Is California headed for an economic downturn?

Some cautionary economic signals are gaining strength in California just a month after Gov. Gavin Newsom and state lawmakers adopted a record-breaking $308 billion budget.

The Golden State is more likely than not to collect less from personal income, sales and corporation taxes than the $210 billion assumed in the 2022-23 budget, according to a Monday report from the nonpartisan Legislative Analyst’s Office, which advises lawmakers on fiscal issues.

The report notes, however, that “significant uncertainty” remains, and the state could ultimately end up collecting anywhere from $25 billion less than anticipated to as much as $15 billion more — likely ending up about $5 billion below projections.

A recent report from the state Department of Finance offers a similarly mixed outlook: For the first time since the pandemic struck in early 2020, California’s tax revenues in June fell short of projections rather than exceeding them. Cash receipts came in about $2.4 billion less than expected, largely due to lower proceeds from the personal income tax.

• H.D. Palmer, a finance department spokesperson, told me Monday that although more data is needed to make “long-term extrapolations,” the June numbers suggest that Californians paying their taxes quarterly — who tend to make most of their money from capital gains and stock options — are seeing “a lot of clouds on the horizon” due to rising inflation and interest rates, persistent supply chain issues and global market instability caused by Russia’s war on Ukraine.
• Palmer said the two reports underscore “the importance of the actions that we’ve taken” to use California’s budget surplus “sensibly” by expanding reserves and paying down debt, rather than “embarking on a major expansion of state programs … that may very well not be sustainable.”
• He added: “It’s something to be mindful of as we consider this final month of the legislative session in terms of … any major potential new financial commitments. … Certainly the administration has one eye on this as we’re looking at the legislation that’s moving.”

Indeed, Newsom cited California’s progressive tax structure in announcing his opposition to Proposition 30, a November ballot measure that would raise taxes on residents earning more than $2 million to fund a variety of climate programs.

• Newsom: “California’s tax revenues are famously volatile, and this measure would make our state’s finances more unstable — all so that special interests can benefit.”

In other state economic news: The California State Teachers’ Retirement System, which provides pensions for hundreds of thousands of public school teachers, reported a 1.3% loss on investments for the fiscal year ending June 30 — its first annual loss since the Great Recession in 2009. The news came not long after its fellow pension fund, the California Public Employees’ Retirement System, posted a preliminary 6.1% loss on investments, also its first negative return since 2009.

• CalSTRS Chief Investment Officer Christopher Ailman: “As long-term investors, we think in terms of decades. One-year returns are akin to the pace of running a mile during a marathon. In a very challenging and unusual market environment where both equities and bonds were down double digits, our diversified portfolio mitigated losses.”
• California’s net liability for retiree health and dental benefits had reached $95.51 billion as of June 30, 2021, up from $95.19 billion the year before, according to a Monday report from State Controller Betty Yee. In a statement, Yee said the report gave her “cautious optimism” that California is on track to achieving full funding: The “minimal growth in year-to-year net liability is incredibly encouraging,” even as inflation “remains a global concern,” she said.

The coronavirus bottom line: As of Thursday, California had 9,922,718 confirmed cases (+0.5% from previous day) and 92,763 deaths (+0.2% from previous day), according to state data now updated just twice a week on Tuesdays and Fridays. CalMatters is also tracking coronavirus hospitalizations by county.

California has administered 78,762,612 vaccine doses, and 71.7% of eligible Californians are fully vaccinated.

Other Stories You Should Know

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1 Newsom declares monkeypox emergency + Capitol updates

Monday was a busy day at the state Capitol, with Newsom declaring a monkeypox state of emergency just days after his administration’s top public health officers said they weren’t quite ready to take that step. Newsom’s office said the emergency declaration will help “coordinate a whole-of-government response to monkeypox, seek additional vaccines and lead outreach and education efforts on accessing vaccines and treatment.” California had 786 reported probable and confirmed monkeypox cases as of July 28, most of which have occurred in gay or bisexual men, according to state data. Newsom’s office said the California Department of Public Health is scheduling listening sessions with the LGBTQ community and is running paid ad campaigns to help educate residents about the virus and grow awareness.

Also Monday, state lawmakers returned to Sacramento after a month-long summer recess — and promptly submitted a $38.5 million emergency budget request to help counties respond to the monkeypox outbreak, noting that “additional funds may be needed if the outbreak is prolonged.”

One of the lead requesters was state Sen. Scott Wiener, a San Francisco Democrat whose controversial bill to permit San Francisco, Oakland and the city and county of Los Angeles to launch supervised drug injection pilot programs squeaked out of the Senate on Monday with the bare minimum number of votes. It now heads to Newsom’s desk.

