymore. They're going to Colorado, they're going to Oregon. They're going to anywhere but here. Because looking forward they're thinking, you know what, this state is not going to support us being here.

We're just going to become donors for people who need help. We've identified that 38% of our population needs help and that's going up and up and up.

If you have 38% of the population needs help and that goes to 50, that means less than 50% and then only the high wage earners from that are able to help with the money, which means you're going to have to get even more money from that.

You keep raising taxes, the people that pay the taxes are going to leave. Where are you going to get the money now? My last comment is the Prop 13 comment. So my dad was an elementary school teacher in a poor district. He was actually one of the first special ed teachers in the state in the 70s.

So I was actually there and I got to watch his anxiety every time the tax Bill got there because my mom and dad were teachers. My mom passed away and he was stuck with three kids. Not stuck, but two of them were. Actually. He had to adopt and he had a new house to pay for, wasn't new.

He bought it in a foreclosure but they could barely afford that thing. There was no insurance. He could care less about what was happening with the school district.

His anxiety was every time he got that property tax Bill he didn't know whether we were going to be able to make it and we were going to lose that house. He was going to have three kids and not any other than moving into maybe his parents house to take care of them.

That's what the anxiety was back then. That's why he voted for that. When according to you, his district and him, he was susceptible to this racism. Absolutely had nothing to do with why people voted for Prop 13.

It had to do with affordability and the inability and, and the penchant for local agencies to just pile all cost of anything they wanted to do into your property taxes and present you with a new Bill that you could not predict how high it was going to be.

So that, you know, when you mentioned that that really brought up some kind of bad memories of the struggles we had to make in the 70s. So you know, that's not, that's, you know, I really was kind of offended by that. So you know, I appreciate that you think that that's how it happened.

But I can tell you from experience that ain't what was going on. What was going on is nobody could afford stuff because property tax are going out of control. The tax system already taxes us so much that we're losing people, we're losing businesses. And so we have to get a control on the spending part of this.

That's the part where we have to focus on. And what we have to do is stabilize what we our revenue, we have to stabilize our funds so that we can absorb the shocks to it, the emergency shocks, as well as this stabilization idea. I believe in the stabilization concept, I really do.

But I don't believe in making it even wilder than when we have now because all that does is allow us to think that we can spend more, even more than we're doing now with revenues that are pretty suspect going forward.

Because you can raise money, you can raise taxes all you want, but if there's nobody here to pay them, we're not, we're going to be in trouble. And I think that's where we're headed. And people like me, once the grandchildren move out, my wife gives us the we're moving out too. Yeah, we'll be gone, too.

And so we have to fix this and we have to fix it in a manner that makes California attractive not just to people, but the people that employ them because people with no jobs can't pay taxes either. So those are my comments about today's.

Thank you very much. We'll move to Senator Gomez Reyes and Senator Durazo is on deck.

Thank you, Mr. Chair. Some comments from the vice Chair. I really appreciate those. I think getting the history, just as my colleague Senator Cabaldon mentioned, it's important to look at that base, to look at the how things work.

I appreciated the comments from Mr. Graves that reserves are there to ensure that we can provide the services that California's want and need. California's are the ones that are paying taxes and some pay more, some pay less. Some are more blessed than others. They have a higher income. And so with a higher income comes more taxes.

And that is to provide the services that Californians need. Some cannot get that job. Some are not getting paid the minimum wage. Some are not barely getting by with minimum wage. Some have two and three jobs to try to take care of their families.

Something that my colleague said is not only it's what Californians want and need, it's what they deserve to live in the fourth largest economy. And we are still, even after people have left, businesses have left. We are still the fourth largest economy. So we still have the number of people that are needed.

We hate to see businesses leave. We hate to see the billionaires leave. We want them to stay here, but everybody has a reason for why they're going to make their decisions. I don't know why, but I just feel like I need to say that something that we hear is to whom much is given, much is expected.

We're blessed to have, the more we're making, the higher our income. Yes. We have to pay more taxes. We have an absolute responsibility. It is still a percentage. If you take a percentage of a low-wage earner, I mean, it's a lot to them. It's a lot to them.

And when you take that same percentage of a high wage earner, it's a lot to them. Also, it means more money for this great state that we live in. What a privilege it is to live in this state. I do want to move and talk about Prop 13.

I think Prop 13 for people like Senator Seyarto's father, I mean, it was meant to protect them. It was meant to protect our seniors. That was the purpose of it for those on fixed incomes.

We didn't want them to continue to pay more and more and more in taxes when they were going to receive more and more and more income. That's not the problem with Prop 13. The problem with Prop 13 is all those corporations that found the loopholes in Prop 13.

When you have a corporation like Disneyland paying no property taxes, there's a problem. There's a problem with our property tax system. When somebody, some corporation like, like Disneyland is paying no property taxes, that's a problem that our seniors that are on fixed income. I am grateful for Prop 13.

