California Insider

The League of Cities is scrambling to respond to fallout from disclosures that the league and the California State Association of Counties are negotiating with the governor, seeking his support for constitutional protection of their revenues in the long run in exchange for budget cuts in the short-term. In an e-mail to city officials in the Sacramento Valley, regional representative Bryan Barr gloats about the league’s success in qualifying its ballot initiative, which, he says, has prompted the Legislature and the governor to “finally believe we are a political player.” Barr says the league has done two polls, one that shows Schwarzenegger’s opposition would not doom their measure, the other saying that it would. “That is something, politically, we all have to keep in the back of our minds,” he says. But he adds: “We (local governments) definitely have the upperhand in the negotiation front, but for right now, we want to see where things go and what they offer for the long term, and what cost to us in the short term. But one thing is for certain: we are finally at the BIG table – somewhere the League has not been in over 20 years.” Barr and Chris McKenize, the league’s executive director, both say no deal has been cut with Schwarzenegger and insist that the league will agree to nothing that leaves the cities worse off in the long term than they would be if their ballot initiative passes.

I think all this chest-puffing by the league is misguided, if it is sincere. If Schwarzenegger and, as rumored, the California Teachers Assn., oppose the local government ballot measure, it's toast. The proposal's achilles heel is that it is retroactive, meaning any tax shift the Legislature and the governor might enact this year would be nullified if the measure passes. But any such shift would benefit the schools, so undoing it would hurt the schools. And the voters aren't going to pass anything that can credibly be described as taking money away from the public education.

Tuesday’s revenue numbers from the Franchise Tax Board provided a bolt of good news for the Schwarzenegger Administration. For the second straight day, the envelopes opened at the FTB produced a personal income tax take exceeding $800 million, at a time when the daily numbers have usually peaked and are beginning to dwindle. Now, with three days remaining in the month, receipts to date from the PIT have already exceeded projections by about $200 million. Receipts from corporate taxes are also exceeding projections, by about $500 million for the month. It’s not entirely clear how much of this is due to the tax shelter amnesty program I wrote about last week, and how much of that amnesty money the Department of Finance was already counting on. But for budget writers, it’s a lot more pleasant trying to account for surplus than trying to explain a shortfall. It looks like the month will end with a combined boost of about $1 billion above projections, more than making up for the $200 million shortfall heading into the month and the $300 million accounting error on the sales tax by the Board of Equalization.

With the Schwarzenegger Administration preparing to announce the details of its energy policy any day, I am hearing that it will rely largely on a plan to get the PUC to move more quickly to fully implement AB 57, a bill passed in the summer of 2002. That bill was supposed to set up a system allowing the investor-owned utilities to contract for electricity as long as those contracts fit into procurement plans drafted by the utilities and approved by the PUC. The idea was to avoid the situation that helped lead to the electricity crisis, when the utilities risked being penalized if they contracted for power and the price on the spot market later dropped. The new system is supposed to give them the go-ahead on contracts at the front end with the promise that regulators won’t come back and ding them later. Schwarzenegger, legislative sources tell me, wants to implement that plan and couple it with a more aggressive posture allowing big consumers to contract for their own electricity – as long as they pay a fee reimbursing the rest of us for their share of the costs still on the books from the electricity crisis.