Similar to the Muppet character, Kermit, California is feeling a bit lonely. Always trying to keep my finger on the pulse, I attended a Senate hearing last week to discuss prospects of creating a partnership with Mexico, as the country has recently passed a resolution to establish goals to reduce Green House Gas (GHG) emissions. To the extent more neighboring countries and states join with California on implementing Cap and Trade programs the better, as it helps us to remain cost competitive.  However, all parties should begin with a level playing field, which is not easy. The only proposed partner remaining in what was to be a Western states and nation coalition is the Canadian province of Quebec. 

Listening to the testimony and asking a few questions, it became apparent that Mexico, as any other nation, and as California should be, is seeking to increase their manufacturing and employment base. To the extent that they can provide offset credits to be used by California's targeted industries, for projects developed in Mexico, it works for them. Unfortunately, I was unable to discern how it works well for us.

For starters, Mexico's commitment to reduce CO2 e is a "statement of goals" while implementation of California's AB 32 Legislation is mandatory. California has worked to clean up pollution levels for years and as we all know, Mexico does not have the same level of regulation or cost of production.  To date, the implementation of AB 32 rewards distributors of energy, but punishes generators. Hence Mexico desires to help us by generating electricity to import to California. Wind and Solar as well as other forms of energy are cheaper to produce in Mexico putting California at a competitive disadvantage.

Just as in the US, heavy subsidies and loans are and will be required for the wind and solar offset projects that were discussed.  Who pays and how is a bit vague but you can be sure we will, as I was told investor capital in a typical wind project is only 7%.

Ever front and center to any Cap and Trade debate (especially before we complete and sign agreements with other countries) must be implementation and monitoring of the planned securities auction, secondary markets and derivative products. How the state will be able to ensure stability for the value of the new currency, offset credits, etc. and how the derivatives and potential holding of certificates will be regulated and play in the markets, is still a mystery.

Meeting the goal to reduce GHG emissions and prevent "leakage" or companies leaving California for "greener" pastures presents quite an unknown challenge that we must reconcile prior to negotiations with other states or countries for offsets (mitigation projects that will supposedly help reduce global GHG emissions). Could there come a time when the state would need to print additional certificates (which would devalue initial certificates and create a loss for holders of same) or buy back certificates as needed at current rates which may be higher than the original auction prices we received? Or is our use of hedge derivative products supposed to save us as it did the housing and mortgage industry?

Due to our implementation over the years of stringent regulatory and emissions and general pollution guidelines it will be difficult to locate partners that will not place California firms at a competitive disadvantage. As an aside, British Columbia implemented a carbon tax in 2008 (much simpler to monitor and control than a securitized market system such as Cap and Trade) and is issuing more tax credits than they are receiving in taxes in an attempt to retain Canadian businesses. As Kermit the Frog understood - its not easy being green.

We anxiously await the release of the Governor's May revise of his original January budget.  The Governor and the Democrats controlling the Legislature are again grappling with a potential $9-$15 billion current cash flow shortage for the fiscal year ending June 30, 2012, that must be addressed, while attempting to increase spending on existing programs. Other than praying for a voter-approved tax increase in November there does not seem to be any real alternatives coming forth from their leadership. As a reminder, if enough members of the Legislature truly believed a tax increase would solve the problem they could vote for one - it only takes 54/80 in the Assembly and 27/40 in the Senate and it has been done before.

Rather than focusing on stimulating private sector employment though regulatory streamlining and tax relief, which would help California to compete with other states and nations, it seems we are doubling down. Hoping to extract more revenue from businesses and taxpayers, Cap and Trade auctions are slated to begin after the November election. Introducing California's new currency, Carbon Certificates and creating "free money' from the securitization and sale of same is the proposed fall back to fill the cash flow gap and simultaneously fund High Speed Rail.

However, since any revenue generated from Cap and Trade must follow the legislative purpose of reducing GHG emissions in California by 2020 to 1990 levels, the General Fund uses are very narrow and high speed rail, a net GHG emitter, is off the table. Alas, once again it seems reality may interfere with wishful thinking.

But all is not lost, and we are consistently making suggestions and trying to educate people about the options that exist to drive California forward. My side of the aisle is again proposing solutions that we hope will be used to close the gap.  With a majority vote budget the Democrats, controlling 52 Assembly Members and 25 Senators, tend to go it alone only needing 41 and 21 votes respectively. But maybe they will be looking for alternatives to draconian trigger cuts. Review our Budget Fact Check for details and comparative data based on real revenues and expenses here.

As expected, AB 1455, my Lemon Law to pull the plug on High Speed Rail debt funding, failed in committee. We were very successful in increasing awareness of the project and pitfalls, by working to form a statewide coalition of counties, cities, trade associations and citizen groups in favor of the bill, which was the goal.  Keeping such a huge, unfunded, debt-driven project front and center in this election year, when the Governor is asking for more taxes, forces the Authority and legislators to get into the numbers before rubber stamping the plan.

You may be interested to know that the newly formed Association of California Cites Orange County is holding its 3rd Annual City Infrastructure Summit on June 7th for elected officials and others, co-hosted by Parsons, the primary contractor for the California High Speed Rail Authority.  Amazingly, the Keynote speaker for the "Orange County" event is the Mayor of Fresno, an avid HSR supporter.  

Surprised we could not locate talent in Southern California to speak to our infrastructure needs, you will be pleased to note that the program was modified to include a High Speed Rail debate of sorts. The lunch program will feature yours truly and OC Supervisor Shawn Nelson in opposition, while Assembly Member Cathleen Galgiani of Livingston, and one still unknown will speak in support. The ACCOC does not want it to be contentious, so we shall see if "polite" facts prevail.

As an aside, the project would appear to be metamorphosing into a regional rail proposal in an attempt to gather votes for a three-year appropriation of $2.7 billion in state debt, when combined with $3.5 billion in Federal stimulus funds will provide 100+ miles of track in the Central Valley near Fresno. Needless to say after three years the same issues remain with project and operational costs, reporting, funding, and compliance with AB 3034 the underlying legislation for the 2008 voter approved bond of $9.95 billion. The key component, an accurate ridership study and model, is also MIA.  To hear my recent comments on KFI talk radio hosted by John and Ken link here.  

Don't forget to save the date for our only district event this spring/summer which I tried to centrally locate in Laguna Hills.  Being in Sacramento four days a week until September, you won't want to miss the Sacramento update, as well as get up to speed with issues affecting your finances, mortgage and taxation. As new rules take hold you will want to know how to plan for today as well as the future. See below for event information:

Thursday, May 17, 2012

6:00 PM - 8:00 PM

Laguna Hills Community Center

25555 Alicia Parkway, Laguna Hills CA 92653

Well, I am officially a mother-in-law, as my daughter got married at the Mission San Juan Capistrano the last Saturday in April. Dan and I are proud parents and wish our daughter Jaclyn and her new hubby, Joel, all the best. In spite of all the political turmoil that will certainly occupy us this year, life goes on.  It's always great to hear from those of you that are living and working in the real world, so stay in touch and keep my staff and me aware of upcoming events.

Thank you again for your continued support and don't forget to periodically review my website at assembly.ca.gov/harkey 

Diane