I am grateful for Prop 13 because that was the purpose of it for those with fixed income. But when those loopholes that allow all those corporations to just sell part of the property, maintain the rest of it and then take the property tax, the discount, because they found that loophole. We've got to close the loopholes.

We've got to close those loopholes. We have to revisit Prop 13. It cannot remain the way it is because the more we do that, then the less money is going to our counties. The less they're able to provide for the indigent, the more the state has to pick up. That has to be revisited.

Something that my colleague, Senator Cabaldon, my colleague from Yolo. All right, sometimes I don't remember where y'all are from, so I'm just going to call you by name. He mentioned that our people will be hurting. The truth is our people are hurting now. This is a time when our people are hurting.

I know that there's been lots of talk about HR1. The devastation to our state and it isn't to us. We're fine.

It is to those who most need the help, those who have the minimum wage jobs, those who have barely enough money to cover the roof over their head, barely enough money from food stamps or from, from the various programs from the food banks to provide food, put food on the table for their families, for the children.

They're going to feel it. They're beginning to feel it. They're already hearing about it. They're beginning to feel it. By next year, with so many people who will have no health insurance, who will be going to the food bank, expecting the county, the state's not providing the services. The Federal Government isn't providing the services.

Now they're going to the food banks. The food banks barely have enough money because there isn't enough money from the counties to cover that indigent help that the county is required to provide. But again, because the county is not receiving the property taxes because of all those loopholes, then where are the people going to go?

Okay, a question now. Irena Asmudson, one of the things that you talked about was the need to update the unemployment insurance program. Can you talk a little bit more about that?

Thank you very much for the question and I apologize to the Senators that I offended. One of the very perverse things for employers in the unemployment insurance system taxes right now is that unemployment insurance taxes are capped at around $7,000.

And so for those who employ lower wage workers or part time workers, they pay the full freight into the system. And because of the way California has borrowed all of that money from the Federal Government and because of the way the loan repayment terms work, employers are absolutely on the hook to repay all of that money.

And the state has chosen not to redo that system to uncap those amounts so that the burden is more fairly distributed amongst employers and across the payrolls. So that means that to pay this money back, the rates on that very small amount per employee has to go up and up and up. That's what's so perverse about it.

So it is making the burdens on employing part time workers, minimum wage workers be much larger than on higher income workers. And it unfairly penalizes those small businesses who are just starting out or who are trying to like expand a little bit. And so the system as a whole is not sustainable.

I just want to correct what you said. You said it creates an unfair burden on the employee. It doesn't create an unfair burden on the employee to have a $7,000 cap. The employer pays that person. I misspoke. Thank you.

Okay. Yes. Those employers who employ those workers and have to pay escalating rates. So if you are employing a minimum wage employee and you face a much higher rate and those rates are escalating automatically under the terms of repaying the loan, then that is effectively increasing the minimum wage that employers in California have to pay over time.

That is to me a huge opportunity to redo the system and to make the system more fair and to reduce the burdens on employers by doing this. Does that answer your question, Senator? And I'm sorry, was that clear, Senator Grove, or did you have further question? Can. Can I. Okay. Yeah. Does this miss Ray's time?

Thank you. Mr. Graves, you talked about first, setting aside for a rainy day, which we are doing. Second, the balance. And I appreciated your comment. It's to find the balance, to build a California for all, especially to help as a result of HR1 on health care, food assistance and childcare that you mentioned.

I just wanted to say that I appreciated that you talked about this balance and to make sure that the services that are needed for Californians are provided. And I did have a question on the diversification. Raise revenues. Now, where would. How would you recommend that we raise the revenues? What are your thoughts on that?

First, I wanted to note sort of a historical note here that several governors have signed off in California's recent history on revenue increases as a way of helping to get the state through budget crises. We can go back to Governor Reagan in the 1960s, Governor Wilson in the 1990s, Governor Schwarzenegger in the early 2000s.

So it certainly is not unusual for California's policymakers, your former predecessors in the Legislature maybe, who have seen revenue increases as one option for helping to close a budget shortfall. Not the end all be all.

It was always coupled with other solutions, including some pretty deep cuts, especially before the Legislature and the Governor agreed to put Prop 2 on the ballot in 2014 and help to build a solid reserve. So I just wanted to make that context clear in terms of revenue options at this time.

My colleagues who focus on tax policy on our website at calbudgetcenter.org, maybe some of you have seen the research, have been focusing a great deal on how very well off corporations doing business in California. We're talking about billions in profits every year somehow manage to pay very little in corporation taxes or perhaps nothing. And this is all legal, right?

These are all loopholes that are built into the state tax code that previous legislatures and governors decided to drop in there. And so our perspective is that that means these folks aren't paying their fair share. They're making money hand over fist, billions of dollars in profit.

We're asking all Californians who can to contribute through the personal income tax. On the corporation tax side we see a lot of loopholes, billions of dollars per year that are not coming to the state treasury to help not just offset budget gaps but also invest in Californians health and well being.

