California’s Next Governor Will Have a Long “Want-List.”

Loren Kaye
President of the California Foundation for Commerce and Education

On Day One of his new administration, Gavin Newsom or John Cox will enunciate his vision for California, and call on the Legislature to implement it, whether it’s spurring more housing, increasing school funding, eliminating the new “sanctuary” law, cutting taxes or “resisting” the Trump Administration.

He will set the agenda for how to spend tax revenues, where the weight of regulations will fall, and how our pioneering state will be perceived and emulated worldwide.

Then reality will intrude.

A Governor may control the levers of state government, but even larger forces out of his control or set in motion by predecessors will elbow in for attention. Here are the predictably unpredictable wild cards I guarantee will ambush the next Governor:

Economic downturn

Economists say you can’t predict a recession, but California is due for an economic slump. The question is how far into the next term the downturn will occur.

More and more economists believe the nation’s growth will begin to slow in 2019 as the effects of interest rate increases take hold and the sugar high of tax reform stimulus wears off. Added local factors like labor shortages and stubbornly high housing prices will add downward pressure on the California economy.

Who knows whether this translates into an actual recession, but even a slowdown will take a bite out of the budget. The top one percent of earners pay 46 percent of income taxes. If the stock market and real estate transactions stumble, and capital gains are off, say, 25% from this year’s level, the budget would suffer a $3 billion hit in revenues, the equivalent of the entire increase in state and local spending on schools in 2018.

My advice: Double down on Governor Brown’s savings strategy. Pump up the budget reserve and resist demands to build into the budget new, ongoing spending that will be painful to unwind when the economy slows.

Natural disasters

California’s seasonal firestorms have worsened in recent decades, likely from a combination of a warming climate and creeping urbanization into fire prone landscapes. But the terror and tragedy of these fires and related mudslides are nothing compared to the inevitable catastrophic earthquake that will someday befall California.

California hasn’t suffered a ruinous urban earthquake in nearly a quarter century. But every day that mercifully passes without a major temblor in a population center brings us one day closer to the inevitable next one.

Even if the next Administration outlasts the seismic clock, an Egypt’s-worth of calamities can beset the state: fires, floods, freezes, bugs, slides, drought, winds, not to mention terrorism and civil unrest.

My advice: Get your disaster response team in place on day one. The ink was still drying on Governor Wilson’s first inaugural address when he had to sign an emergency proclamation to devote state resources responding to a Valley-wide freeze. The natural and human-caused disasters came fast-and-furious for the rest of his first term.

Energy shocks

Unlike the economic cycle or a state of emergency, an energy price shock would most likely be a consequence of state policy adopted in a prior administration. But like the worn carpet in the office, the new Governor inherits what the departing team left behind.

By 2021, policies already baked into state regulations will increase gasoline and diesel prices by another 30 to 60 cents a gallon. These price increases could double again by the end of the next decade, per current regulatory policies. Electricity rates are among the highest in the land, and have lately increased far faster than the national average.

Implementing recent legislation and executive commitments will fall on the next governor, including:

  • Reducing overall carbon emissions in the state by 40 percent below 2020 levels by 2030.
  • Increasing electric utility generation purchases of renewable power to 60% of the portfolio by 2030.
  • Purchasing 100 percent of electricity generation from renewable sources by 2040.
  • Achieving overall carbon neutrality by 2045.

The last two are not legally binding, but will establish the policy context for the next Governor.

These ambitious goals will be accomplished by an unknown combination of market incentives and command-and-control regulations – at an unknown cost. What is known is that the ultimate price will be paid by energy consumers: drivers, electric and natural gas utility customers, and purchasers of goods and services that rely on the use of energy to provide that commerce.

My advice: Use market forces whenever possible to achieve these goals, because this will drive compliance at the lowest cost, and impel innovation as prices inevitably rise. Command-and-control regulation risks making the wrong choices and locking policies onto inefficient technologies or compliance strategies. Note that the only California Governor ever to be recalled stumbled on implementing an inherited energy policy.

The new Governor understandably will highlight his new initiatives and the changes he perceives voters crave. But he should maintain vigilance for the existential risks that lurk over any Administration.

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