California Capitol Hill Bulletin

Volume 24, Bulletin 4 – February 9, 2017 [online/pdf]

To expand communications between Washington and California, the California Institute provides periodic bulletins regarding current activity on Capitol Hill that affects our state.  Bulletins are published weekly during sessions of Congress, and occasionally during other periods.  To subscribe to the Bulletin or other California Institute announcements, visit this link.

CONTENTS OF THIS ISSUE:

Education: House Committee Examines Higher Education Issues

Homeland Security: House Border Subcommittee Assesses Security

Infrastructure: Senate EPW Committee Takes Up Infrastructure Issues

Report: LAO Analyzes Governor’s Prop 98 Budget And K

Report: Volatility Of Personal Income Tax Base Examined By LAO

Education: House Committee Examines Higher Education Issues

The House Education and the Workforce Committee held a hearing on Tuesday, February 7, 2017 entitled, “Challenges and Opportunities in Higher Education.” The following witnesses testified: Dr. Beth Akers, Senior Fellow at the Manhattan Institute; Dr. William Kirwan, Co-Chair of the Task Force on Federal Regulation of Higher Education; Dr. Jose Luis Cruz, President of the Lehman College of the City University of New York; and Mr. Kevin Gilligan, Chairman and CEO of the Capella Education Company. The purpose of the hearing was to examine the current state of America’s higher education system and explore ways to strengthen the system for students, parents, institutions, and taxpayers. Topics that were covered included: simplifying and improving student aid; promoting innovation, access, and completion; and ensuring strong accountability and a limited federal role.

Dr. Akers spoke during her testimony about strategies for funding higher education. She noted that most students who borrow to fund college see the benefit later in life through higher earnings. The average borrower in student loan repayment will spend only about seven percent of their income on loans when they are in repayment. Very few individuals have loan balances greater than $50,000 or $100,000, and these large balances are often held by borrowers with advanced degrees that provide the potential for very high earnings. She recommended, “We should recognize that it’s not the high price of higher education that’s a problem. Rather, it’s that some students will pay that price but never see a return. Rather than using public resources to make college less expensive across the board, funds should be targeted to provide relief to those who made a losing gamble on college.”

Dr. Kirwan testified about the regulatory environment surrounding higher education. He believes that many regulations are well developed, address critically important issues, and provide appropriate measures of institutional accountability. However, he also said “too many regulations are poorly framed, confusing, overly complex, ill conceived, or poorly executed.” Some, he says, are even entirely unrelated to the mission of higher education. Dr. Kirwan said, “The problem is exacerbated by the sheer volume of mandates – more than 2,000 pages of text – and the reality that the Department of Education issues official guidance to amend or clarify its rules at a rate of more than one document per work day.” The regulation only adds to the problem of college affordability, he noted, because the cost of regulation is almost always passed on to the consumer.

Dr. Cruz spoke about higher education serving as a ladder of opportunity for economically disadvantaged students. Despite progress made since the original Higher Education Act was passed in 1965, he found that low-income students today enroll in postsecondary education at rates lower than high-income students did in the mid-1970’s. According to his research the 2-year and 4-year sector represents the country’s best opportunity to improve this inequity. Dr. Cruz provided several specific recommendations to facilitate this effort around the topics of federal-state partnerships, FASFA, data systems, and more.

Mr. Gilligan described Capella Education Company’s FlexPath program during his testimony. He believed the FlexPath program is a pioneer in competency-based education and can revolutionize higher education for the adult, contemporary student. He provided recommendations that would fully decouple direct assessment from time and credit hour constraints. In his testimony, Mr. Gilligan also spoke about the alignment of Capella programs to the needs of employers and their schools that focus on software engineering and coding.

For more information, please visit: http://edworkforce.house.gov/calendar/eventsingle.aspx?EventID=401221 .

Homeland Security: House Border Subcommittee Assesses Security

On Tuesday, February 7, 2017, the House Homeland Security Committee’s Subcommittee on Border and Maritime Security held a hearing entitled, “Ending the Crisis: America’s Borders and the Path to Security.” Witnesses included: the Honorable John F. Kelly, Secretary of the U.S. Department of Homeland Security (DHS); Mr. Steve C. McCraw, Director of the Texas Department of Homeland Security; Mr. Joe Frank Martinez, Sheriff in Val Verde County, Texas; Mr. Leon N. Wilmot, Sheriff in Yuma County, Arizona; and the Honorable Eddie Treviño, Jr., County Judge in Cameron County, Texas. The hearing was held to examine gaps in the security of the southern U.S. border and discuss a path to security.

Secretary Kelly briefly spoke about three recently signed executive orders concerning border security and immigration laws. He also testified that he is committed to executing President Trump’s plan to secure our southern border with effective physical barriers, advanced technology, and strategic deployment of law enforcement personnel. He added that, “While the presence of physical barriers and additional technology is essential, it must be bolstered by persistent patrol and the vigilance of the dedicated men and women of DHS.”