There is a Bill that was introduced on the other side of the Legislature in the Assembly. I don't know the Bill number off my head, off the top of my head. This would close the waters edge election loophole. This is the one where we're losing three or four billion dollars per year.

This is a way of offshoring corporate profits to evade state taxation. And so at least some of your colleagues maybe in, in this House as well as in the Assembly are very concerned about this. There are other opportunities as well.

I'm not our tax policy expert so I would encourage I could follow up with you if that would be helpful and put you in touch with those on our team who can give you a lot more information about that.

And you said the website was CalBudgetCenter.org thank you. The other option that you mentioned was to borrow from state funds. Could you tell us a little bit more about that?

Yes. So this is another one that has been used historically as a way to help muddle through prior budget crises. Right. As a way of saying, yes, we could solve this all with revenues or we could solve it all with deep cuts or maybe let's just do cuts in revenues.

But actually there might be another opportunity here which I think drives some people crazy because they don't necessarily like the ide idea of doing this, that we have lots of special funds in California, hundreds of them, and many of them have fairly substantial balances for good reason.

And in bad budget years, the Legislature and Governor will often say that money is sitting there and could be temporarily used to help get us through this general funds shortfall we are facing now. Maybe a few billion dollars borrowed that is always paid back with nominal interest. Right. So these funds are not raided and never paid back.

Right. These are loans from special funds. And this allows the Legislature to sort of work through a budget crisis without feeling like the only options you have are to deeply cut services or to just do huge tax increases. Right. So it's sort of another tool in the toolbox that I wanted to highlight.

I know there are questions around whether you may or may not have exhausted that strategy at the moment, but to the extent that special funds are paid back over time, that will always be an option in the So I guess what we often counsel is that sometimes people are hoping for the big bang approach to all of this.

We can solve it all with this one silver bullet that will get us through. And sometimes muddling through may be a better way to do things, even if it maybe isn't the most satisfactory method at the moment.

Thank you. My colleague reminded me that it was Assemblymember Connally who was carrying that particular Bill. The last option under diversification was you talked about the projected surplus temporary account. Tell us about that account, please.

Well, that, I mean, this was a really interesting idea that was put into law just maybe two or three years ago. You, the Legislature created this new account as a way of giving yourselves and the Administration an option of saying, wow, revenues are really doing. They look like they're doing pretty well. Right. We're riding high here.

Revenues are coming in way better than we thought. But how much of it is real? Not quite sure. Maybe we should carve off a piece of those expected revenues and put them into this new account with a very long name.

It's like it's a surplus holding account and it gives you an option to avoid committing those dollars immediately. And then you come back and you take a look a year later. Let's say you come back and say, did those dollars actually materialize? And if they didn't, you didn't commit them. No harm, no foul.

If they did materialize, then you have the option of saying, ah, we now have those revenues in place and we can invest them appropriately as we see fit, whatever our priorities are at the moment. It's been a little puzzling, I guess, that this account, I know it's pretty new, but it hasn't been tried out yet.

So it's still untested. And it seems like a good opportunity for the Legislature and the Governor to give it a try and see if this would help get the state through, you know, some tough situations. Thank you. With the permission of the Chair.

Just if you can begin to wrap up. I've been really generous with everyone. We have six people on the list and if they each took 10 minutes, we wouldn't have time for it. So we need to get to the end. And to the other people on the list?

Well, no, I think Senator Reyes husband has been sitting there making notes and he's going to have extensive public comment when we get there.

Ms. Hollingshead, first, I want to thank you. I'm so glad you began today's discussion giving us this history and providing the charts that you did. It was easier to understand at page seven on the recommendations, you talk about raising the cap from the 10% to the 50 and doing this gradually, legislatively. How is that done? Or is that sent to Californians, to the voters? How is that going to be done?

Yes, it would have to be sent to the voters because it would be a constitutional amendment on the budget stabilization account.

And we would suggest that the legislature's Bill that would go before vote, that would eventually become the aca, that would go before voters, would have a schedule under law where the cap would automatically increase by, you know, by a set number of years.

Wonderful. Thank you very much. And Mr. Chair, that was my last question.

Thank you. And our list is growing. So my previous admonition about 10 minutes should actually get smaller. Senator Durazzo is up and Senator Richardson is on deck.

So the lesson learned is put your name on the list right away. Don't be the last one.

That's correct. Worse than that, be the Chair or the Vice Chair.

I don't know exactly what you meant, Ms. Irena, but you mentioned Something about the structural changes in the economy, when changes in the economy were not reflected, have not been reflected in terms of our policies. And I just, I want to comment that I could see that happening right before our very eyes. Just as one example.

Again, I don't know what you meant by it, but employers providing health care insurance to their employees, the number and the percentage of that has, over the decades has diminished enormously. And I think there's a correlation there with the number of people who are on Medi Cal. The number has grown enormously over the last few decades.

So there's something about, we're not taking into account what's going on out there in the real economy for people. And that's where my concern is, not only for what you present today, all of you present today, but how do we, you know, how do we determine the success?