• Wiener: “California — like our nation as a whole — is experiencing a dramatic and preventable increase in overdose deaths, and we need every available tool to help people stay alive and get healthy. … This legislation isn’t about whether we want people to use drugs. Rather, it’s an acknowledgment that people are using drugs, and our choice is whether we want to make every effort to help them survive and get healthy.”
• The Senate Republican Caucus sent Newsom a letter urging him to veto the bill, which they said may run afoul of federal law. “Fueling the drug epidemic with drug dens and needle supplies is like pouring gasoline on a forest fire. It merely worsens the problem,” the lawmakers wrote.

2 Will electric car goal leave many Californians behind?

Two of the areas in which California often prides itself on being a leader: equity and the environment. But can the state really enact one of its loftiest environmental goals — banning the sale of all new gas-powered cars by 2035 — when a large portion of the population can’t afford zero-emissions vehicles?

That’s the question underlying this deep dive from CalMatters’ Nadia Lopez into the state’s hodgepodge of electric vehicle rebate programs, which have long suffered from inconsistent and inadequate funding. Some programs have already shut down this year due to a lack of funds, and one has a backlog so long that it’s closed to new applicants. Others are still accepting applications, but months-long waits for the money have forced some Californians to give up their rebates because they can longer afford cars whose prices have shot up amid skyrocketing inflation rates and strained supply chains.

• Quentin Nelms, a Tulare resident who relinquished his $9,500 state subsidy: “It’s useless at this time because there’s nothing out there and the cars that you do find, everything’s gone up in price.”  
• Another obstacle: Many Californians, especially renters and those living in rural communities, lack access to charging infrastructure, Nadia writes.

Yet another concern was raised in a recent letter to Newsom and state air regulators from Fix Our Roads, a coalition of labor unions, transportation advocates, local governments and business groups. The coalition warned that before the state formally adopts its proposed regulations for banning gas-powered cars, it needs to come up with a plan to replace lost gas tax revenue — the primary funding source for transportation infrastructure projects. Otherwise, the loss of funding “will decimate the quality of our roads and bridges, jeopardize safety, decrease mobility, cripple public transit, and result in more traffic congestion,” the coalition wrote. “Furthermore, reductions in funding of that magnitude will destroy hundreds of thousands of middle-class construction careers.”

3 California environment roundup

Let’s dive into the rest of California’s Monday environmental news:

• Two bodies were found inside a burned vehicle in the zone of the McKinney Fire, California’s largest wildfire of the season so far that as of Monday afternoon had charred more than 55,000 acres in the Klamath National Forest in Siskiyou County and remained 0% contained, according to fire officials. With dry lightning, high temperatures and gusty winds in the forecast, the blaze is expected to keep growing.
• Meanwhile, flash floods closed some roads into Death Valley National Park and limited access to the Mojave National Preserve in Southern California, according to the Associated Press.
• New oil and gas drilling, including fracking, has been put on hold on more than 1 million acres of public land in Central California until the U.S. Bureau of Land Management conducts an additional environmental review, according to a settlement between state and federal authorities still subject to court approval.
• The federal government must also conduct new environmental analysis before drilling on 4,000 acres in Kern County, according to a settlement with the Center for Biological Diversity, which sued the feds after they sold seven oil and gas leases on the land in December 2020.
• Attorney General Bonta, Newsom, state air regulators and the cities of Los Angeles and San Francisco filed a motion to intervene in a case challenging the federal government’s decision to adopt more stringent fuel economy standards for model year 2024-26 cars. “The future is zero-emission,” said Liane Randolph, who leads the California Air Resources Board, “but some cars will still run on gas — and to protect public health, it is absolutely crucial that they be as fuel-efficient as possible.”

Other things worth your time

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A California Democrat running for Congress failed to disclose investments in Moderna and Pfizer stocks. // Business Insider

In a key swing district, Katie Porter clashes with GOP opponent over inflation and ‘Orange County values.’ // NBC News

How some California parents changed their politics in the pandemic. // New York Times

Why San Francisco is behind Austin, Seattle in building housing. // San Francisco Chronicle

S.F. could get sued over housing gridlock, says state legislator. // San Francisco Standard

Residents fight church’s plan to host safe-parking program for homeless. // Palo Alto Online

Who’s to blame for a factory shutdown: A company, or California? // New York Times

Why a Sacramento-area restaurant owner brought in a priest to talk to his workers. // Sacramento Bee

GEICO restricts California policy sales to online, lays off hundreds. // Sacramento Bee

California judge rules Visa must face claim it profited from Pornhub video of child. // Bloomberg

Following historic $21 million verdict, Fremont asks for new trial in police killing of pregnant teen. // Mercury News

S.F.’s new drug sobering center is a ‘lifeline’ for this mother and son. But how big of an impact is it making? // San Francisco Chronicle

County to provide naloxone vending machines in attempt to prevent opioid overdose deaths. // San Diego Union-Tribune

Why Sacramento courts have caged cells, and why that will change. // Sacramento Bee

California could paint a clearer picture of English learner achievement if new bill passes. // EdSource

August was ideal for California’s High Sierra, until climate change. // San Francisco Chronicle

California is trying to make world’s tallest tree invisible. // Los Angeles Times