Another theme of Secretary Kelly’s testimony was cooperation both within U.S. agencies as well as with partner nations, particularly Canada and Mexico. He noted that interagency relationships and bilateral cooperation are critical to identifying, monitoring, and countering threats to U.S. national security and regional stability. While DHS possesses unique authorities and capabilities, he believes that the U.S. must enhance and leverage coordination with federal, state, local, and tribal partners in order to combat the magnitude, scope, and complexity of the challenges the U.S. faces. An integrated counter-network approach is key to success, he believes.

During the second panel, Mr. McCraw testified about the increased resources that the State of Texas has devoted to the border security effort. He noted that the responsibility to secure the nation’s border is the federal governments, but the Texas State Legislature and Governor have had to step in as they believe an unsecure border with Mexico threatens border communities. With this effort, Mr. McCraw stated that integration of detection capabilities and interdiction assets between the State of Texas and the U.S. Border Patrol is key to maximizing effectiveness. The best approach he has witnessed includes a multi-layered, redundant, and vertically-stacked strategy.

Mr. Martinez, Mr. Wilmot, and Judge Treviño, Jr. provided testimony about their ground level experiences on the border and solutions they believe could prove effective. Mr. Martinez presented the Texas Border Sheriffs Coalition’s solution, which requires all federal, state, and local law enforcement to work together. Mr. Wilmot advocated for the federal government to view border security as a mandated program and also stated that the federal government should focus on border security first and immigration reform second. Judge Treviño, Jr. believes that utilizing a 14th century solution such as a border wall to address a 21st century problem does not make sense, especially when that solution is the most expensive of all possible alternatives. He states, “If we provide a wall of technology utilizing cameras, sensors, and other state of the art technology, we arm our federal law enforcement personnel with the necessary and proven resources they need to perform their jobs and duties.”

For more information, please visit: https://homeland.house.gov/hearing/ending-crisis-americas-borders-path-security/ .

Infrastructure: Senate EPW Committee Takes Up Infrastructure Issues

On Wednesday, February 8, 2017, the Senate Environment and Public Works Committee held a hearing on “Oversight: Modernizing our Nation’s Infrastructure.” Witnesses at the hearing included: William “Bill” T. Panos, Director of the Wyoming Department of Transportation; Michael McNulty, General Manager of the Putnam Public Service District in West Virginia; Cindy R. Bobbitt, Commissioner of Grant County, Oklahoma; Anthony P. Pratt, Administrator at the Delaware Department of Natural Resources & Environmental Control; and Shailen P. Bhatt, Executive Director of the Colorado Department of Transportation.

Mr. Panos offered a rural perspective on several surface transportation and infrastructure ideas, including challenges in funding surface transportation infrastructure investments. He believes that significant federal transportation investment in rural states benefits the nation by enabling truck movements between the West Coast and large cities in the Midwest and East, allowing commerce that originates in rural areas such as agriculture and energy products to quickly enter markets, and providing access to scenic wonders like national parks. He said that public private partnerships and other approaches to infrastructure investment that depend on a positive revenue stream from a project are not a funding solution for rural states.

Ms. Bobbitt also spoke about challenges rural counties face surrounding infrastructure such as declining populations, shifts in demand for rural transportation infrastructure, and limits on property tax collections. She urged Congress to make federal highway dollars available for locally owned infrastructure.

Mr. McNulty testified about the water infrastructure needs of rural areas. He believes that if rural and small town America is not specifically targeted in legislation that would authorize and fund new water infrastructure initiatives, the funding will by-pass rural America and be absorbed by large metropolitan water developments.

Ms. Bhatt’s testimony highlighted several Colorado projects in need of maintenance and funding. She concluded by stating that financing mechanisms cannot correct what is essentially a funding problem due to insufficient investment.

Mr. Pratt spoke specifically about infrastructure on U.S. coasts. While water and coastal infrastructure such as beaches, dunes, and wetlands do not fit the traditional vision of infrastructure, he said, they are just as critical to the nation’s economy and well-being. He stated, “If we don’t maintain our shorelines, many of those visitors will travel elsewhere for their coastal experience, taking with them their money and our coastal jobs.” Beach project restoration creates jobs with engineers, geologists, biologists, construction crews, and support staff all working together. Additionally, he spoke about how investment in coastal flood risk management saves money by reducing post-disaster recovery payments. While financing and public private partnerships are important, he said, federal investment is still necessary to enable projects.

For the full hearing, please see: https://www.epw.senate.gov/public/index.cfm/hearings?ID=82518667-E24B-4CB5-BAFC-35B3FAE0D372 .