Not measuring just by credit ratings and bond markets, but by whether Californians can consistently access health care, pay for the food, pay for a roof over their heads and other core needs. They're not asking for, you know, 10 cars in the, you know, in the garage.

It's just like these are basic needs and that's what they need government to help them achieve. They want to do it on their own. So if an employer does not provide the health insurance, does not provide the retirement, where do they go? They go to government.

So we have to pick up the tab when it's not being provided. So my questions are, how should these reserve policies or any other policies be structured to explicitly prevent disruptions to healthcare access or other basic economic security, especially during downturns?

We have got to make sure that our policies, our policies here at the state do not leave people behind and out when it comes to these basics.

And so I'm concerned that we're coming up with reserve policies that are just not connected, directly connected to regular working people and what they need and what they try to reach every single day? The majority of people on Medi Cal work, the majority of people on Medi Cal work, they are not sitting at home.

You know, the demand for child care is enormous, enormous. We're not helping to build a childcare system as part or not part of our education system. So we're not addressing these basic needs, it seems to me, in these policies. So I just. How do we, how do we do that?

How do we, how do you propose ideas for policies that are going to be based worker centered economy or a human being based economy? The people who work every day are not looking to be billionaires. They wouldn't mind it, but that's not where they're all coming from. They're all coming from.

I want to have a basically good life for me and my kids. So what do you suggest based on that? Not, you know, main bond markets?

I mean, I do want to recognize that a lot of the language that we're using here is very technical and theoretical, but ultimately, what we're talking about is protecting services for Californians that have been committed to by the Legislature in previous years.

So when we talk about, you know, this idea of core services or we talk about the state's ongoing service level, what we mean is that the state won't need to look to the programs that it usually needs to cut during downturns in order to balance the budget.

So that's often, you know, as you've already mentioned, health and human services programs within limits by the Federal Government, universities, the judicial branch, you know. Right. There's. There's parts of the budget where the state has relatively more flexibility and ability to control spending and isn't so constrained by constitutional requirements or court requirements.

And so those are often the places where the Legislature goes to make budget reductions, reductions when revenues drop. So I think it's important to emphasize that, you know, that there is a very clear bridge between having the money available and then being able to support the service level for Californians.

I did also want to mention, I think this is an issue that's been kind of touched upon in various places. But there is also the issue that when revenues are surging, often what we would think of is sort of the opportunity cost of that money is going to be lower than when revenues are falling.

And by that I mean that the needs are broader and bigger when revenues are falling, because that tends to happen during a recession, during a downturn, when there's higher unemployment, when people have more need for state service.

And it's precisely that time that it's important for the state, state to be able to be able to meet those needs and to be able to, you know, maintain the service level that it has committed rather than pulling back.

So I recognize that, you know, the way that we talk about this sounds very theoretical, but it is meant to be connected to the state's programs.

Yeah, I understood what you were saying. It's not so complicated that I don't. Understand what you're saying. The question is for you, how do you develop policies that are more explicitly aimed at working people and them not having to be without health care, be without, you know, a roof over their heads?

So I think you all need to be much more directly focused on working people and what their needs are versus, you know, how does this look, you know, in the stock market, gentlemen?

And to put this in the context of reserves, I just wanted to remind us all that the state, you all did create a safety net reserves several years ago and had $900 million in it at 1.0. It was specifically designed to protect CalWORKS and MEDICAL during downturns.

And that money was used, I don't remember exactly when, within the last couple of years. And so that I wondered if that was where your question was going. It is true that the budget stabilization account is a General Fund reserve. It can be used anywhere the Legislature wants to put those dollars.

In theory, it could be used to prop up the prison budgets, which may or may not be a priority for you or anyone. So if you have designated discretionary reserves with different labels on them like safety net, then those dollars could be directed where you want them to go during recessions in order to protect specific programs.

As to we're just going to pull money out of a larger General Fund reserve and then figure out where to put it. So I'm not sure if that's where you were going with your question.

I mean that's a better idea there. I just, I think that, you know, there's other policies that we just have to think out of the box. You know, other policies about where do we invest our, like our infrastructure. Someone mentioned infrastructure dollars that creates jobs. It creates good paying jobs.

Probably in the downturn someone said, right, it's probably less expensive to do it.

But policies like that which are going to create the jobs that we need be more explicit about what we're doing with the funding that we do have and how that could benefit working people and not just, well, we're going to make more money by investing over here, not by creating better jobs.

Does that complete your. I'll take the, I guess as a yes. Do you want a response? Direct it to somebody and they will respond. Who would you like to have respond?

I could offer something. I don't know if you'll find it satisfactory. I think, I think various comments, including yours, Senator, point to kind of three challenges that the state of California is facing simultaneously.

One that is highlighted by this hearing is that the reserve policy that the state currently has is not going to be sufficient to sustain the level of service that we have in recessions. We have a separate issue of what to do with revenue surges to the surplus holding account. That's an Estimation error issue.

