California lawmakers negotiating $15.5B climate change bond bill

Bonds

California lawmakers are in negotiations on a bill that would ask voters for $15.5 billion of bond authority to help fill a gap in the state’s plans to spend $54 billion over five years to tackle climate change.

The state Senate approved Senate Bill 867 on May 31on a 33-5 vote. The bill, currently in an Assembly committee, is “on pause, while negotiations are under way between the Senate, Assembly and the governor’s team,” said Nicole Winger, chief of staff for the bill’s lead author, Sen. Ben Allen, D-Santa Monica.

She noted, however, the Legislature, which begins its summer recess Friday, has until Sept. 14, when session ends, to pass it.

“All around the state, we see the evidence of climate change, with monumental threats from sea-level rise, droughts, flooding, wildfires, and more,” Allen said. “SB 867 seeks to provide crucial investments that build upon foundational state expenditures in recent years.”

Torrential rains in the state’s agriculture center in the Central Valley put strawberry fields like this one underwater.

Bloomberg News

Gov. Gavin Newsom’s proposal to do a big spend — the $54 billion over five years approved in the 2021 and 2022 Budget Acts — took a hit this year when revenues declined. He ended up slicing that down to $48 billion, or 89%, but if the bond measure passes and is signed by Newsom, it will help close that gap.

The $306.5 billion budget, signed by Newsom on June 27, closed a $32 billion shortfall, retaining $37.2 billion in reserves amid increased economic risks.

A decision by the state and federal government to allow Californians in counties impacted by winter storm flooding — that’s 55 out of 58 counties — to delay income tax filing until October is pushing that revenue out several months beyond the normal May income tax windfall.

“California’s pass-through elective tax and the deferral of tax deadlines in a number of counties add uncertainty,” Fitch Ratings analysts wrote in a May report.

The state estimates that the deferral of income taxes from April to October will shift $40 billion of its tax revenue from the current, into the next fiscal year, while acknowledging the difficulty in crafting an estimate given the lack of clarity on potential taxpayer behavior, Fitch analysts wrote.

“Fitch considers the state’s liquidity cushion of $109 billion, including $91 billion in borrowable resources as of April 30, more than adequate to address cash flow implications,” analysts wrote.

California’s rating outlook was revised to negative from stable in May by Moody’s Investors Service amid the state’s revenue uncertainty. The outlook revision came just days after the governor announced his annual May revisions to the budget.

The rating agency also affirmed the Aa2 rating on the state’s general obligation bonds, citing the state’s massive economic base and healthy budget reserves and liquidity.

“The negative outlook reflects a weakened and uncertain revenue environment in California that raises the possibility of extended pressure on the state’s budget,” Moody’s analysts Matthew Butler and Henrietta Chang said in the report.

The state holds an AA rating from Fitch Ratings with a stable outlook and an AA-minus rating from S&P Global Ratings with a positive outlook.

The climate change bond measure could go before voters in March or November 2024 if Newsom signs the measure. The California constitution holds that the Legislature cannot authorize the sale of GOs in excess of $300,000 without a two-third’s vote of the Legislature and the approval of a majority of voters at a primary or general election.

“SB 867 seeks to provide crucial investments that build upon foundational state expenditures in recent years,” said Sen. Ben Allen, D-Santa Monica

California’s fourth Climate Assessment found that the cost of climate change for the state alone could be more than $113 billion annually by 2050, according to the bill.

“The wildfire season is becoming longer and more intense each year due to hotter temperatures and wide scale tree death resulting from prolonged drought,” Allen wrote in the bill. “This phenomenon has led to the worst fires on record.”

In just 13 months, starting in October 2017, the state “endured four massive fires that caused 118 deaths, burned 700,000 acres, and destroyed 27,000 properties. In 2020 and 2021, California saw the highest and second-highest number of acres burned, a record-breaking 4.3 million acres in 2020 and 2.5 million in 2021,” according to Allen.

Frequent coastal flooding is expected “to threaten nearly half a million people, $100 billion in property, and 3500 miles of roads within the next 80 years. The number of hazardous sites, like wastewater plants, which are susceptible to 100-year flood events is expected to increase by nearly 2.5 times over a similar period, drastically increasing the risk of pollutant disasters if adaptation measures are not taken.

The period between 2020 and fall 2022 was the driest since record keeping began in 1895, and that was followed by record flooding in the first four months of this year. The winter’s rain and snow are expected to provide a brief respite, according to the bill, but is not expected “to be enough to pull the entire state out of our multi-year drought.”

It dedicates funding to projects to reduce fire risk near communities and ensure forests are healthy enough to withstand more intense wildfires; reduce the risk of catastrophic flood events by slowing and capturing runoff, which will improve groundwater infiltration and help to stabilize drinking water supplies; protect coastal communities from sea-level rise; and help urban communities adapt to rising temperatures by reducing heat-island effects through greening projects and supportive measures, such as cooling centers.

The bill would dedicate funding toward an exhaustive list of climate change items, including $5.2 billion for drought, flood and water projects including groundwater projects to store water and clean drinking funding to improve the quality of water. It also authorizes $3 billion for wildfire and forest fire prevention. Two billion goes toward coastal and flood-management projects and $500 million for heat mitigation including programs to reduce the urban heat island effect, for urban greening and $2 billion for biodiversity projects.

“The impacts of a climate emergency — extended fire seasons, water shortages, more severe flooding, and increased extreme heat days — are real and put our residents and infrastructure at risk,” said Sen. Anthony J. Portantino (D-Burbank), chair of the Appropriations Committee and a bill co-author, in a statement after the measure passed the Senate. “Preventative measures will protect lives and property and also save the state billions of dollars.”

Portantino contends California is investing less than half of what is needed to properly address the effects of more intense weather events and SB 867 provides the critical investment needed.

The bonds also would make the state “more resilient to flooding and wildfire, support the state’s clean energy transition, and spur investment in parks and nature conservation,” said Sen. Josh Becker (D-Menlo Park), who chairs the Senate Budget Subcommittee 2 on Resources, Environmental Protection, and Energy.

The state has faced a whipsaw of weather over the past decade from wildfire-inducing drought to atmospheric river-driven flooding, which Sen. Bill Dodd, D-Napa, said “provides ample evidence that climate change is a real threat to our state.”

“It’s critical we lock down stable funding to address these challenges and invest in real solutions — before it is too late,” Dodd said.

The bond measure received bipartisan support in the Senate, said Sen. Henry Stern, D-Los Angeles, who chairs the Joint Legislative Committee on Climate Change Policies.

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