Report: LAO Analyzes Governor’s Prop 98 Budget And K-12

On Thursday, February 9, 2017, the California Legislative Analyst’s Office (LAO) released “The 2017-2018 Budget Proposition 98 Education Analysis.” The report analyzes the Governor’s overall Proposition 98 budget package as well as his specific spending proposals for K 12 education.

According to the LAO, the Governor’s budget set the minimum guarantee under Proposition 98, down $379 million in 2015-16 and down $506 million in 2016-17 as compared to the June 2016 estimates. These drops are likely due to predicted reductions in General Fund tax revenue. In response to this predicted drop, the administration proposes reducing Proposition 98 spending to match the lower estimates, primarily by deferring some program costs from 2016-17 to 2017-18. The report states, “Regarding 2017-18, the administration estimates that the minimum guarantee will increase $2.1 billion above the revised 2016-17 level, reflecting modest year over year growth in state revenue.” They have proposed using this increase primarily for eliminating the prior year deferral and providing a cost of living adjustment to the Local Control Funding Formula (LCFF).

The report states that the administration’s estimate of state revenue is likely low given its other economic assumptions. By May, General Fund revenue in 2017-18 could be significantly higher than assumed in January. Holding other factors constant, these higher revenue estimates would increase the 2017-18 guarantee. The LAO recommends that, regardless of the exact level of the 2017-18 minimum guarantee, the Legislature adopt a final budget plan that continues to rely on a mix of ongoing and one time spending.

Three proposals are included in the Governor’s budget relating to LCFF. The first is that $859 million in LCFF payment is deferred from June 2017 to July 2017. Because schools still would receive their full LCFF allotment within a few weeks of the original payment date, the deferral is intended to have no programmatic effect. The second proposal eliminates the deferral during the next payment cycle. This allows the state to return to the regular statutory LCFF payment schedule moving forward. The third provides a $744 million augmentation for LCFF implementation in 2017-18, which would bring the total LCFF funding to $56.6 billion. To achieve full funding in 2017-18, the administration estimates an additional $2.3 billion, beyond the proposed $744 million augmentation, would be required.

The LAO recommends that the state exhaust other potential one-time options before adopting a payment deferral for 2016-17. It also states, “Were the Legislature to include a deferral in its budget package, we recommend it retire the deferral as soon as possible, as the Governor proposes. We also recommend the Legislature take the Governor’s same approach of dedicating most new ongoing Proposition 98 funding to LCFF, thereby giving districts flexibility to meet local priorities and cost pressures.”

The report also discusses funding for special education, preschool, school facilities, and pensions. For the full report, please visit:http://lao.ca.gov/Publications/Report/3549?utm_source=subscription .

Report: Volatility Of Personal Income Tax Base Examined By LAO

The California Legislative Analyst’s Office (LAO) released a February 2017 report titled, “Volatility of the Personal Income Tax Base.” The brief examines one aspect of California’s Personal Income Tax (PIT) overall volatility: the volatility of the PIT tax base. Further elements of PIT volatility such as how tax rate progressivity, deductions, exemptions, or credits affect PIT revenues paid to the state will be analyzed in future publications. Specifically, for this brief, the LAO compared the PIT tax base to personal income as measured by the U.S. Bureau of Economic Analysis (BEA) and examined how these two factors change from year to year, in essence, their volatility.

California’s personal income tax is California’s largest revenue source, making up roughly two-thirds of the state General Fund. Wages and salaries make up nearly half of the PIT base. The other half includes: dividends, interest, and rent; transfer payments; employer-paid benefits; and proprietor and partnership income. California chooses to tax most, but not all components of personal income that are measured by BEA. For example, employee retirement contributions and other elective deferrals are generally excluded from the PIT base. On the other hand, capital gains and retirement distributions are two significant pieces of the PIT base that are not included in BEA’s personal income calculation.

After comparing these two measurements, the LAO found that between 1990 and 2014, “personal income in California grew by somewhere between 2.5 percent and 7.1 percent […] in 15 of those 24 years.” According to the report, that represents a fairly reliable level of personal income growth. However, the analysis found two components of BEA personal income that are fairly stable, but not included in California’s PIT base: transfer payments and employer-paid benefits. In addition, California’s PIT base does not tax certain subcategories of BEA personal income that are, according to the LAO analysis, relatively stable. Additionally, an income category taxed by California but excluded from BEA’s personal income measure – capital gains – was found to be highly volatile. In fact, in the time period between 1990 and 2014, capital gains was over ten times more volatile than the part of salaries and wages included in the PIT tax base. All of these factors contribute to a much more volatile PIT base than BEA measurement.

Overall the LAO found that, while California’s progressive tax rate structure and other tax policy choices likely do contribute to the volatility of PIT in its entirety, a significant cause of the tax’s volatility is because of the tax base itself.

To read the full report, visit: http://lao.ca.gov/reports/2017/3548/Volatility-of-PIT-030817.pdf .