But fundamentally, the state does not have sufficient money set aside under the rules of Proposition 2 to sustain the level of service that is currently offered. The second challenge the state is facing is that the Federal Government has pulled back significantly, particularly in the areas of health care and food assistance.

And the state faces very difficult choices about how to respond to that change. And then the third challenge that is intertwined with that second one is that the state faces notable structural deficits. We, the lao, cannot weigh in on what the right size of government is. That is a decision for the policymakers.

And so when faced with this structural deficit, we can offer you ways to change your levels of revenue, your levels of spending, but ultimately these two things are not currently in balance.

And so the revenue ultimately kind of turning back to this reserve policy, and I think to the point that you're aiming us to answer, is that what we are trying to offer is a reserve policy that can help the state meet its commitments for services to Californians, regardless of what that level of commitment is, such that when there is a change in the state's revenue structure or potentially in the level of support from the Federal Government, the state can respond and potentially backfill some of those losses to ensure that the services are still sustained.

Because as you know, Outside of Proposition 98, the vast majority of General Fund spending goes to the state safety net programs for Californians. I hope that helps a little bit.

Okay, thank you very much. We have 40 minutes left and we have six more people, which actually the list can't get longer because we will now have every single Member of the the Committee made comments or asked questions. I appreciate this level of participation. We'll go to Senator Richardson, and Senator Weber Pierson is on deck.

Thank you, Mr. Chair. Let me preface my comments. Call Mr. Laird and I the OGs of the group. But I've been around here long enough to know that. Please don't take personal. When people say they're disappointed and up upset, it's not you. It's, you know, sometimes the reality of what we're hearing, sometimes we may agree to disagree.

But I have found in my one short year here, I don't think most people mean it personal. So I don't want you to walk out feeling bad. You did your job and now it's time for us to do ours. So be encouraged. That's my first point.

My first question is, when we're talking about doubling the reserve from 10% to 20%, are we talking about approximately 3.5 billion to 7 billion or somewhere? Between 7 and 8 billion? Is that what we're saying? Can we say the numbers associated with this?

The Department of Finance might have the numbers off the top of their heads better, but I do believe currently 10% is around $20 billion of reserve. And, and so 20% would be closer to 40 billion.

Wow. Okay. Is that your understanding, ma'm?

Yeah, I would say the estimate of. The 10% through the multi year would. Be between 22 to 25 billion. And then taking it up to 20 billion would be up to about 50. Billion in multi year. Okay. If we could reach those.

So in light of that, I won't pontificate on my perspective of that and where that would come from. That's kind of a daunting. That's why I wanted to hear the number and I wanted us to hear the number so we would really understand the significance about what we're talking about from the lao.

Could you please provide to the Committee, I'm sure you've done reports on Prop 13. There's been a lot of discussion on that. Would you kindly share them with the Committee at a later date when available?

Also, if you have any reports regarding Prop 98, those funds, what has come in, maybe what is covered, not covered and so on to give us a little more knowledge. And then finally, if the LAO has any reports on initiatives that we have that are not paid for.

So for example, Prop 30, although it was passed, there was no money allocated towards it. So if you have any information on that, I think that would be helpful for us to better understand as we go forward with dealing with initiatives. My next question has to do with where revenue increases come from.

It's my understanding at the budget retreat we went over a little bit about a large part of those are coming from. Health issues. Is it possible for someone to help us delve into better to understand, are those health implications due to. Are they having to do with the baby boomers?

And we're at the tail end of the baby boomers and can we expect that number to begin to go down? Does it have to do with people who are working for companies that aren't being covered by insurance? Could we get a little more information on where we think those numbers are coming from?

And I don't expect you to have the answer today, but if you do, that would be great. But if not, if you could follow up with the Committee, that'd be helpful. Is that something you might know?

Yes. Just to make sure I understand the question, you're looking for cost drivers in MediCal Is that the underlying question? Like, what are the core cost drivers in the MediCal program?

Yes, the cost drivers. And do we anticipate any changes? Meaning this is. I was reading, I'm at the tail end of the baby boomers. So are we going to see now a decrease? Because now a lot of those initial baby boomers are in their 80s. Are we going to expect to see a decrease or no, because we have people who are gig workers and aren't having insurance.

If I. I don't know if it's possible to, and I don't know if this is something I should be requesting officially in legislation and a report or is it generally info that you know, But I think it would really help us to see a little further down the road of are these numbers looking to be consistent or do we expect to see any changes?

We are. So we are currently undertaking our analysis of the Medi Cal program for the purposes of understanding the budget. And it will delve into the very questions you are asking. What are the major cost drivers in Medi Cal? What proportion is driven by demographics? What proportion is driven by kind of underlying just growth in healthcare costs?

Demographics are a piece of it, not a significant piece of it. But that's something that will be in our forthcoming Medi Cal analysis and we'll make sure to get that to your office.

Okay. And I have three last quick questions. Have I haven't heard in the Senator, I believe, from Los Angeles, Senator Reyes briefly started talking about cities and counties. I've been around long enough to remember when, for example, San Diego, you know, had bankruptcy. Who would have ever thought San Diego would have had that experience?

So we're talking about balancing our budget, but what happens when the cities and counties, their budgets aren't balanced and they're going to be coming to us? Have we looked at those types of numbers to anticipate if we're going to ask to be helped to help cities and counties in these projected years? Has anyone looked at that or talked about it or.

We're certainly familiar with some of the budget constraints and budget challenges that a number of localities are facing at the moment. The state does not have budget capacity to provide funding to those localities. The state has allowed local jurisdictions to go bankrupt in the past and to undertake kind of fiscal restructuring in that process.

But at the moment, the state too is faced with notable financial constraints that make such assistance challenging.

Did you have anything to add? Got a pretty good name here. Asmundson. I did my best. Asmundson.

Asmundson thank you for the question. This is in fact, the work that I am trying to do right now. I know that the associations of League of Cities, csac, they're concerned about these issues. Csba, both the aging of the population and the structural issues that affect the California economy, those are all hitting cities and counties.

Oftentimes they don't have capacity. And so honestly, one of the best things that you could do for your constituents is to talk about these issues and make sure that at the local level, the elected officials are also talking to people. As a General point, I think we've all realized that social contract issues are at play here.

And so we're going to have to figure all of this stuff out together. There aren't any easy issues. But again, talking to your constituents, making sure that they realize that the state cannot bail them out, is a huge service to them.

And as you complete your work, we would certainly remain open to learning more. Sir, did you, did you want to add.

Yeah, I was just going to note I'm not here representing the counties, but a couple weeks ago they did put out a report where they estimated the cost of HR1 implementing those provisions. And their estimate is that the annual cost to counties with no state backfill would be 6.5 billion to 9 billion.

Maybe 6, somewhere between 6 and 10 billion per year. That's a range. But that is their estimate. And as I understand it, they are talking to the Administration right now about the fact that they can't take on 6 to 9 or $10 billion per year in new costs to implement HR1.

And we commented on that report and discussed those numbers at our hearing on HR1. And the top end was 9.5 billion.

So if we could get a copy of that report, that would be great. I'm assuming staff has it. And then my last question is, sir, for you. You mentioned that there were various funds that we could consider potentially borrowing from.

You also mentioned potential loopholes if you would provide those to the Committee so we could look at them further and potentially have a further discussion. But thank you for all of your participation and look forward to working with you all.

Thank you. Thank you very much. Senator. We're going to move to Senator Weber Pierson and Senator Smallwood-Cuevas is on deck.

Thank you, Chair. I promise this will be quick. Want to thank everyone so much for taking the time. This has been an excellent panel discussion this morning. Wanted to quickly just ask a question within the LAO's presentation around the excess capital gains.

And I know you had said there was this formula that was created a very complicated form formula. Before we embark on potentially changing that formula, just wanted to understand the historical. The history behind why that formula was created in the first place.

Yeah. So essentially there is a, I'm going to say theoretical but not actual relationship between Proposition 2 and Proposition 98. And the way that this formula works that reduces the excess capital gains is it says, what would Proposition 98 spending for schools and community colleges? What would Proposition 98 spending be were it not for excess capital gains?

What is it actually? And then the difference between these two things is what's subtracted from the total excess capital gains requirement. I think we have. I want to. Say, importantly, this has absolutely no effect on school and community college spending. There is no people.

I think that sometimes that can get confused because of course, if I say, like, well, there's this confluence between Prop 2 and Prop 98, you would assume that that means that that affects school and community college funding, but it does not.

All that happens with that excess portion that is not going to the formulas is that it goes back to the General Fund. You know, I think we have tried to understand the rationale behind this, given the complexity and given, given the complexity of how it works.

It often results in these incredibly counterintuitive calculations where, you know, you'll suddenly have 100% of the excess capital gains are no longer required because you're switching tests between the two calculations. You know, there's these really odd things that can happen, and it creates almost like we would think of like a random number generator in the formula.

So we have asked ourselves and asked and talked to the Department of Finance about, like, well, why does this exist? I mean, I think the sort of underlying rationale, as best we can understand it, is that the idea is that you wouldn't want to kind of doubly commit money that has been committed under the Prop 98 formulas.

Also for Prop 2, both Prop 98 and Prop 2 are saying that there's a share of General Fund revenues that need to go to these commitments. And so you don't want to sort of double commit the same tax dollar. That's the theoretical idea. In practice, it doesn't work at all that way.

In practice, as I said, it's more like a random number generator. And so given that complexity and given the way that it's reducing excess capital gains that go to reserves, we do think that it makes sense to change that.

Thank you. So if we changed or eliminated that formula, it would not necessarily have an impact on anything else.

It would essentially mean that there's less money for the General Fund in years when revenues are peaking as a result of capital gains. So like in year, you know, in, for example, in recent years, in 2223 and 2324 if I'm going to get those right. No, I didn't.

2122 and 2223 when the state had really, really significant surpluses, it would have meant that those surpluses were a bit smaller, not hugely smaller, but a bit smaller, and that that money would have gone to reserves instead.

Okay, thank you.

Thank you, Senator Smallwood-Cuevas with Senator Ochoa Bogh on deck.

Thank you, Mr. Chair, and really appreciate the conversation and especially, you know, the recognition of the purpose of reserves.

And for me, what's clear is that the purpose of reserves is to protect people, to protect the investments that people have asked the government to make, especially during economic downturns when, you know, we have before us the need to cut health care, to cut childcare, to cut all of the workforce programs and vital programs. I think this is a very helpful conversation.

I was a little surprised by the disappointment in being offended, because I am both disappointed and offended at the ways in which the Trump Administration has created for California a crisis now that we have to have these kinds of discussions, essentially giving trillions of dollars to the wealthiest 10 and 1% individuals and corporations, while working people, particularly young mothers, young families, are facing the dim prospects of losing their health care, having their health care get out of reach, and we know just everyone struggling to make ends meet.

I want to just double down on comments made by my good colleague from the Inland Empire who just talked about how it is unacceptable that we have the wealthiest 1% getting a trillion dollars while we're going to cut a trillion dollars out of our Medicaid funding, slashing the safety net for so many.

And again, we are here having to do this work because of that. We're here because of that. Not that we haven't looked at our balancing our budgets. We created the rainy day funds to do just that, but we have this external pressure now that we have to respond to. And so I am incredibly offended and disappointed by that.

I really wanted to ask a follow up question to Ms. Asmonson because you talked about the human infrastructure and you talked about our unemployment system and how, you know, during COVID the strategy was to invest more into workers, the human infrastructure, so that we could weather the impacts of COVID and avoid recession, which obviously we have.

And, and it was a strategy that worked and certainly no major undertaking like that happens without some challenges. But for the most part, California was not able, you know, we didn't see huge layoffs, we didn't see a total chill in our economy.

And so my question is, as we were talking about reserves and ways to reform those strategies to increase our ability to weather these kinds of downturns.

And we're also talking about the question of how do we raise revenue overall to ensure that there's a balanced and shared responsibility and ensuring that we are able to maintain the programs that the people of California have wanted.

I go back to the question about the human infrastructure and workforce and, and what are, or what do you see as some of the out of the box thinking to address the affordability question and the ability for workers to be able to sustain themselves during these downturns?

I see we talk about revenue, we talk about cuts, we talk about reserves, but what I don't hear us talking about is sort of workforce development strategies.

What I don't hear us being intentional about is saying, okay, who's in the safety net and how do we move them from being part of an extraction on resources to sort of a revenue contributor through income tax by moving them into quality jobs?

So I'm, I'm curious, you know, are there strategies that the Legislature should take that can strengthen which wage based income? While we also are looking at this question of reforming our reserve policy and looking at other revenue strategies.

And is there a sense that if we did that we could sort of take some of the volatility out of the economic cycles that we seem to go in in terms of boom and bust? Because once thing is true that the personal income is that stabilizing factor.

So I'm just curious, how is there a possibility to do more investment in looking at workforce and those strategies to help to stabilize that personal income?

That is a great question that is well beyond the scope of this panel. But I will note a couple of things. First, a lot of the easing of barriers to allow people to get education. Senator Cabaldon, I was very proud of the fact that you made it much easier for people to go to CSUs through an automatics.

That was an administrative thing that the state did. And hopefully over time that's going to really increase the employability of people. So one is good wage jobs, which people can get qualifications for. The other part is again, it comes back to the social contract of what kind of affordability challenges do we face in the state.

And a lot of that has to do with housing. A lot of that has to do unfortunately with Prop 13. And so those are much longer conversations that have to be had both on the wage side and on the affordability of California. And so those intersect with the reserve discussion that we're having right now.

But I applaud you for taking that on and I would be happy to come back and talk more about that issue in future justification. Thank you.

No, I appreciate that. I mean, because we saw that work in the Great Depression sort of era where we invested in the works program, Administration.

We saw it in the, you know, crisis in the 70s around the gas crisis, with the creation of the community employment and training program to really bring those most vulnerable folks in the safety net into a structured process that would track their ability to move into higher paying jobs and out of the safety net overall, reducing the cost that we had to share for safety net and programs and core services.

So I appreciate that. My other question that I had is having to do with the looking beyond California and what other revenue models may exist in sort of large, other large states, states that have diverse economies that we should be looking at in terms of this balance of potential revenue strategies and reserves.

Are there any other models that are out there that are showing some promise?

So I will also say the social contracts in the different states are so widely varied. I used to get questions all the time about, okay, how does California compare to other states? It really is comparing apples to oranges. But I'm happy to have a side conversation about that if you want. Thank you.

Thank you very much. And just before I go to Senator Ochoa Bogh, there was a follow-up question from Senator Weber Pierson.

Yes, thank you. Just one follow up question. If we were to change and change the formula or no longer use the formula for the excess capital gains, is that something that we could do from a legislative standpoint or do we need to take it to the voters? No, that would need to go before voters. Thank you.

Thank you very much. And just before I go to Senator Chobo, we had Senator Choia and Senator Archuleta in line. They had to leave. Senator Archuleta really wanted to put on the record that his concern was how we're funding Go Biz and how Go Biz fits in the budget.

So I just want to let everybody know that was his concern that he would have raised in a comment and a question if he was here. Then we'll go to Senator Ochoa Bogh.

Thank you, Mr. Chair, so much. This has been incredible. And I just, my, my hat has just been. My eyes has just been open quite a bit and I have appreciated so much the perspective that my colleagues have actually brought up and also appreciated some of the comments that have been made here today. So many, many aspects.

But I'm going to try to be as quickly as possible in addressing some of the things that I have learned and some of the comments that I would like to make. And I'm not sure if there's going to be a question on the end, but first of all, we've talked a lot about the reserves.

You know, this is about the reserves and what the purpose is behind those reserves. And as we look at the reserves and the programs that they're supposed to. Be. Addressing, which is, you know, the basic core safety net, what we should be considering safety net components in government, and that's what they're for.

One of the things that I've said and I've said very often in my town halls is that government should really be there to provide safety nets for those that are the most vulnerable in our communities. Right. That is what we should be focusing on as far as programs go. But here's a couple of things that I want to address.

According to the CalMatters article that came out just about a week or two weeks ago, stated in there that in the seven budgets that Newsom has signed beginning in 2019 and 20, and the eighth one he has proposed, revenues have increased by 60%, mostly from taxes that tapped into a 48% increase in California's personal income during the period.

And total spending, however, jumped 72% from 203 billion to $349 billion. So when we talk about revenues and talk about new revenue, the need for new revenues, folks, we've had an increase in revenues every single year, 60%. So as we talk about the need for or the assessment or the reconsideration of taxes, let's think about that. In that same note, I want to point out.

I also want to point out that when we look at the tax perspective in California, according to the Tax Foundation, California has one of the highest overall tax burdens in the US, ranking 48th for competitives in 2026. Let us sit on that for a bit.

And it says here that it features the nation's highest top marginal individual income tax rate of 13.3% and up to 14.4% with payroll tax. And a high combined state and local sales tax of 8.98%. So these are just some of the tax rates how we compare to the rest of the state.

So revenues are up, highest, one of the highest tax state in our nation. So having said that, I want to talk a little bit about, you know, we're talking about programs that we are, that we are addressing here that we're supposed to cover.

And part of our responsibility as far as protecting, you know, those the most vulnerable are safety net programs. And we talk about why they're there, you know, how these programs have actually skyrocketed with our programs and our government growing quite bigger. So a couple of things.

You know, my colleague from Bakersfield mentioned the cost of doing business in California, extremely expensive. And much of the taxes also being paid by, you know, being paid by these businesses. When the cost of doing business in California is so extremely expensive, we're going to see industry moving out, right?

And we're seeing that. We see articles of these major corporations leaving the state. So we see, and you know, it was mentioned earlier today, if these people, by my colleague from Temecula. When these industries or these businesses leave, those are the ones that are creating industry jobs.

And when they leave because the cost is not bearable, including Searles, Searles Minerals in my district that just announced the closing of their plant after over 100 years being in business in California. They're laying off over 300 people because they can't afford to do business.

So let's talk about the cost of doing business and how that impacts everybody else. As industry leaves, right, we don't have people that are paying into the system. Downward spiral. The cost of doing business also increases the cost of goods and services, which cater to the cost of living increase.

So we have families that are currently working 2, 3, 4 jobs to make ends meet. We talk about the importance of education, ensuring that we have a workforce that is prepared to be able to move up economically. Right. Which is incredibly important.

But here's the problem, that regardless of what we pay people, if the cost of living continues to grow up, it's going to be incredibly difficult for these folks to be able to stay in this state. As mentioned by my colleague, our young professionals are leaving. Why? Because as mentioned earlier by Mr. Graves, right. He was talking about, you know. Not we, because I haven't supported many of the things that make it become very costly to do business in California.

But this Legislature has created a system that has made the cost of living incredibly, incredibly costly in California. Brought by legislation that has made the cost of business, of conducting business incredibly expensive. Also increasing the cost of actually able to live here. So let me bring this forward and give a different perspective.

The system that currently is in place is not working for the average Californian. And we're trying to create more reserves to pay for those, for those programs that are going to kind of subsidize the need. Because people can't afford housing. Right. But why can't people afford housing?

Legislatively, it's policy that has made the building of California housing so expensive that it doesn't work out. It doesn't pencil out. So what do we do? Those regulations that have made building housing so expensive is now being looked at to government, to the Legislature to say, how do we subsidize that housing? Then we go into...

And then we go into education. Education. Much of education in California is incredibly expensive. So expensive. This is why my kids are going to school in Utah. My kids are in school in Utah because it's so much less expensive for them to actually go there.